Recent events in Europe have once again highlighted the macro-economic problem of the developed economies: over borrowing at all levels, public and private, led to unrealistic expansion of credit which eventually led to a bust. In each case Western governments dealt with the private debt crisis by transferring these assets onto the public’s balance sheet (think TARP and the Federal Reserve’s special lending facility in the US). Now, in Europe, the bill for these public sector bailouts is coming due. Absent some extraordinary rescue the governments of Europe’s southern tier will need to default on their debt– as the President said in a recent press conference regarding America’s own shaky budget situation, it’s simply math.
However default of any of the Eurozone members would likely spell catastrophe for the EU project as a whole. Therefore the flinty northern economies, particularly Germany, are in a position to decide whether to work to fund the excesses of the Greeks and the Italians, or be accused of destroying Europe (again).
Ultimately the problem in Europe is the same as exists for all fiat-currency unions: creating more money is limited only by the political will to create more money. When confronted with the choice of printing more euros or watching Europe disintegrate, the Germany’s will like choose to support the print options. Therefore today’s Europe crisis is likely a temporary blip on the road to a more coordinated and tightly bound Europe. Whatever depreciation comes from printing more money will likely quickly dissipate, given the relative lack of alternatives.
How exactly this plays out remains the challenge of the day. Nevertheless it appears the European Union will be with us awhile longer.
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