The Dubious Benefits of the Eurozone

12 December 2009

Saturday


The Greek economy is in serious trouble. Its travails have been recounted in the financial press and the popular press alike. The BBC has reported popular discontent in Greeks fear times will get tougher. Greek debt is frightening investors, and last week this had the consequence of what the Financial Times called a “spectactular collapse” of the Greek bond market.

The Euro has remained stable, despite these developments, as though blissfully unconcerned (or unaware) of events in the Balkans. But Europe ignores the Balkans at its risk, as history has shown. I find it rather problematic that membership in the Eurozone confers so few benefits in the time of crisis.

Many are the advantages of being a member of the Eurozone; some nation-states are obligated to join as soon as they can meet the entry requirements; other nation-states are clamoring to join at their earliest opportunity. With membership in the Eurozone a nation-state acquires access to one of the world’s great markets with a uniform currency and a uniform code of commercial standards to facilitate trade. This is a powerful position for any nation-state that can gain acceptance.

But is the Eurozone to be a fair-weather friend? If a member state can no longer meet the standards of the Eurozone is it to be unceremoniously ejected from the union and cast aside as though this profitable association, once unprofitable, means nothing? Many Eurozone economies already run budget deficits far in excess of the three percent that is supposed to the limit for member states. Thus, while entry to the club is highly restrictive, no immediate action is taken to eject those states that fail to comply with its requirements. In this sense, the Eurozone is seen to be rather too lenient to its member states.

But leniency in economic discipline can definitely go too far, and especially if that leniency allows sufficient latitude for the Greek economy to “implode” as suggested in the Financial Times. I am no student of the Eurozone, so I don’t know if there are formal mechanisms for putting to right the sort of problems that are appearing in Greece, but if there are no such mechanisms, there ought to be.

Greece, for the moment, shows the problems of the Eurozone in their starkest form, but these problems are not limited to Greece, and if they are not stopped in Greece they will threaten to spill over into the next least stable economies. If the European Central Bank does not step in and take decisive action in a matter so central to the interests of the European economy, it will only add to the image of European dithering.

The Greek bond market has come under great pressure; the bond markets of Ireland, Spain, and Portugal are also under pressure. While I would not expect a chain reaction collapse of bond markets like the chain reaction of currency collapses in Asia during the Asian currency crisis of 1997, similar forces in the investment world are in play. The economies of Europe are far more robust than those of Thailand and other Asian Tigers whose currencies were systematically shorted by speculators. Nevertheless, while there is not going to be spectacular collapse of the entire asset class of Eurozone bonds, if decisive action is not taken, this asset class certainly will suffer.

Failure to take such decisive action could be interpreted as unwillingness upon the part of Eurozone members to come to the aid of one of their own. It is ironic at this point in history, when the Europeans have made such a point over the past few years of emphasizing the virtues of collective security, that there should be so little interest in collective financial security. Collective action on behalf of the Greek economy would be in the interests of the entire European economy; implosion of the Greek economy will prove that a Eurozone economy can collapse and no one will come to the rescue.

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