Sunday, November 21, 2010

Euro: Shaky Fundamentals

The recent Irish banking crisis clearly depicts that Euro makes little sense, because the European Union lacks taxing, spending and regulatory authority which are critical in managing a modern economy.

The U.S. federal government regulates banks and financial institutions and ensures deposits because continuously functioning banks are as essential to modern economy as uninterrupted electricity, infrastructure and the Internet. Ireland government, not the EU, regulates and ensures the solvency of Irish banks.

Irish treasury doesn’t have the cash or borrowing capacity to recapitalize troubled Irish banks, Without an EU rescue, Ireland's banks default, its government defaults, or its citizens face cuts in government services which will make their life miserable.

Had Ireland continued with its own currency, it could have been in the position to print money inorder to recapitalize its banks -- that is exactly what the Treasury and Fed can do for the FDIC, Citigroup, Bank of America, and other financial institutions, or RBI for India.

Printing money would have pushed down the Irish pound against the dollar and other currencies, resulting in some inflation and lower Irish living standards, as bank losses would have spread over the entire economy. However, over several years Ireland's trade balance would have improved, and provided they didn’t take any foolish steps, the Emerald Isle would have worked out of its mess.

Lacking the power to print money, Ireland must accept aid from the ECB and stronger EU governments, but accepting aid seems to create political embarrassment for Irish politicians.Ireland makes the usual baseless claims that it can handle its own problems but euro is weakening against the dollar.

Quick, decisive action seems to become impractical when it is most needed, and fears spread about the euro zone breaking apart. Let us understand this by taking US example of why there is something fundamentally wrong with European Union. Among the 50 states, the U.S. federal government equalizes social spending by transferring tax revenue from rich states to poorer one. France and Germany, like New York, are prospering, but Brussels cannot tax Germany for benefits in Greece in the manner Washington taxes New York to for spending in Mississippi, or other states

Keeping its huge wealth to itself, Germany provides its citizens with employment security, health care and other benefits, portrays itself a model of country of European Union, and scolds Italy or Greece or others for frugality.

Greece, Portugal and others have borrowed thoughtlessly to satisfy their citizens' expectations for benefits on a par with Germany and now face severe troubles. If they still had their own currencies, devaluation of currencies would have significantly helped these countries to come out of these heavy debts .

With each such crisis, probability of infected nations dropping the euro and returning to national currencies increases. Ultimately, this motivates Germany and others strong European nations to come to their aid.

The Treaties of Rome and Maastricht provided Brussels with key powers for building a single market for private goods and services but deny Brussels the taxing, spending and regulatory powers to act as a sovereign government.

The EU should not be printing money,Unless this void is filled.


Anonymous said...

I agree with you about almost all the article. I just would chance the last sentence with "The UE should not just printing money, but fill this gap!".
This is the only solution I can see for the Europe.

Anonymous said...

I'm not sure that you know what "loophole" means. The Euro has fundamental problems of all sorts, but I can't think how it might have a loophole of any kind.

EUbrainwashing said...

Fundamental black-holes in the EURO maybe - one in which taxes will be tipped forever. A hell-hole, certainly, a stink-hole most like.

The loop-hole is only that those who have lent excessively, to the point of apparent foolhardiness, can only have done so because they knew, however it turned-out, their bad investments were ultimately indemnified and so protected.

But that was not the game. Not concerned with making bad investments that cause financial collapse and just getting their money back, instead the aim has been to ramp-up such debt and then lend the selfsame sums again required to fund the bailouts themselves. So in doing create enormous and indefinite national debts held by the bailout nations that can afford to pay such interest as demanded. The people of the EU become tax-slaves to the international bankers.

The loophole exploited is the promise that sovereign states will act as lenders of last resort and behind them the resolve of the member-states of the EU to rally behind the EURO.

This is a win-win for the bankers, who funded this debt and subsequently will lend the bailout too, and for the EU/EURO which can only be improbably left to horrifically die or become politically fully incarnated as a result.

Prakhar P. Singh, Sajan K. Roy, Debjeet Dey said...

The Euro has fundamental problems of all .......
Point taken... I have changed the title. Thanks

DP said...

On the much misunderstood Euro

Anonymous said...

fix your own damn country first, poor Indian sikh. Or the Hindus might just massacre your ass again.

Prakhar P. Singh, Sajan K. Roy, Debjeet Dey said...

@.....fix your own damn country first
I am feeling pity on you.... I can very well understand your frustration.For your future remembrance i would like to say that your knowledge about India is too shallow, as I am a Hindu. further please Don't beat around the bush and i will appreciate if you can stay on topic and contribute in positive discussion. Rest everyone will agree that India is fast changing and have gained enormous importance on international map.

Anonymous said...

cant it be that the euro zone devalues the euro for the sake of ireland.. since the euro zone is a union

Anonymous said...

"Greece, Portugal and others have borrowed thoughtlessly to satisfy their citizens' expectations for benefits on a par with Germany and now face severe troubles. If they still had their own currencies, devaluation of currencies would have significantly helped these countries to come out of these heavy debts ."

Thing is, if Greece were not part of the Eurozone, it would not have borrowed and spent so recklessly. Even if it had wanted to, it would not have found the lenders.

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