Is the Euro on a Short Path to Extinction ?

The world is watching Ireland writhe over in its debt crisis. Meanwhile the European Union Eurozone members meeting in Brussels decided to grant it the 85 Billion Euro rescue package that the Irish government requested. The terms imposed on Dublin for the loan are a 5.8% interest rate on its repayment schedule, but the important “haircut for bondholders” so often touted by German Chancellor Angela Merkel has, for the time being, been put aside for further discussion. But, the mere possibility that bondholders, who are always preferred creditors and don’t normally share in the financial problems of the entities they lend money to, has continued to shake European bond markets today.

Ireland needs to survive the debacle without defaulting on its sovereign debt (i.e., government bonds, like US Treasury notes and bonds). It probably will do this, but its citizens are in the streets demanding early elections and asking the government to explain just how it got innocent citizens, who are now paying the price in unemployment and drastic loss of property values, into this mess.

On the sidelines, investors are already making bets that Italy or Portugal will be next - bets in the form of demanding more interest for lending money to Portuguese or Italian governmental entities or banks.

In a move meant to calm the markets, the European Central Bank felt obliged today to say that the EU as a whole will have 1.6% GDP growth in 2010 and that that level will rise in 2011-12. But, mystifyingly, the ECB also said that Spain is not doing enough to institute the austerity measures that would prevent it from falling into the Greece-Ireland trap. And, even Belgium got caught up in the turmoil, issuing 2 Billion Euro of government bonds at a higher than normal interest rate.

So, the bond markets are nervous and the stock markets in Europe followed suit in a downtrend of about 2% today.

The Euro is also on the firing line. It has lost 1.5% against the Dollar and more against the Swiss Franc today. Both the Dollar and the Swiss France are refuge currencies, that is, they are bought when the rest of the world’s currencies look less attractive because of economic or geopolitical trauma.

One thing is abundantly clear. The European Union is ill-prepared by its very nature to deal with the current banking and fiscal problems of its member states. This is most obvious in the fact that no one is really in charge. The chairman of the European Central Bank makes statements, Germany’s Chancellor Merkel makes statements and nobody has the power to demand a pre-publication review or to demand agreement among the members before anything is said. That has been papered over in the past, mostly because the topics of discussion were not nearly as important as the topics related to the present financial crisis Europe finds itself in.

One need only look at Great Britain to see the difference. Britain, while a member of the European Union, is not part of the Eurozone. It has kept its Pound Sterling.  A new government was elected several months ago. It set out an austerity plan for putting its fiscal house in order. The plan calls for sacrifice and citizen support. The prime minister speaks for the government and so there is not the cacophony of voices we are hearing in the EU right now. And, the plan seems to be working.

If we look at the United States, the real message of the recent mid-term elections was to do what David Cameron and his Conservative Party have already started to do in Britain, “get the US fiscal house in order.”

It will be much more difficult because the US Congress is split between the two parties, but the House of Representatives is controlled by the GOP, which campaigned on fiscal restraint and cleaning up the spending spree mess left behind by the last House controlled by Democrats. Since it is the House that initiates spending and oversees government budgets, it will have a strong voice.

If the President is smart, he’ll work with the GOP. He can only win by doing what the majority of Americans want him to do. And he can only win if he abandons his policy that says “spend the USA into prosperity” and adopts the more prudent austerity of Great Britain and the newly elected GOP House members.

As for the European Union, it has serious work to do and it would be a very good idea to find common ground that all members can support. That, in part, means not letting the German government, which admittedly has bought the majority of Eurozone government bonds, ride roughshod over the rest of the Eurozone in an effort to save its own fiscal house. If cacophony continues to reign, there will be no hiding place for the Euro, or for the European Union, which will be forced into "third world" status, with a mountain of debt and a never-ending line up of member states begging for more.