Even following Thursday’s EU summit, an orderly resolution of these problems seems unlikely. The Germans will push for draconian cuts to Greece’s government spending and public sector wages but they won’t budge on relatively tight monetary policy and the overly strong euro””and they definitely won’t agree to loosen their own (German) fiscal policy.
Ireland is already cutting hard. Such fiscal austerity leads to double-digit declines in GDP, and risks massive political revolts. Ireland’s banks are today probably insolvent. Who can afford to repay their mortgages when wages are falling and unemployment rising? Irish house prices continue to speed downward. This is not an example of a “careful” solution””it is a nation in a financial death spiral.
Other EU countries will lobby for a continuation of the status quo. They would prefer the ECB keep lending to the periphery, and the problems be pushed off for another day. This too is no solution.
For now Europe will try to muddle through. Greece will promise a pound of flesh, hoping not to pay, and other nations will be spared with promises of continued financing””but just for now.
Financial markets know that this makes no sense, hence the “largest ever” short euro positions, betting on a further decline of the currency. If one country must make a substantial and painful fiscal adjustment, eventually the rest will follow.
Just more proof that social democracy (as opposed to modern “socialism”) doesn’t work.
Some measure of government is necessary, but the level that much of Europe has is unsustainable – thus the Euro is unsustainable.
An the Democratic party wants to take us down this road!
YBIC,
Phil Snyder