Feb 12, 2010 Article by Theodore Roe | 4 comments

Greek Bankruptcy Threat Underlines The Fundamental Problems Of The Euro and EU

There used to be a racing competition known as IROC. No, I’m not referring to the infamous Camaro model, rather the competition (the International Race of Champions) that inspired it. The idea of the competition was to get utterly identical cars together and give them to the world’s best race drivers. Because the cars were all clones the only way a driver could win would be on sheer ability. While the idea for the race ultimately failed, we are seeing a similar competition in the Euro Zone. 16 nations, all supplied with the same currency, were let out of the gate in 2002, and by 2010 several of them are on the verge of failure.

Europe’s history has been a long battle between unification and balkanization. From the conquering ancient Romans and Germany’s Anschluss to more peaceful solutions like the modern day European Union, there have been the repeated attempts to lump all of Europe together into one cohesive economic unit. The benefits of such an arrangement are tremendous, as the pooled economic power of the even the few European heavyweights, like France, Germany and the Netherlands, produces a pool of resources to rival even the United States for GDP. As a matter of fact, according to the International Monetary Fund the whole of the European Union (27 countries, 16 of which use the Euro) has four times the GDP of China and has even edged out the United States for the top spot in world rankings.

The Euro, first adopted in 2002, is the currency of Austria, Belgium, Cyprus, Finland, France, Germany, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. It is also used by about three million people outside of the Euro Zone, including the micro states of Andorra, Monaco, San Marino, Vatican City and several overseas holdings of European nations. Monetary policy for the Euro, including interest rates, is set by the European Central Bank, headquartered in Frankfurt, Germany.

While monetary policy for the Euro is centralized, policies concerning state spending and taxation are left to the member states respectively. Here regulations are particularly lax, mostly because European countries are not all that keen on letting an outside body tell them how to run their local governments. This grand divide has created some major problems with concern to economic solvency, and Greece is the shining example of the problems in the current system.

This is why viewing European Union as a single entity is misleading. It is a vain hope that Europe, eternally wracked by a peristaltic pangs of unity and independence, would ever be able to work as a single unit. This daring experiment is now on the verge of failure, thanks to the PIIGS (Portugal, Italy, Ireland, Greece and Spain) and EU’s lack of ability (through purposeful design) to effectively control its newborn currency.

Greece is practically bankrupt. It is one of several countries in the Euro Zone that has ballooning debt, which threatens the stability of not only the European Union, but its prized Euro dollar. Greece’s debt is over four times the limit allowed by the EU. Moves to slash government salaries, hike taxes and raise the retirement age have been met with an uproar in the Mediterranean country, compete with threats of mass strikes. This has sent the Euro on a plunging course, as confidence in the ability of Greece to repay its debts shrinks away to practically nothing.

The economic powerhouses of the EU, like Germany and the Netherlands, are busy trying to figure out what they can do to stave off bankruptcy in Athens. Germany spoke up earlier this week, pledging support for their Greek allies, but coming up short on an actual plan to stabilize the failing state. Polls have shown that the German people are utterly against raising their own taxes so that they can help Greece limp along to solvency. This is coupled with the knowledge that Greece, because of the widespread public panic against cost-cutting measures, might not even meet all stringent terms set forth by the EU in order to receive aid.

Greece is just the first example of how the Euro, and the EU that comes along with it, can ruin an economy of a small nation. The other PIIGS are grappling with serious debt issues as well. How many more states will the prosperous EU nations be able to float before the whole mess tumbles down? The only real way to avoid more collapses is to drastically tighten control over the economies and spending policies of member states, and that will surely be met with resistance.