Thursday, July 2, 2015

The Economist: Europe's Future in Greece's Hands

With events still fluid in Greece and the referendum coming up this weekend, The Economist runs this article which takes a look at the big picture of how all this impacts the EU. Below are some quotes from this article and then a few added comments.


"THE European Union has never seen the like of the past eight days in Greece: barred banks, capital controls, the first IMF default by a developed country, the collapse of a multi-billion-euro bail-out, plans for a referendum that may hasten Greece’s ejection from the single currency, and the beggary of the people. Were the stakes not so high, all those emergency summits and last-minute demands would count as farce."

. . . . 

"But as the drama has become more desperate, so Europeans seem less worried. They take comfort from the fact that Greece is uniquely dysfunctional. Game-playing and repeated miscalculation have poisoned the negotiations. Without Greece, many now conclude, the euro zone might actually be more stable.

Sadly, that is wrong. Look beyond Greece, and the threat of further conflict within the euro is all but inevitable. Although Greece’s departure would prove the euro is not irrevocable, nobody would know what rule-breaking would lead to expulsion. Nor would it resolve the inevitable polarisation of debtor and creditor governments in bail-outs. If the single currency does not face up to the need for reform, then this crisis or the next will witness more Greeces, more blunders and more dismal weeks. In time, that will wreck the euro and the EU itself."

. . . . .

"Brinkmanship and crisis are inevitable in such a system. And they are aggravated by the euro zone’s reliance on ad hoc bail-outs, which politicise every decision. They set one side against another, breeding contempt among the creditors and resentment among the debtors. They turn wise policies into concessions that should not be given up to the other side until the last minute. No wonder the process has failed: at crunch time more than 20 negotiating parties, all with vetoes, were working to different agendas and haggling under pressure. The same downward spiral is all too plausible in a future crisis: the ruination of politics and the economy as demands for forgiveness from debtor nations like Italy or Portugal, say, founder on demands for austerity from Germany and Finland."

. . . . 

"The bloc knows that it needs to change. It has moved towards banking union; five of its leaders have issued a paper on how to strengthen the euro, including, among other ideas, a deposit-insurance scheme. But their proposals are modest because governments are harried by anti-EU populists and their citizens did not sign up to the euro expecting to give up a lot more sovereignty. The moral of Greece’s disaster is that Europeans must face up to the euro’s contradictions now—or suffer the consequences in more ruinous circumstances."

My added comments:

This article in The Economist supports what we have said here on the blog about the game playing that appears to be involved in this conflict. More importantly, it raises the big questions that can lead to major international monetary system changes which is what we follow here

The article shows what we need to watch carefully as this crisis unfolds and is eventually resolved one way or another. We can use this as a real world live beta test to see if the world is more likely to move towards a more centralized financial system or breaks down into a more decentralized system.

This article in The Economist is calling for the EU to respond to this crisis by moving towards a more centralized system (a banking union and each country being willing to give up sovereignty to make the union more stable). But there is much resistance in Europe (and around the world for that matter) within each nation to the idea of giving up national sovereignty. The BRICS nations are an example of the world potentially moving away from full global cooperation depending on how they are treated at the IMF and The World Bank. In the US, there is massive resistance to giving up national sovereignty.

It's pretty clear that the Greek people are going to go through some very tough times no matter what they do now. This human crisis will be used by both sides in the sovereignty debate. Those who want a more centralized system will say that the lack of such a centralized system is the problem (we need new "global rules of the game"). Those opposed to a more centralized system will use the crisis to say the EU should break up and this mess proves the EU was never a good idea in the first place.

How this big debate gets resolved in the EU has huge implications for how the next major global crisis might be resolved if and when we get one. 

We need to see what happens here with the EU because it will be a big signal as to how the public may respond if we do get another major global financial crisis like Jim Rickards and others are predicting. Public response in a complex system is unpredictable. So this live beta test unfolding with Greece and the EU will provide real world insight into which direction the public will go when push comes to shove and they have to make a choice. 

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