Accepting the premise that “he who has the gold makes the rules,” I’ve been thinking about the most likely end-game for the European crisis.
The Euro zone is not the United States of Europe. We have one monetary policy and one fiscal policy. They also have one monetary policy but twelve fiscal policies. A unified monetary policy was key to the development of the Euro, replacing the currency of twelve different nations and facilitating greater trade. There were also some halting steps toward governance and standardizing trade agreements, but that was essentially the end of the unification process.
Greece (as well as Portugal, Spain, and others) squandered their budget surpluses by being nice to their voters. As an extreme example, hairstylists in Greece were permitted to retire at age 53, because that job was considered hazardous. The Greek government kept borrowing more Euros to lavish greater benefits on an aging population.
When the United States plunged the world into recession in 2008, the Greek tragedy began unfolding, with other nations soon following. When Germany was asked to help with the bailout, the German worker reasonably asked why he had to work and pay taxes until he was 65, so the Greeks could retire at 53?
Fighting and screaming as they went, the rest of Europe collectively agreed to bailout the weaker members of the Euro zone. Suddenly, Finland has said they will contribute to the bailout but only with cash collateral. The whole deal could possibly un-ravel over this, but I doubt it.
But, what happens to Greece if they are thrown out of the Euro, and they are forced to use the Drachma again as their currency. First, the value of the Drachma would drop terribly. Imports, such as oil and food would skyrocket in price. With less international trade, unemployment would rise from already heart-breaking levels. In short, it would not be pleasant.
And, what happens if the European Union dissolves, and the Euro is no more? Germany’s Deutsche mark would skyrocket in value, quickly killing 30% of their GDP, which is their export sector. Again, international trade would plummet, and unemployment will rise even more. In short, it would not be pleasant.
Germany simply cannot allow the Euro to collapse. Given they have no option, they will eventually provide the funds necessary to save the Union. Of course, they will extract their pound of flesh, which is understandable. Having seen the negotiating strength the Finnish have just shown, the Germans will be even more emboldened.
Losing control of your fiscal policy is a major loss of sovereignty, which is surrendered only to the country who has the money to buy it. The major power centers of the world will be Washington, Beijing, and Berlin!