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Euro zone and monetary zones


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#1 Bold

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Posted 23 September 2011 - 03:25 AM

It's been a while since I been in here. Apparently the section is still alive! It's always nice to see something you started rolling many years ago still going even when your no longer there to look after it!

Anyway, I feel I can start the ball rolling on a new subject.
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Most of you are probably aware of the situation in Greece in relation to the euro currency. As it is becoming clear as time goes by, there are only 2 solutions to the Greek problem.

1- Drop the euro (or get expulsed by others euro members). Accept the fact they can no longer roll over the debt, and write off all current debts (anyone who lended money to Greece can pretty much forget about it!). Start using a new national currency and after MANY hard years of local recession, get back on balance.

2- The euro zone becomes a real monetary zone like all others. In other words, they have institutionalized transfer payments between rich and poor zones to restore wealth equilibrium in the zone (like in Canada, the US and most larger countries). This would have one main implication. France and Germany would have to accept the fact they will pay for the smaller economies for many, many, many years to come.

Which options do you think is better or more plausible?

Option 1 is harder on the Greek people but easy on the rest of the world.
Option 2 is easy on most of the world, moderately hard for the richer european countries and Greece.

I was originally tending toward option 2. But seeing the way the political situation is developing and considering there is no universal language in europe to facilitate the mobility of workers, I am wondering if it will not simply end up being option 1 by default!

Any others ideas on the matter?


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#2 warita200

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Posted 23 September 2011 - 09:15 AM

Boldie,

I think that option two was the final goal of the monetary and political union the EU was aiming at.

As for what will happen in the end, it is hard to say. In my opinion, option 1 is the most plausible one. It is definately headed that way and I dont understand, why the EU pretends it isnt. They are just prolonging the agony by alocating funds to greece and it is all lost money. Maybe the reason why they dont want Greece to announce bancrupcy is because it will pull other countries in financial distress down the drain too. Also, it would be a strong blow for the entire EU....

But the question I ask myself is: can Greece be saved? Isnt all of this just a big waste of funds that could be allocated in a more meaningful way?

Oh and as for what you said about the second option, that it would put a strain on the richer countries..... well, it already is that way. The rich countries are funding the smaller and undeveloped ones. Not all people are OK with it and their protests are growing with the Greece problem dragging on.

All in all it is a sad situation and quite depressing. I just hope that this fiasco will be a valuable lesson for the future....

#3 monsta

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Posted 24 September 2011 - 05:09 PM

QUOTE (Bold @ Sep 23 2011, 04:25 AM)
I was originally tending toward option 2. But seeing the way the political situation is developing and considering there is no universal language in europe to facilitate the mobility of workers, I am wondering if it will not simply end up being option 1 by default!

Any others ideas on the matter?

If European politicians are to be believed (a big leap of faith!) then the European nations will stick together - for better or worse - and see their ultimate fate together. In any case none of the viable options will be easy and all will be painful.

Out of the two options fiscal union would probably be more favourable particularly in long run. By following a similar fiscal policy (and highly likely a similar tax code) it will raise the creditability of the monetary system making the Euro be seen as a more reliable and robust currency which would attract more foreign investment which will spur economic growth. The biggest problem with this option, which is something you already alluded to, is that many of the taxes paid by the richer northern European nations would go towards the struggling southern nations. Would the richer tax payers be willing to do this? It is a big ask.

Another issue with increased unity is many countries would lose some of their powers as they would have less control in certain fiscal policies although this would not be eliminated (the individual states of of America still have a large control over their individual budgets). This lose of control and power would be troubling for not only the politician of many European nations but also its citizens. In the end though this option would provide large economic benefits that America currently enjoys on the world market which will become even more pronounced when the emerging markets grow in stature.

On the other hand if the barriers to unity prove too much then it is likely that the whole Eurozone would unravel and this would end VERY badly. For a start the breakup of the union would come after multiple sovereign defaults which are all very damaging on their own, so for them to happen in quick succession is something that is beyond comprehension. Also with a breakup of the union a lot of currencies will have to be made (which will create chaos in itself; imagine 17 new currencies having to be issued pronto!) and what's more a lot of these currencies will depreciate in value so any investors who had money in the Euro would lose a lot of money (and if they could take their money before the changeover then there will likely be many bank runs which would bankrupt the banks). Too much money is invested in the European banks and funds to allow this to happen no matter what the cost of the solution is. Finally by returning to their local currencies the European nations would lose the advantages of the Euro such as less transactional charges or in the case of Germany a depreciated currency that played a big part in their booming export businesses.

As for what will happen... I think Greece will default. There is little will to save them or to implement the changes for unity at this moment. The Euro could survive the shock of Greece defaulting and leaving the Euro. However if that isn't the case and it becomes apparent that the weaker nations particularly Portugal and Ireland will default too then it is likely those nations will be saved to prevent the whole system from falling. If there is no will to save the Euro (and countries) even in that stage then the Euro would probably fall and that would result in a depression for the European economy.

Oh and whatever happens, Greece's economy will absolutely tank! The real question is whether Greece brings down Europe with it! I suppose the Greeks may look to the example of Argentina in 2002. Like Greece they were held to an overvalued currency for their economy and they decided to default and declared all external debts void. They faced a hard number of years but their recovery was aided by the countries large amount of natural resources and a booming economy in the regional and world economy. Greece will have none of those things to aid them in case of default. Plus due to the high profile nature of this event it means Greece will suffer from a greater loss of reputation should they default. This will mean they will be locked out of the international financial market for a longer period of time making future growth in the years after a default more difficult and protracted.

#4 monsta

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Posted 27 October 2011 - 07:09 PM

- Update -

It would seem that they have finally arrived at a solution (let's hope there are no further crisis!) when the European leaders delivered on their promise to reveal their solution to the European debt crisis. They made 3 broad measures although it should be said the details have not been finalised:
  • 50% "voluntary" cut on Greek debt - I am bit suspicious with this, it looks and smells like a default and I doubt the investors would happily forgive 50% of the debt without a bit of "encouragement". But for all intents and purposes Greece have had their debt halved. Call it what you will.
  • 106 billion Euros ($150 billion) of funds given to European banks - The money will be raised from private investors but if they fail to raise the necessary funds then the European taxpayer will make-up the shortfall (yes another potential bailout!). And if this fails then they will resort to the EFSF.
  • The EFSF boosted to 1 trillion Euro ($1.4 trillion) - The war kitty will be boosted from its current 440 billion via investment management vehicles. I am not sure who will provide this boost but I don't think it will be actual cash but guarantees; basically I believe they will stick a bunch of IOU's and hope countries will meet their obligations. If the countries don't meet their payment I am not sure who picks the tab (probably the taxpayer and this could be US or Chinese taxpayers).
Well in any case the news was well received (all the markets had strong rallies today) and we can finally move on. What is also significant is the German and French governments expressed a strong desire for fiscal and tax integration of the various Eurozone states. In addition there will be a new leadership structure to the Euro (or is it EU?). So it would seem that the Eurozone steps one small step closer to the United States of Europe. I wonder what European FTV people think of that prospect...




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