Eurozone Catastrophe: How Saving the Euro Could Mean Blood on the Streets

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AlterNet / By Marshall Auerback

Eurozone Catastrophe: How Saving the Euro Could Mean Blood on the Streets
The whole future shape of Europe must be resolved in a week or so. It’s a high-stakes game of poker that the Germans are determined to win--at the expense of misery for many.

December 2, 2011 |


The eurozone story is changing by the hour. Here's what you need to know to understand developments that will impact the entire global economy and potentially cause major social upheaval.

The eurozone is facing two distinct, but related, problems: Problem #1 is a national solvency issue, which only the European Central Bank (ECB) can solve. Problem #2 is deficient "aggregate demand" (a fancy term for the spending power of consumers), which calls for a stronger fiscal policy response to offset declining investment and purchases in the private sector.

As it stands, the ECB is the only show in town to save the eurozone from a very drawn out and damaging recession. Why is that? Well, because the individual member states in the European Economic and Monetary Union (EMU) cannot spend without taxation revenue or debt-issuance, because they are users of their currency, rather than issuers. This is a key distinction, and one often missed in media coverage. Their position is in sharp contrast to, say, the US, the UK, Canada, and Australia, all of which are issuers of their own currency and therefore not subject to the same kind of solvency risk because they are in control of their own money supply. The only institution in the EMU that can spend without recourse to prior funding is the ECB. That is the consequence of the flawed design of the monetary system that the neo-liberal conservatives in Europe forced upon the member states at the inception of the common currency.

As the issuer of the euro, only the European Central Bank is in the position of backstopping the eurozone nation’s bond markets, which allows these countries to fund themselves without paying the usurious rates of interest now being demanded for countries such as Greece. The problem is that the ECB is only willing to do so for countries willing to submit themselves to harsh austerity measures as a quid pro quo. This strategy might well save the euro, as it will diminish the markets’ concerns about national solvency. But the cost is likely to be yet even more depressed economic activity, higher unemployment, lower tax revenues, higher social welfare expenditures and, consequently, even higher public deficits. And isn’t that precisely what the Germans in particular most fear? ...........(more)

The complete piece is at: http://www.alternet.org/economy/153297/eurozone_catastrophe%3A_how_saving_the_euro_could_mean_blood_on_the_streets/

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