The Risk of Euro Collapse in 2012
The Euro is bleeding in the water because of the European financial crisis and many critics as well as doomsayers are circling around the victim.
Background
Europe has remained unable to step away from the collapse of its financial systems after the U.S. real estate market crash in 2008. With many of its banks tied up in the same mortgage-backed securities as other institutions, European governments found themselves strapped, trying to deal with the problems.
The weaker governments of the Euro market which includes Greece, Portugal, Spain, Italy, and Iceland all took a collective pummeling from losses. Germany, France and England remained the standouts but still suffered themselves. To add insult to injury, these countries were then looked up on to help bailout their smaller and poorer partners. Four years later, as Greece continues to deconstruct and elections may push the country to full rebellion against the European Market to default on its obligations, the rest of Europe is trying to read the storm clouds to figure out if the system is general is failing.
The primary fear is that Europe as a collective body has too much debt coming due for its institutional banks to fend off. Once the debt creeps up, that issue plus general panic raise concerns that the general population will pull all their funds out, hitting German and French banks hard and eventually making the remaining system insolvent overnight. That in turn causes the technical collapse as the European financial market lock up.
Up until 2012, the administration of a number of European countries has been fairly conservative, trying to manage debt with vetted financing as well as enforcing austerity measures to reduce spending. However, two major elections in April 2012 have upset the apple cart. Both France and Greece now have new leadership decidedly more interested in raising taxes than spending cuts. The only problem is where all that tax money is supposed to come from hasn’t been identified. In the meantime, the U.S. still struggles in its own recession and China’s consumption level is slowing down markedly, reducing revenues worldwide. Collapse Won’t Happen!
Do the above forces signal the implosion of the Euro? Opponents to that concept argue that Germany at least realizes losing Greece means eventually losing the European Union. The loss of that system is far worse for the country than any Greek bankruptcy in and of itself. Germany would lose significant resources and cross-border market benefits if everyone in Europe went back to their original borders and individual territories economically. So the country will ultimately be expected to save the Euro as well as the system to save itself.
Implosion is Imminent
Proponents of a collapse point out the European system is simply broke, period. Each country’s bank is connected by the European Central Bank which is being pulled to its limits with overwhelming short-term bridge loan financing demands. If a country actually leaves the system, the rest get stuck with the outstanding debt as a write-off, which essentially means a loss and depresses the value of the remaining Euro. Too many losses, and the Euro loses its value entirely as the currency becomes a negative debt value.
Actions Taken
What’s interesting to note is that the French banks are now taking the same step of the U.S. Federal Reserve by devaluing the Euro directly with the printing of more currency. When this occurs, in the short-term France can hand out more money or pay more bills, but in the long-term the system adjusts with inflation, demanding more currency for the same product sold. So instead of putting out actual Euros, the French banks are instead issuing more bonds, or IOUs. As people buy them, that cash replenishes the French accounts. However, the bonds have no basis, so in short it sets up the Euro for the same fall-down as the U.S. dollar did with mortgage-backed securities investments. Eventually, the house of cards fall down and the Euro will go with it.
The irony of the Euro’s situation is that the U.S. dollar is in the same boat. The only currency that has any real solvency and backing is China’s, and the Asian country already holds billions of dollars and Euros in the form of government bonds with its surplus money. So, yes, there is a high technical risk the Euro could destabilize. That said, there is a political incentive in Europe as well as the U.S. to not let that happen. If it means recapitalizing banks with baseless bonds to keep the system going until good times return, clearly the leadership is thinking, so be it.