Euro crisis

With the euro as single currency, European countries can be compared to the US and its dollar. In this sense, Europe has two issues, instead of one for the US: -As for the US, the economic slowdown means that European countries must dig their deficit. -Unlike the US federal government with the 50 US states, [...]

A restart of the economy with more Reaganomics, which is a policy mix of Keynesianism (temporary deficit to help the economy) and monetarism (limit inflation) is tempting: -dig the deficit -throw money to cover the deficit between soaring government’s budgets and shrinking government fiscal incomes -hope for spending to re-ignite the demand and the economic [...]

An inflationary deficit could temporarily alleviate the pain. It could allow short-term restructuring, but the long-term backlash could be punitive. Nevertheless, Germany remembers the stagflation (stagnation-inflation) of the 1970s. Germany will most likely push for a non inflationary long-term restructuring.

Germany is tired of the inefficient (and inflationary) management of countries in financial turmoil. Thus, solving the euro crisis becomes very political.

Restructuring has two limits: panic or political upheaval.

Yes. We may regret that austerity measures are forcing Greece into recession, as described in the NYTimes. But, financial markets have lost faith in Greece. Greece has promised for years to restructure. They didn’t do enough. Now, foreign lenders are tired.

If ever Greece goes back to the drachma, consequences could be devastating. For economical reasons. For political reasons.

For Greece or Spain, it’s not just black and white, in or out of the eurozone. It could be grey as for Ecuador and Panama, which are using the US dollar as national currency.