In order for the European Union's common currency area to survive it must become even to a greater extent a Euro Transfer Union (ETU) that takes from the rich countries and gives to the poor countries. But there is a limit to how far the wealthier countries will go. So will the ETU break down?
In the long run, taxpayers in the wealthier countries may balk, said Jörg Krämer, the chief economist at Commerzbank in Frankfurt.
“In the beginning people may say that a transfer union is a price you have to pay so that the euro survives,” Mr. Krämer said. “Fine. But the perceived costs of a transfer union may go up over time. There may be a time when the voters say, ‘We don’t want this.’ ”
I expect Peak Oil to put too large a strain on the ETU and force at least a partial break-up. Check out PIIGS bond spreads over Germany. The market it starting to build up for the next phase of the crisis.
Looking at the future of the Euro Simon Johnson basically says more ETU is the next step.
Step 1: Agree on greater fiscal integration for a core set of countries. This will not be full fiscal union but some greater sharing of responsibilities for each other’s debts. There is much room for ambiguity in government accounting and great guile at the top of the European political elite, so do not expect something completely clear to emerge.
But Germany will end up underwriting more liabilities for the European core; its opposition Social Democratic Party and the Greens are pushing Chancellor Angela Merkel in this direction, calling her “un-European.”
But Johnson's third step has Greece falling out of the Euro zone, possibly along with Portugal or Ireland. He can't rule out Spain or Italy either. I repeat: Peak Oil will amp up the size of the bad debts and cut the revenue flows to fund them. So some countries will get ejected from or run away from the Euro.
Johnson then says something scary but it sounds right to me: Then comes the American government, burdened by massive debts, under attack by the financial markets.
And when the financial markets are done with Europe, they will come to test the fiscal resolve of the United States. All the indications so far are that our politicians will struggle to get ahead of financial market pressure.
We will not get the fiscal sobriety needed to save us. The 2010s are going to be a long running series of financial crises.
|Share |||By Randall Parker at 2011 January 01 04:03 PM Economics Sovereign Crises|