Even more alarming is the exposure of other EU banks to Greek debt, which totals $193 billion, according to the Bank for International Settlements. Factor in the risk of copycat crises in Portugal and Spain, and you begin to see the outlines of a disastrous Europewide banking crisis. The only way out of that will be further compromises by the ECB about the paper it accepts as collateral. Already last week it waived its rules, continuing to hold Greek bonds, despite their junk status. If this continues, there is only one way for the euro to go, and that’s down.<\/p>\n
Keep this in perspective. When the euro was launched back in January 1999, it was worth less than $1.20, and for most of its first three years it was down below parity with the dollar. So its recent slide from close to $1.60 before the global financial crisis to $1.27 last week is far from unprecedented. But the way this crisis is unfolding, further declines seem likely. It will surely be at least a year before investors wake up to the fact that the fiscal predicament of the United States is actually worse than that of the euro zone.<\/p>\n
The difference is, of course, that the United States has a federal system, while the euro zone does not. In America, Texas automatically bails out Michigan via the redistribution of income and corporation tax receipts. What the Greek crisis has belatedly revealed is that such fiscal centralization is the necessary corollary of a monetary union.<\/p>\n