This story, in short, is not over.
For the eurozone, two lessons are clear: first, it has a choice ”“ either it allows sovereign defaults, however messy, or it creates a true fiscal union, with strong discipline and funds sufficient to cushion adjustment in crushed economies ”“ Mr Buiter recommends a European Monetary Fund of €2,000bn; and, second, adjustment in the eurozone is not going to work without offsetting adjustments in core countries. If the eurozone is willing to live with close to stagnant overall demand, it will become an arena for beggar-my-neighbour competitive disinflation, with growing reliance on world markets as a vent for surplus. Few are going to like this outcome.
The crises now unfolding confirm the wisdom of those who saw the euro as a highly risky venture. These shocks are not that surprising. On the contrary, they could have been expected. The fear that yoking together such diverse countries would increase tension, rather than reduce it, also appears vindicated: look at the surge of anti-European sentiment inside Germany. Yet, now that the eurozone has been created, it must work. The attempted rescue of Greece is just the beginning of the story. Much more still needs to be done, in responding to the immediate crisis and in reforming the eurozone itself, in the not too distant future.
Wolf is correct that this is just the beginning, and the direction in which it is moving is bad for ordinary Americans. Roughly 30% of the current Greek bail-out — do you [i]really[/i] believe it will be the final one? — comes from the International Monetary Fund, 40% of which is financed by the US government.
US taxpayers are now on the hook for an additional $15 Billion or so (40% of 30% of $146 B), and IMF moneys are junior to [i]existing[/i] holders of Greek paper. With Greek 2-years trading at around 20% interest they’re considered far more risky than most corporate junk paper. Ya think we’ll ever see our $15 Bil?
[i] Slightly edited by elf. [/i]
1. Bart: We’ve been doing it for decades in Africa…
You know Bart,
There are plenty of lazy, corrupt, nasty and often violent people on this side of the Pond, but it galls me when Europeans talk as if that was reflective of American national character.
If you had said that Greece’s economy was out of whack with that of northern Europe and it should never have been permitted to join the Single European Currency, I would have no argument, but to descend to the level of dismissing a population (even one as small as Ohio) in that fashion is absurd.
The US is paying for 12% of the bailout of Greece through the IMF.
Once again, the fleecing of the US taxpayer sheeple goes to pay for socialism in other countries…so those countries can turn around and protest the United States.
We really need to stop doing this.