Who here thinks that Greece will continue without a default?
My original thesis with Europe has been that the leaders there tend to bicker, stall, delay, and fail to act toward cohesive goals. Fundamentally, with so many different leaders and local politics of each country, disagreements are bound to happen.
It had looked simplistically like it was Germany versus the large debt states, with the German politics making bailouts difficult and forcing austerity on the debtor states. The EU as a whole fought against defaulting of the debtor states because the dream of a unified EU economy and currency couldn't be failed.
Now, as Greece struggles under the imposed burdens of austerity actions (and fails to lower its deficits), it looks more like Greece will be forced to default. Without the Euro, I am sure this would have already happened, and the matter would be contained. So, I wondered.. why was the Euro even developed. What was the economic theory?
From the Federation of European Employers:
"There are numerous reasons for introducing a common currency. For most EU countries today, the majority of international trade is with other EU members. By removing exchange rate risks from the internal market, cutting the costs of transactions, and encouraging firms to trade across national borders, the common currency has made the eurozone into an area of monetary stability in Europe. It has also forced EU states to adopt responsible economic policies that contain inflation and increase real living standards."
So has the the Euro turned the eurozone into an area of monetary stability? Perhaps, but it also seems to have artificially strengthened Germany at the cost of other eurozone states. And, in 2010, the Euro had great fluctuations.
Has it forced the EU states to adopt responsible economic policies? I think this is a big failure. States attempting to enter the EU have cheated on their economic records (Greece). Several states have too huge debts and decreasing credit rates.
A big, implicit reason for the Euro, was to compete with the US dollar and establish a rivalling reserve currency. There is no coincidence that this challenge could come about starting in the 1990's (after US debt ballooned through the 1980-1990 period). Without the current eurozone issues stemming from failures of economic leadership, I am sure the US dollar would be greatly threatened now.
However, the EU has a big failure in economic leadership. A strong move, such as a 100-billion bailout, or agreements on loans or austerity can be reached. However, this plan can fall apart when an election removes a party from power in Germany, France, Spain, Greece, Italy.. etc. There are so many actors and possibilities for chaotic change that stable, strong plans (like the 700 billion US bailout) are simply not possible there. For example, the IMF head Straus-Kahn is a possible criminal rapist, and this could now derail the economic support for the debtor countries (since he was one of the big leaders in support).
Me, I'm betting against future bailouts for Greece now. I think austerity kills nations, and cannot balance a budget during a recession. All that can happen is a downward spiral of failing tax revenues, leading to cuts in private sector spending, leading to higher taxes, and worse businesses (when they are already weak). Austerity reminds me of when a sick body, instead of working to stay strong and weather the disease, instead destroys in attempts to cure the sickness. Greece has defaulted 5 times since the country was independent and spent a whopping 50.6% of these years in default (the worst of the European states)*. Who would lend to such a credit risk?
The EU leadership should have made a surgical cut to eliminate the cancer of Greece back in 2009. A single default, followed by bailout support to the big banks, could have helped the EU move on. To me, it looks like the unified Euro, rather than promoting economic stability and cohesiveness, instead has become a blood vessel that cancerous economic conditions will metastacize. It didn't have to be this way. If the eurozone would have a strong, centralized economic leadership that was not swayed by local politicians and elections - things could be much different. I think the US Fed bank is an example of such a strong system.
*Reinhart and Rogoff, "This Time is Different"