WILL THE EURO SURVIVE?

WILL THE EURO SURVIVE?

Will the Euro survive the current crisis? Will the crisis lead to new European political alliances? What will be the shape of the new Europe, and what will its impact be on the global economy?

The current crisis in this continent will not be resolved until the political differences affecting the management of the Euro are sorted.  Recent summit crisis talks by EU leaders will not resolve the current economic crisis in Europe until political and fiscal reforms are introduced to form a single European Federal Government. 

Only by political integration will the Euro be saved.

WHAT HAS CAUSED THE CURRENT CRISIS?

For years most of the Western Democracies have been living beyond their incomes—with governments relying on printing or borrowing money to fulfil election promises.  To win elections, political parties have routinely bribed voters with promises that their countries could not afford.  On entering the Eurozone, member states were no longer able to print money to meet their budget deficits as previously; they instead relied on borrowed money to recompense for the shortfall.  This resulted in some Eurozone governments running up unsustainable debts and no longer able to borrow further funds to finance their government spending.

The problem has been made worse because governments in the Eurozone now have to repay debts accumulated over the years as well as pay higher interest rates to service existing loans.  At the same time, income from taxation is decreasing as economies contract, growing unemployment, escalating welfare payments, and an ageing population.  Countries such as Greece, Ireland, Spain, Portugal, Italy, and even others such as France, Belgium, Austria and the Netherlands are now in danger of defaulting on their loans unless their economies can begin growing to generate increase taxation revenue to repay existing government debts.

The problem has been made worse by the expectations of their citizens in believing that the State never runs out of money, and that they are entitled to the social support provided by the State such as unemployment benefits, health care, free education, and generous superannuation payments.   People have become dependent on the State—encouraging them to become lazy, irresponsible, uncompetitive, and unwilling to work as hard and save as people who do not have the benefit of a welfare state to provide their basic needs..  Socialistic policies adopted by Western Democracies have resulted in the State replacing the responsibility of the family to provide the needs of family members, contributing to the break-down of the family unit, and the bankruptcy of the State. Unlike the West, Asian families are largely responsible for providing the welfare and educational needs of members of the family.

With the exception of Germany, most western democracies have become uncompetitive with the Asian economies because of their high debt and cost structures.  They have financed their deficits with borrowed or printed money to meet their people's demands, leading to the economic and social mess they are in today.  Unless they can increase their productive output to compete, economic decline is likely to persist.

WHAT IS THE SOLUTION?

The only solution to resolve the crisis in Euro is for full political and fiscal union amongst those EU nations willing to give up their national sovereignty to create a new United States of Europe.  This union would have a single EU President with the power to tax European citizens to finance the new Federal Government. The authority to tax will provide an income stream to finance the issuing of new Euro bonds to replace the national debt of individual members and resolve the current debt problems of member states that agree to join the new United States of Europe—on condition they give their allegiance and sovereignty to the new government.

Some existing Eurozone member countries will be unable to obtain the political support to amend their constitutions to transfer their sovereign rights to the new united Europe Government.  This will result in the Eurozone having fewer members than at present, but those who remain will benefit from having a strong currency supported with a common economic policy.

However, even if these countries do not agree to join, they will still be able to accept the Euro as an alternative currency to finance trade, just as countries that have gotten into financial difficulty have either used the US dollar or have pegged their own currencies to the dollar to restore economic stability in the past.  We can expect those Eurozone countries that cannot meet the conditions required to remain in the new Federation to continue using the Euro as a Reserve Currency.

There is only a short time available for the Eurozone countries to accept the fiscal and political changes to create a new monetary authority to restore confidence in the markets and to save the Euro.  Reforms must be implemented within the next few months to prevent the collapse of the Euro.  Germany as the dominant EU economy is insisting on reforms that other member countries need to accept or leave.  Once these reforms have been implemented, market confidence will quickly be restored to the Eurozone nations, and the Euro will become the world reserve currency of choice. The Eurozone will attract capital from around the world and quickly become the most powerful economy in the world.

THE ROLE OF GERMANY

Germany is the only European nation with  the financial wealth and industrial might able to provide the nucleus to create new Federated Europe.  For many years, Germany has been the leading export nation of the world, investing globally to create a world economic empire.  Unlike China (where much of its manufacturing is controlled by overseas multi-national companies) or the Anglo-Saxon nations (whose economic influence is focused on services rather than producing manufactured goods) Germany continues to produce goods that the world wants to purchase.  While the rest of Europe is suffering from economic stagnation, the German economy is growing from strength to strength.  The weakness in the other EU economies is attracting more investment capital into Germany as a safe haven further stimulating growth—even when  German interest rates reach all-time lows.

Germany has strongly opposed loose monetary policies to stimulate growth in the EU—maintaining the only way out of the current economic morass is for countries to reduce government expenditure, increase taxation revenue, and to live within your income.  Their tragic historic experiences in the twentieth century, resulting from printing money by German Governments which led to hyper-inflation, has made them  wary on adopting loose monetary policies to solve the current crisis.

Germany itself has large debts of approximately 85% of GNP, but it is expected that the economic reforms made over recent years will enable this debt to be reduced to a more sustainable level.  Some of this debt has been incurred in support other EU countries and their banking system. However, reducing Germany's debt as with the other EU countries will depend on steady economic growth to provide the increased taxation revenue to reduce their debt levels.  Germany has a vested interest in transferring this debt to a new EU political entity.

Germany is now the undisputed leader of Europe.  The recent decision of the UK to opt out proposed fiscal union of the EU members has shifted the balance of power in the EU in the favour of Germany.  The rest of Europe is looking to Germany for a solution of the current Euro crisis, giving the position dictate the terms for the creation of a new Europe in a way it has never done since the times of Charlemagne.

Germany will not allow the European Central Bank to print excessive money to bail out the indebted Eurozone governments—in spite of pleas from other EU members, unless fiscal and political reforms are made.  Those nations who do will not accept the fiscal discipline and join the new political federation demanded by the Germans will be forced out of the Eurozone.  The nations that accept the Germany's conditions will have their economies under-written with the might of the Germany economy, supported by Germany's large gold reserves, and become a part of the new fiscal union.

The planned fiscal union will provide one central body to have the political authority to control the money supply, collect taxation revenue, and approve Government spending for those EU countries that accept.  Those EU nations, in addition to the UK  who will not accept these conditions, will remain outside the new Eurozone bloc.

WHO WILL LEAD THE NEW UNITED STATES OF EUROPE?   

There appears no European leader at present with the charisma and political skills to bring about this political union.  Chancellor Angela Merkel has provided some political leadership in reinforcing German concerns of adopting loose monetary policies to inflate the Eurozone out of its current crisis, which has increased her popularity domestically.  However, she was not held in the same high regard by other Eurozone members.   Historic distrust between the different nationalities will mean that only someone with exceptional leadership skills can bring together the EU members into a single Federal Government.  It will take the threat of a major crisis for the individual member nations to agree to surrender their national sovereignty and submit to the authority to a single new leader. 

Meanwhile the Catholic Church is becoming more active in promoting reforms to restore confidence in the global economy, suggesting the need for a single global reserve bank, which would have the authority to issue a single global currency.  The Vatican is the one organisation that could be accepted to implement as an impartial authority in uniting a largely Catholic Eurozone into a single European Federation.

What is clear is that the Eurozone members only have limited time to make the political and fiscal changes to restore confidence in the Euro, or it will collapse? 

Germany will not allow this to happen as it would bring about the economic disaster to itself, and to the rest of the world.  It will be Germany that will provide the leadership to restore a new economic order underwriting the validity of the Euro as a reserve currency.

THE CONSQUENCES OF FIAT MONETARY POLICIES

Ever since the 2007 economic crisis, governments around the world have reverted to printing or borrowing money to shore up their banking systems and to re-inflate their economies in an effort to revive economic growth.  While this has largely saved the banking system from collapsing, it has failed to create the economic growth to prevent growing unemployment problems and provide additional government revenue to finance their spiralling debts.  In addition to inflating their money supplies, many governments have borrowed excessive amounts of money becoming trapped in downward debt spiral with rising servicing debt costs and falling incomes.

Meanwhile, many Eurozone nations are caught in this debt bind where there seems no way out.  Increasing taxes is reducing economic activity, shrinking their economies and making it ever harder to recover to repay their debts. Lack of confidence that there will be an economic recovery in several Eurozone countries has meant investment capital has largely dried up—making it even harder for to get out of the morass they find themselves in.  In some cases, they may have little option but to default on their loans, leave the Eurozone, and revert back to their original currencies.

Many countries such as Japan, China, India, and the Anglo-Saxon nations will soon have to cope with spiralling inflation as a result of loose monetary policies—creating a lack of confidence in printed money, and undermining the viability of their banking systems. The consequences of global inflation will bring about a world-wide depression and the collapse of the banking system.  While at present the world is focused on the crisis in the Eurozone, little thought is given to this growing disaster around the globe.

The US dollar still remains the key world reserve currency essential for financing global trade. Yet, the continued political impasse in Washington in resolving the USA's budget and current account deficits is creating a disaster waiting to happen;  it is a ticking time bomb about to explode, creating havoc to the global economy, and throwing the world into a global depression.  As soon as confidence in the US Government's ability to attract the inflow of foreign capital essential to finance its bond market, there will be a massive sell-off in US treasury bonds and a collapse in the value of the dollar.  All those countries holding their foreign reserves in US dollars will have their savings wiped out and have their economies thrown into a deep great fall.

This will bring about the collapse of the debt-ridden Anglo-Saxon economies, but will also hit the Asian and Latin-American economies hard—throwing these countries into deep depression, followed by political unrest, poverty, and economic chaos. They will turn to the newly restructured Eurozone and United States of Europe for help to restore their economies.

WHAT WILL HAPPEN NOW?

To save the world, all nations will agree to have their banking systems and the management of their economies under the supervision of the newly-created United States of Europe to be rescued. The Euro will, by default, become the only world reserve currency, used to finance global trade.  This economic power bloc will bring about a new economic order but will dictate the terms and conditions required for nations to follow—cultivating global prosperity; this will restore confidence in the global economy.

The world will look to a revitalised German-dominated Eurozone as the new world super-power.  Led by German efficiency, this new global power will dictate the conditions countries will need to meet to be able to conduct trade, including regulations, to protect the global environment.  Individual freedom will be restricted, with people's lives being regulated by the state to benefit those participating in this new global trading system. 

Rather than the Euro collapsing, it will be the catalyst of the most powerful economic entity in the world.  Germany will dominate the world economically where there is failed military. The Anglo-Saxon alliance of the last 200 years with its free-market capitalism will cease to exist.

 

Bruce Porteous

bruceport@xtra.co.nz

26th December 2011