Why Save the Eurozone?

In Economics, Financials, Politics on September 20, 2011 at 15:47

The euro is definitely worth preserving. It’s existence is at the best interest of all of its member states. Conflicts of national interests, the ruthless financial markets, and political miscommunication, are the major threats to the future of this currency. France and Germany, Europe’s most influential states, have an obligation to prevent the demise of the Eurozone.

Consequences of a Collapse

A collapse of the eurozone would not only damage its existing member states but also the EU and the global economy as a whole. Markets would shift attention to Spain and Italy, their yields would explode, and the two countries would default. Their default would, in turn, bankrupt most of the world’s largest banks exposed to their debts. Political tensions would exacerbate market conditions and Europe’s recovery would take too long to happen. The costs would just be ‘too much to take’. A return to national currencies would lead to massive currency devaluations for the illiquid states and further deterioration in their standard of living. Germany has no much of a choice too. Intra-European trade is a main booster to its growth. Abolishing the euro would take away that advantage. A strong and stable currency is of paramount importance in an era of slow growth and high-volume trades. The problem, however, lies on the actual functioning of the Eurozone.

What to Do

Firstly, restructure immediately the debt in the countries that are unable to repay it (i.e. Greece). Secondly, run extensive stress tests on European banks to ensure their capacity to absorb losses from a potential sovereign default. Thirdly, initiate an immediate EU growth plan. Without development, state revenues, employment levels and foreign direct investment will remain suppressed in the EU region. Fourthly, reshape Eurozone’s framework. Urging a fiscal union and reconsidering the Maastricht criteria are critical. Monetary union cannot function properly without a common/unified fiscal plan and proof to that is today’s situation.

The Eurozone has offered its member states great gains over the past decade. It’s the irresponsibility of individual countries and the negligence of the Union that brought us here today. One should be able to see the broad picture. The way I see it, this is a one-way road with no way back. Saving Eurozone should be out of question once and for all.

by DG

click here for interactive maps:

http://media.economist.com/sites/default/files/media/2011InfoG/Interactive/EuroGuide_20110725/main.swf

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  1. “The consequences of a collapse” that you mention are more likely to be factors that lead the Eurozone to collapse i.e. a default of Italy and/or Spain. Continuing with the euro in itself does not prevent a default of Spain and Italy. In fact many argue that Spain’s continuing membership of the euro is likely to lead to a default as they are mired in deflation caused by a strong euro i.e. unable to reflate their way out of economic depression. Their economy is continuting to shrink while their debt pile continues to grow leading eventually to default.

  2. All Eurozone troubled economies need to first discipline their home economics (reduce deficit, revert debt augmenting dynamic) to return to an equilibrium point, and then implement a growth agenda through reforms such as opening up professions, reducing bureaucracy, applying a more investment friendly tax rate system. Leaving the zone to devalue their way out of the crisis is a myopic view as it fails to solve the root of the problem (i.e. poorly managed economies) and will inevitably reduce the standard of living of those countries. I agree with you that Italy and Spain are in deep trouble irrespective of Greece’s course, but they would be in a far worse situation had Greece been let go bankrupt.

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