I Never Really Liked Europe, Anyway

by JT McGee

For the love of all things holy, Europe is going absolutely freaking nuts.

I’ll spare most of the fun in macroeconomic theory and just say this: the Euro is so toast.

If you’re not much for keeping up on the financial markets, here’s the Europe crisis explanation in less than 300 words.

Europe’s Economic Problems in 300 Words

Europe shares a common currency.

European nations do not have the same problems, nor do they have the same desire to fix said problems.

Traditionally, countries facing a debt crisis inflate their currency to repay debts. However, because European nations all share the same currency, you have to have agreement among all nations (or at least those that carry most of the political weight) to approve measures to create liquidity.

Those nations that carry the most political weight naturally have the most economic weight. Germany doesn’t really care about Greece’s problems, because it doesn’t want to fool around with policy that affects its $3+ trillion economy to maybe save Greece’s $300 billion economy.

Greece has a politically irate population unwilling to take an offer by the broader Eurozone to essentially remove Greece’s debt problem if the nation agrees to higher taxes and fewer social services.

Greece sees the solution to the problem as proposed to be unworkable. Greece knows that its problems will affect other EU nations so it can just sit around and do nothing, never agreeing to any proposal until it gets a more favorable deal.

Other EU nations don’t want to play along, because…well, “screw those guys!” Meanwhile, other countries that were on the brink are now on the verge of failure due to a greater slowdown.

So, basically, you have a macroeconomic staring competition going down. At some point, Greece’s economic woes will flow into the broader Eurozone. Other European banks, governments, and institutions hold Greek debt securities. And every moment we wait, things get worse elsewhere.

They could just cut the PIGS nations (Portugal, Italy, Greece, and Spain) free and let them deal with their own struggles on their own currencies. But that sets a precedent – all Euro-denominated debt is not the same in the risk of default. That’s not good for the markets.

TL;DR Europe is full of powerful people acting like children, and a continental currency union is fundamentally flawed.

{ 3 comments… read them below or add one }

Sam June 3, 2012 at 17:40

Simple and precise. Well done.

Germany better bail everybody out!!!

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BeatingTheIndex June 4, 2012 at 11:35

The questions is, can Europe afford to go down in flames? That’s what will happen if not concrete action is taken!

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Money Beagle June 4, 2012 at 12:21

World markets are falling, including Germany’s. Lending is slowing. Growth is down while unemployment is up. These things are not just isolated to Greece. Germany and the other nations are feeling the effects, and if they’re not careful, the cost of all these things to their own citizens will far outweigh the costs of offering assistance.

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