The Tragedy Of The Euro
Following the last credit crisis, governments took over the banks’ liabilities through bail-outs. Since then, bail-in legislation has been enacted in all Eurozone member states. But if they try bail-ins to save just a few banks, they will likely collapse the whole system, because nervous bank bond holders and large depositors will flee the whole Eurozone banking system, rather than risk being forced to accept worthless bank equity.
Equally, the governments of Italy, Greece, Spain, France and others cannot afford the bail-out route, because they will be unable to fund them, and for a second time lifeboats will have to be launched by the EU, ECB and IMF. Only this time, the amounts will be far larger. It was funding failing Spanish banks that took Spain’s debt to GDP ratio from 35.6% in 2007 to 97% today. Just imagine where it goes to on the next credit crisis, and just imagine the demands on the Italians with their debt-to-GDP ratio already at 130%.
The Eurozone is now perilously on the edge of a financial and systemic abyss. The euro itself is not at fault. The institutions behind it failed to understand that converging interest rates in its first decade would lead to debilitating malinvestments, and that interest rate convergence would be followed by destructive divergence. National governments did not understand the full consequences of no longer being able to print their national currencies.
Don’t blame the euro. It is the victim of abuse by politicians who see it as a stepping-stone towards their grand objectives, and a hapless ECB, forced into increasingly destructive monetary policies. We must hope that the rest of the world is not destabilised by contagion from the Eurozone’s failure.