by Richard Lyon
Tue Feb 23rd, 2010 at 12:26:13 PM EST
I found an interesting article in Spiegel Online International. I have found this to be a good German news source for someone who doesn't read German. My impression is that Der Spiegel is a reasonably well respected source of news and opinion. If anyone on ET thinks that this impression is seriously flawed, I'd be very interested in hearing about it.
Can the Euro Zone Cope with a National Bankruptcy?
Here are a few excerpts that I found particularly interesting from what is a fairly long article. They are probably a bit out of context presented alone.
There has never been this much uncertainty. No one knows whether the Greeks will manage to solve their problems, whether and how other countries will come to their aid, whether the crisis can be confined to Greece or whether it will spread like wildfire among the PIIGS -- and end up tearing apart the European currency union.
All of this translates into excellent opportunities for foreign currency traders and speculators. They can either bet on a decline of the euro or a bailout for the Greeks in the form of a rescue effort by other euro zone countries. In the first case, the price of Greek government bonds will hit rock bottom, and in the second case it will rise.
These are the kinds of conditions that make it possible to make a lot of money quickly -- but with devastating consequences, because speculators amplify trends and increase risks. If they bet on a Greek bankruptcy, it will become even more difficult, and expensive, to attract fresh capital. This could lead to a national bankruptcy or the feared conflagration -- or even the collapse of the euro
It is no coincidence, however, that the speculators have not zeroed in on the dollar, the British pound or the yen. Although the United States, Britain and Japan are also groaning under the burden of their debt, the euro is much more vulnerable, for both historic and political reasons.
The weak southern countries, members of the so-called Club Med, have always been seen as problem cases. They have lived beyond their means and neglected the need to be competitive, they have built up -- partly in full view, partly cleverly hidden -- enormous mountains of debt, and they have avoided hard-hitting reforms. These conditions existed before they became members of the euro zone, and they did not improve afterwards.
The other euro countries looked the other way. Initially, before the establishment of monetary union, they looked away because they didn't want to jeopardize their political goal of a European common currency. Later, it was because they themselves were benefiting from the euro. The German export economy, in particular, was able to expand continuously, unhampered by troublesome revaluation and appreciation that would have made its exports more expensive.
At the time, politicians ignored the concerns of many economists. Now they realize that this may have been a mistake. The European agreements that define the legal framework of the currency union do not include any provisions to account for the kind of crisis the euro is currently experiencing. For that reason, there are no instruments available to combat such a crisis.
The article goes on to provide a detailed discussion of the mechanics of currency trading and esoteric instruments such as credit default swaps. What seems significant to me is that this is a German publication, not an American or British publication, that seems to view these problems as serious and significant. I understand them to be saying that they think that absent major structural changes, the future of the EMU is seriously threatened.
Certainly the role of financial speculators is magnifying the problem. It could well be a replay of the way they used the US housing market as a roulette table. However, in the absence of real international financial regulation, that problem is not going to go away. All nations must have dealings in international financial markets. As such they are swimming in shark infested waters. As long as there serious questions about the future of the euro the sharks will taste the blood.