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How to Solve the Eurozone Crisis

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By - Friday 15 June 2012

How to Solve the Eurozone Crisis

It's been a while since I wrote in any depth about the Euro and what the future holds for it as a currency – the last time in fact was at the point of the Irish bailout back in November 2010.

At the time, my thoughts were that the practicalities of disbanding the currency were just too unworkable and costly for it to actually happen, in essence that it would be easier and more cost effective to find a solution to the problems arising from the debt mountains and work out the kinks. Public sentiment appeared to be the same; we ran a poll on the subject in which 55% agreed it should continue.

Euro Poll Results

However, since then a lot has changed. More debt has been uncovered in several countries; more bailouts in some form or another have been issued (whether that be bond deals or physical bailouts in their own right), and more are rumoured to be on the way.

So far, we have seen bailouts issued to:

  • Greece:  €110 Billion (IMF and EU) (Round 1)
  • Ireland: €85 Billion
  • Portugal: €78 Billion
  • Greece: €130 Billion (Round 2)
  • Spain: €100 Billion (For bank use only)

Euro Bailouts So Far

Rumours suggest that Cyprus may also need to apply for a bailout in the not too distant future after already having borrowed 2.5 Billion from Russia. Cyprus financials hinge heavily on the outcome of anything Greece does - as a result, estimates on the size of the request (if indeed the request is made) vary from 10 to 60 Billion. 

Italian bonds have also been volatile during the Spanish bailout announcements, prompting rumours of what would likely be the largest bailout figure yet.

The list will likely get longer. So far there has been little sign of recovery in the countries that have received bailout thus far, and most of the countries have denied needing the bailouts prior to applying – Spain most spectacularly denying anything right up until the night before, making predictions of "who's next?" nigh on impossible for the long term.

The fact that to date 4 countries have had 5 bailouts between them and not one is showing any real signs of growth is very significant now, leading to imply that bailouts just don't work. If the Greek situation is anything to go by it would suggest all it does is prolong the demise of the country's status and credibility from a financial point of view.

Infamous hedge fund dabbler and gold hog George Soros has piped up at the Festival of Economics in Canada claiming the Euro only has 3 months to live, suggesting that far too much pontificating and procrastination has gone on and Germany's economy will be weakened so much that the Euro will just collapse and revision of the rule book is really what is required with respect to debt control.

Whilst Germany, (for the time being at least) is the Golden Goose nursing the ailing Eurozone, it cannot continue to do this ad infinitum, it needs repaying or it too will die. The other prospect which is unlikely to be under consideration is the Germans call in the repo-depot and the financial equivalent of World War 2 breaks out.

Whilst Soros is right about the general faffing about by those in charge in Euroland, the wider impact has to be considered – something overlooked by most (including Soros it would appear) in their day to day life.

The financial ripples have been felt as far afield as China – the larger concerns though are the countries local to the struggling nations that have heavy financial ties in terms of exports. Suggestions have been made that it will cost in the realms of €1 trillion if Greece leaves the Euro – leaving the country isolated, bankrupt and ostracised in the world of finance for potentially decades and even demote it to 3rd world status.

Romania, Bulgaria and Russia would suffer significantly having extensive trade ties with Greece and the likelihood that Cyprus would follow in collapse soon afterwards would expand the list of countries affected.

Whilst some financial commentators have said that Greece doesn't want to leave the Euro, it might have no choice – after all, it's a bit like having a tenant in a property that won't pay rent, but they're really nice about it – there comes a point where you have to evict them one way or another to protect your own interests and assets.

Greece could also decide to leave (a real possibility given their political instability and voter sentiment at the moment) a sentiment that appeared to be shown by the Irish around the time of their bailout.

On the other hand, Euroland has to take into consideration a couple of situations that can be avoided if Greece is held in or decides to stay. If they stay and Greece does start to show signs of recovery – several nations will breathe a sigh of relief knowing that trade with the region can continue with reasonable levels of surety they will get paid. The second and perhaps more significant point is that there is considerably less chance of a domino effect of default by the other countries that have received bail outs so far.

The spanner in the works though is how much more cash has to be thrown at the situation to make it work?

The reality in all of this is I have no idea – and so far it would appear that no one else has any idea either. There is, however an alternative solution that would sort the situation out once and for all.

Whilst I have no real idea of the practicalities or costs (other than vast) of actually doing it – I am a little surprised it hasn't been considered.

Solving the Eurozone Crisis

Solution To The Euro Crisis

  1. Count up who owes what to who
  2. Make every country involved provide an income and expenditure sheet
  3. Have an independent, non-member country assess each country's situation (The Swiss might be good at that)
  4. If it would appear more viable for a state to return to its old currency – make the provisions to do so, and make allowances for the reduction of debt owed if they do.
  5. Create a strict compliance schedule for all to keep it under control – failure to do so would incur privilege penalties for countries breaching agreements (i.e. trade embargoes, higher international lending rates etc.) rather than just being told to stand in the naughty corner which appears to be the current policy.

Far be it from me to suggest that any country might make a few false declarations as far as the figures are concerned – after all, whoever heard of a corrupt politician? The point is though that the creation of the Euro in itself was too vague in the first place and no real hard and fast rules where set out with respect to how money was used and what would happen if anything went wrong.

Making the countries themselves actually responsible for what they spend and how they spend it makes more sense. Most of the bailout cash so far has gone on propping up banks that think they can lend willy-nilly to all and sundry, the rest on government spending (parties).

Regulate the banking and lending sectors – inform lenders that "other peoples' money" investment schemes that run at the expense of tax payers when they go wrong and create swathes of toxic debt will not be tolerated, regardless of how much of a good idea they might sound whilst guzzling Crystal at the local boozer.

The Euro was originally formed to make trading easier between several countries and unify day to day business. It has failed. How about something gets done to actually achieve that?

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