The Eurocrats are trying to design a better system for managing the Eurozone – both finding a way to restructure the dodgy debt and evolving a more conservative approach to state financial management in future.
There are many reasons why this is proving very difficult. Some nations favour stronger centralized control, others oppose it. Those who have been disciplined about money are understandably hostile to paying for the sins of those who have been, and in many ways still are, irresponsible, continuing to live too well on borrowed money.
Even speaking about imposing “haircuts” (compulsory capital write-offs) on future holders of senior (lowest-risk) sovereign bonds sends markets into a tizzy; no one publicly contemplates the much greater need to decide how haircuts will have to be imposed on such holders of current bonds.
As long as Europe’s toxic debt problem remains unresolved, we can expect further currency crises as speculators seek to profit from politicians’ cowardice like Vikings raiding poorly-defended shores.
However, this does not necessarily mean that the Eurozone will crumble, as many believe.
The European Central Bank can save the day time after time, if need be, as it has virtually unlimited credit it can call on… and it prints the money.
Ultimately, I believe, the Eurozone will hold together because of the political imperative that it does hold together.
Saved by an expanding cushion of credit and cash, bullied by periodic crises, the politicians and bureaucrats will eventually find a way to restructure the debt, share out the pain, and evolve a more sensible system of managing the finances.
CopyRight – OnTarget January 2011 by Martin Spring