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by ForexNewsNow Team on September 19th, 2011

Why the Euro Crisis is a Political Crisis

ForexNewsNow – The first 110 billion euros for the Greek bailout plan that was launched in order to respond to the EU debt crisis has already gone up in smoke. A highly praised second bailout plan of 158 billion euros based on the financial solidarity of the 17 countries that use the euro was agreed upon in July in order to avoid a Greek default. However, even before national parliaments vote on this plan, it may already seem useless.

The only way to keep the euro zone together and allow Europe’s single currency to survive is to either withdraw the euro from non-performing economies or move Europe closer to a federalist model with a common supranational government bestowed with the powers to enact fiscal and financial reforms when necessary.

Who’s currently in charge of fixing the euro zone?

When it come to the current debt crisis, the Brussels’ Commission is noticeably silent. Leading states such as France or Germany do not know which way to turn anymore. Every week a politician announces a new direction and the consequences are felt in the forex markets. Even economists that used to provide credible solutions are now denouncing the irrationality of the markets.

This debate leads us to the main historical issue the euro has faced: How can a single currency function in the long-run in the absence of a single supreme government? The European Central Bank has never been, and will never be a government. And, in any case, its top priority appears to be the fight against inflation.

Moreover, a deeper European integration seems mandatory – especially in the name of fiscal cooperation – and a central bank cannot replace a comprehensive supranational European government in that regard. In short, it appears that nobody and no organization currently has the power to make the necessary changes.

How can the euro zone be saved?

  1. The current deployment of the euro should be called into question, at least in its current format; that is to say the concept of excluding countries from the euro that are unable or unwilling to respect certain economic and fiscal constraints must be accepted. A few months ago, it would have been an abomination to utter these words, while today it has become quite commonplace.
  2. The implementation once of for all of real economic, financial, fiscal and above all political federalism as we have already advocated in previous analyses.

In the first case, the risk would be a general destabilization of the global financial markets and the failure of the collective adventure embarked upon for half a century on the “Old Continent” to unite it via a single currency.

In the second, a political deadlock might appear as ocurred in July in the US over the US debt ceiling debate given how reluctant European states are to entertain this notion.

In both cases, strong political courage and determination will be needed, we do not see how the euro can survive without it.


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By ForexNewsNow Team

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