Friday, June 1, 2012

The Eurozone in Trouble

The European Union seemed like such a good idea for so many reasons; however, it is now on the brink of collapse!
by Charlie Leck

News out of Frankfurt this morning is not good – certainly not good regarding the European Union (E.U.). The European Central Bank has informed leaders of the E.U. that its financial foundation is unsustainable under its current framework.

This is not – not, not, not – to say that the E.U. is sunk and kaput! It is a serious warning, however, that massive changes must be made to the system.

What must happen now, the Central Bank’s executives are telling E.U. leaders, is that action must be taken immediately to stabilize the Euro (the E.U. currency) and a clear vision must be established for what the Euro will look like in coming years.

The vast difference in the European approach to a “union system” is far different from that of the various Canadian provinces or the individual states in our own system. In Europe there is a single currency, with one singular, central bank. That bank sets interest rates and issues the currency; however, the various nations in the Union independently determine budgets and separately manage their economies. It would be similar to the U.S. having each of its states determine their own approach to valuing dollars and managing the flow of them.

Individual nations within the Union are very slow to admit financial problems when they occur and, as a result, the Central Bank is always reacting too late to tackle these problems. It is bound to occur on a decentralized financial system

In other words, can the E.U. really become a Union with a strong central and federal government that can react quickly to solve financial problems and over-ride the actions of individual union states? Enabling the E.U. to do this would be a huge step; and it is likely the only way the E.U. is really going to be sustainable.

Irish citizens voted yesterday on ratifying an E.U. treaty that would require much tougher budget discipline within their nation. Results are due any time (perhaps before you read this). It appears the measure will pass, but if it is rejected it will lead to great nervousness all over Europe and perhaps to the eventual failure of the E.U. itself.

Howard Schneider’s article in this morning’s Washington Post is probably the best analysis of the current problems facing the E.U.. I recommend it to you.

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