The Eurozone and the spectre of banking collapse

I am skeptical as to the economic benefits of the Eurozone. In my view, the Euro has always been more of a political construct than an economic one. Nevertheless, the Euro has functioned quite well as a leading international currency in the decade since its formation. However, the present financial crisis is revealing tensions within the Eurozone, the consequences of which are not readily apparent.

There are weak and debtor countries like Portugal, Ireland, Greece, and Spain (you should notice that I have replaced Italy with Ireland here as a 4-nation member of Club Med as I see the Irish as more vulnerable). These nations find the monetary policy of the Eurozone not to their liking — they are in deep recessions and want more monetary stimulus. Moreover, the printing presses are no longer available to them as they gave up this policy tool in order to enter union with stable currencies like the Deutschemark and the Guilder.

Because economic weakness has become so severe in these countries, questions about their solvency and their desire to remain within the Eurozone have surfaced.  Ambrose Evans-Pritchard, for one, has been vociferous in seeing an end to the Euro.

But Wolfgang Munchau has also added his voice to the debate.

These are both good reads that I highly recommend.  My take on events is that a number of countries within the Eurozone will face banking crises, starting with Ireland.  At that point, leaving the Eurozone will make no sense because the damage has already been done.

Evans-Pritchard’s calculus is more to the point: Ireland must threaten to leave now if it wants to maximize any EU help it expects to receive, before the scope of other EU banking crises become apparent.  Weakness in the financial sector has infected all of the Eurozone members. I have mentioned that Austria has a weak banking system (see posts here and here). But, there is even growing evidence that Germany too has a fragile banking systemTo be clear: this is an ‘every nation for itself’ strategy pitting Eurozone members against each other, where those nations savvy enough to request help sooner are likely to benefit at the expense of others. The question is whether the Germans would go along with this.  If they do not, tensions will rise and that will change the calculus for Portugal, Italy, Ireland, Greece, and Spain. I don’t have a view on this as yet because the situation is still evolving.  However, I lean toward believing the Eurozone will remain intact even while individual nations or banking systems collapse.

As events occur in Eurozone banking, I will keep you abreast on developments.

Related Reading:

Bailout: The story behind America’s billion dollar gamble on the “new” Chrysler Corporation
Banking and Financial Systems
Central Banking Systems Compared: The ECB, The Pre-Euro Bundesbank and the Federal Reserve System
The Financial System and the Economy: Principles of Money & Banking
Study Guide for Burton/Lombra’s Financial System and the Economy: Principles of Money and Banking, 4th

4 Responses to "The Eurozone and the spectre of banking collapse"

  1. Free Tibet   January 21, 2009 at 3:12 pm

    My God. If this isn’t the dumbest thing I’ve ever read about Europe I dunno.The euro more of a political construct than an economic one? That’s so ludicrous as to be silly. I really do hate comments that don’t offer alternative explanations to outrageous postulates. But in this case it just isn’t worth the time to honor this blather with reason.

    • ex VRWC   January 21, 2009 at 6:19 pm

      Calm down he said it was his opinion!I am interested to see if his premise comes true – The Eurozone remains intact while individual nations (economies?) or banking systems collapse. Specifically how would this come about? I have trouble picturing that.

  2. Guest   January 22, 2009 at 9:56 am

    Thanks for repeating the same sort of nonsense that comes out of Evans-Pritchard. What are these premises based on? Should we now use the UK pound as a good example so that we can all call in the IMF to help us out with hyperinflation/bankruptcy? How about presenting some well researched facts?

  3. Anonymous   January 23, 2009 at 8:11 am

    It is a fact that the “Eurozone” was first a political entity forged during the cold war and that the economic integration leading to a single currency began much later. The majority of Europeans are not about to give up the benefits demonstrated by a single currency, but there are serious tensions, of which Evans-Pritchard is a symptom one might add. Harrison’s conclusion that the Eurozone will remain intact while individual countries may see their banking systems collapse seems fairly reasonable to me.