The End Of The Euro?
Paul Krugman, The Euro Trap[…]
Greece’s fiscal woes would be serious but probably manageable if the Greek economy’s prospects for the next few years looked even moderately favorable. But they don’t. Earlier this week, when it downgraded Greek debt, Standard & Poor’s suggested that the euro value of Greek G.D.P. may not return to its 2008 level until 2017, meaning that Greece has no hope of growing out of its troubles.
All this is exactly what the euro-skeptics feared. Giving up the ability to adjust exchange rates, they warned, would invite future crises. And it has.
So what will happen to the euro? Until recently, most analysts, myself included, considered a euro breakup basically impossible, since any government that even hinted that it was considering leaving the euro would be inviting a catastrophic run on its banks. But if the crisis countries are forced into default, they’ll probably face severe bank runs anyway, forcing them into emergency measures like temporary restrictions on bank withdrawals. This would open the door to euro exit.
So is the euro itself in danger? In a word, yes.
The end of the Euro? Once the banks start to crash, the Euro will be no more.
What cracks me up is how no one seems to understand basic principles of common sense here--putting all of your economic eggs in one basket puts them in extreme danger. Sure, they may look strong and safe all piled up like that in one place, but haven't you ever heard of "safety in numbers" or the idea that the more diverse you are, the better prepared you are to protect yourself?
Likewise, the idea of a central bank sounds nice on paper, but ultimately it weakens the ability to survive if a huge chunk of said bank goes down. One giant bank fits the whole "bigger they come" kind of thing. It helps makes it worse that the Euro (like the USD) is imaginary and has no value. While it means the Euro and the USD can "expand" and provide, what many seem to think of as, infinite wealth, neither currency is based on anything tangible like gold.
So, when the faith in a particular portion of the economy vanishes, it becomes the weak link that breaks the chain. We're seeing this happen in Greece right now.
But as Krugman says in his piece, if they were separate economies, they'd be in much better shape. I think this would be true even if they had their own central banks with currency value based on the potential value created by their economy (this is how our money works).
Of course, returning to the principles of basic common sense would avert a lot of these problems, I would think.
On a side note, if the rich didn't have to be so damn rich, that might help, too.
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