Collective Conscious

The Euro­zone is on the verge of becom­ing the next South­east Asia, circa 1997. In the wake of an unusu­ally long global reces­sion, the finances of Euro­zone coun­tries are under­stand­ably awful. What makes the Euro­zone dif­fer­ent is, of course, its com­mon currency. In Asia, every coun­try had the abil­ity to devalue or defend its cur­rency while their debt crises raged. In Europe, there is no such option; they are all tied to the Euro which is in turn con­trolled by the Euro­pean Cen­tral Bank. The ECB has to take all of Europe into account when mak­ing deci­sions about the cur­rency, and the strong influ­ence of France and Ger­many with their sta­ble finances makes com­pet­i­tive deval­u­a­tion an unlikely approach.

As its smaller ele­ments face their respec­tive crises, Europe is being forced to fill the gaps in its over­all finan­cial frame­work. In the United States, the Fed­eral Reserve con­trols the com­mon cur­rency for all 50 states, but the fed­eral gov­ern­ment allows this sys­tem to work by cen­tral­iz­ing deficit spend­ing and effec­tively guar­an­tee­ing the debts of the indi­vid­ual states. In Europe there is no cen­tral fis­cal author­ity to take on these impor­tant roles, leav­ing coun­tries like Greece and Ire­land to face seri­ous crises when their bud­gets get severely out of whack. Imag­ine, for exam­ple, if Cal­i­for­nia were an inde­pen­dent coun­try — or New York City in 1975.

For­tu­nately both Cal­i­for­nia and New York can rely on the United States gov­ern­ment for nearly unlim­ited assis­tance. Until today, Euro­pean coun­tries had noth­ing. Even after today, there is only a cen­tral fund to assist strug­gling coun­tries, and no cen­tral fis­cal author­ity to shoul­der the bur­den of a com­mon cur­rency. The IMF can­not con­tinue to play this role, and bailout fund­ing can­not con­tinue to be assem­bled ad-​​hoc. Sooner or later the Euro­zone is going to be forced into more seri­ous fed­er­al­iza­tion if it is to sur­vive future crises.