Europe’s Date With Destiny

After thousands of years of wars based upon nationalism and fought to conquer territory and expand borders, Europe decided to join together and form a monetary union. The originators of the European Union, and later the euro, had a vision of a united Europe in their mind’s eye. There would no longer be a threat of European wars and perennial threat Germany would be pacified due to its new role as leader of the EU and the largest economy within the euro-zone.

The concept of the euro ($EURUSD, $FXE) makes perfect sense as anyone who traveled throughout Europe before its inception can attest to. Previously, one would have to change currency at each border which became quite a hassle not only for tourists but also for European businesses engaged in cross border commerce. Before the EU, Europe was filled with barriers, borders, and obstacles to the free flow of commerce, ideas, labor, and financial transactions.

The European Union has undoubtedly been a large net positive for the continent and for the world. However, the net benefit of the euro is not as clear. There is an old saying about not lending money to friends unless you want to lose their friendship. So it is the same with the European Union, it is one thing to take down barriers to the free flow of commerce and labor, it is quite another thing to share the same currency and monetary policy. The euro-zone now finds itself dealing with the flaws and omissions of its creation.

Cutting through all of the various theories and doomsday forecasts of the assorted euro punditry, there is really one core issue that matters above all others – European fiscal integration. The euro-zone is doomed to be a failure if the 17 member states are unable to come together to form a European Treasury with the power to issue euro bonds, enforce tax laws (police powers), and oversee and enforce budget discipline etc. As it now stands, countries can violate the Maastricht Treaty and run large deficits while receiving nothing more than a slap on the wrist from Brussels. Greece even went as far as to hide the true extent of its debt in order to join the euro, then once it had joined, deficit estimates were consistently revised upward.

As Italian Finance Minister Giulio Tremonti was quoted as saying yesterday morning, “Today in Europe there is an appointment with destiny…..” in order to solve the debt crisis. He went on to say “Just as on the Titanic, not even first class passengers can save themselves.”  Tremonti concluded by stating that he is convinced that the issuance of euro bonds is the right solution.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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