Making the Euro Too Big to Fail

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European Union leaders ought to at least try to seem confident that the crisis in Greece will be resolved.  They know that for the euro to survive, Greece must not be allowed to simply walk away.

The key point is in the crisis is the definition of “resolved.”

Greece’s solution is default

The most basic solution for Greece is to default on its debt and leave the euro behind.

Defaulting on its debt has many advantages for Greece:

• It will relieve Greece of its massive debt, which it can never repay in any case
• It will also reduce some of the need for the proposed austerity measures
• Greece will return to a devalued drachma as its currency
• It will make Greek products cheap and attractive to the rest of Europe
• It will result in higher employment and economic recovery

Default contagion

The problem with Greek default?

It is exactly the kind of “resolution” that the European Central Bank fears.

Once Greece defaults, Spain, Portugal and Italy will not be far behind. The default contagion will lead to the death of the euro and a fractured European Economic Community.

To European Community leaders with grand visions of the "United States of Europe," this is unacceptable. The euro is the world’s second largest reserve currency after the dollar, and a source of political and diplomatic power for the European Union.

Therefore, to the European Central Bank (ECB), Greek default is not a tolerable option.

“Plan B:” Alternative Strategies to solve debt crisis

“Europe’s leaders should look for alternative strategies to solve the debt crisis,” billionaire financier George Soros told a Vienna panel of bankers, “because the “survival of the EU is of vital interest to us all, there’s a need for a “Plan B,” he said, “You need a Plan B and there’s no Plan B at the moment.”

Ah, but there is a Plan B...

“Plan B” according to Jean-Claude Trichet, President of European Central Bank, does not mean letting the weak economies off the “euro hook.”  “Plan B” means burying the hook of economic control deeper into all European Community economies.

“(These) debt problems show the need for central EU control of national budgets,” Mr. Trichet said recently.

Mr. Soros agrees, explaining that this could include EU-wide taxes, a “banking system guaranteed by European institutions, not a bunch of national banking systems,” or a financial transaction tax.

What does that mean?

The end of European sovereignty

It means that “Plan B” is" the grand solution."  It means that the ECB is to take control of the Greek economy lock, stock, and barrel.  If you think the violence in Greece in bad now, just wait until Greece loses what is left of its sovereignty, with austerity measures imposed by the European Community, backed up by European Union military forces. Expect the same to occur in Spain, or any other EU country in a similar situation.

Surely this is not what they have in mind with “Plan B?”

Not exactly.  There’s more.

What Mr. Trichet and Mr. Soros propose is to not only strip Greece of what remains of its sovereignty, but to strip all European countries’ “control of their national budgets.”  Does this mean that all major budget decisions for Greece and all other European Community members would be made in Brussels?

The answer is “yes.”

That is like putting a flu patient in the same room with healthy people.  What will it accomplish?

Mixing weak economies with the strong

It will “blend” the strong core European economies with the weaker ones.  It will mix bad debt with the good debt. Those at the top know that this is the only way to keep the euro as a currency.  It is the only way to keep Greece, Spain, Italy, Ireland, and Portugal from defaulting on their sovereign debt and leaving the euro.

The idea is that absorption of national budgets into one single European Community budget will stabilize the weak economies and lower the risk of bad debt by mixing it with “good” debt.  This may be a good idea on paper, but how will Germany and France feel about permanently paying to the improve lives of Greeks and Spaniards?

Does this sound familiar?

Bad apples spoil the bunch

That is exactly what Wall Street did with the toxic sub-prime mortgage debt. Wall Street realized that the high-risk debt could not stand on its own. So Wall Street blended high risk mortgage debt with conventional “A” paper mortgage debt as a means of diluting the risk.

That policy only succeeded in polluting the entire mortgage debt financial sector.  Eventually, the “toxic debt” was sold to financial institutions around the world, leading to the meltdown of 2008.

Will “Plan B” work for the European financial system?

Or will it end up crashing and burning?

Will “Plan B” reconcile the problems Greece faces today, or will it lead to more catastrophe?

The basic problem remains unresolved

The problem is that the euro as a currency does not work for the small, slower economies.  Logic and safety says that if you’re a slow driver, you stay in the slow lane.  If you’re a fast driver, you stay in the fast lane.

The ECB’s solution?  “Plan B?”

Get rid of the lanes. Eliminate all financial sovereignty in Europe.

Harmonize economies that march to the beats of different drummers.

Consolidate all power in the EU.

But more power held at the top will not change the facts:   Small economies need small currencies in order to compete.

“Plan B” will not work for very long, and will poison the entire European Community financial system.  Then it will poison what remains of the world’s financial system.

The concept of “European Union” is a political idea. The truth is, “Plan B” is not based upon economic realities.  Will the problems of the European financial system affect the rest of the world?

Absolutely.

When reality catches up with the European Community, things will be even worse than the current situation.  There will be total collapse of the world’s financial and trading institutions.  The truth is that Greece was too small to succeed in the  eurozone.

The EU’s solution to the Greek debt crisis?  Make the eurozone “too big to fail.”

Hold on tight; it’s going to be a rough ride.

And those are…The Gorrie Details.

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