The End of the Euro

With recent events in Greece, Portugal, Spain, Italy and Ireland, the common European currency has been threatened. The governments in these, and other countries, have made a practice of running huge fiscal deficits to finance lavish social spending. Those deficits were often far beyond the agreed upon limits defined by the treaties which created the European Union and the common currency. The large deficits are becoming more and more problematic because the borrowing countries are reaching the point where they are no longer able to service the interest on the debts.

When countries run up huge national debts, there are often a number of ways for them to repay the debts. A common method is to cut spending or raise taxes. Unfortunately, this is not a popular practice in Europe when major unions riot and protest whenever cuts are made that can threaten their income. Additionally, in a number of European countries tax avoidance is a common practice, so raising taxes might not necessarily raise revenue. Another method to lower national debts is to grow out of the problem. If a country can increase its GDP and national income enough, the debts will be swamped with new, increased, tax revenues. However, Europe is currently only recovering from a major recession, to which it might fall back into. With such a shady economic outlook, growing out of debt seems unlikely. Another of the most common methods to eliminate national debt is to inflate it away. Countries often print new money and use that cash to pay off their debts. This practice eliminates the debt at the expense of current money holders. Again, this would likely be impossible for Europe as it would pay off one country's debt at the expense of others.

Unfortunately it appears as though all of the common methods countries can use to eliminate their excessive national debts can not be used for the problematic European nations. What appears to be happening is that a major international consortium of EU countries and the International Monetary Fund are going to create bailout packages for the individual countries, starting with Greece. This will take some of the debt burden off of the Greeks and allow them to artificially reschedule their debt. They will also need to implement drastic austerity measures which will be incredibly unpopular domestically.

So, in the end, how does this all shake out? Simply, the Euro will either collapse or certain countries will be forced out of the common currency. For starters, the countries who are footing the bill for the bailout packages will do so grudgingly. Such packages will be incredibly unpopular and while initial packages may pass, subsequent requests for help may be ignored. Secondly, countries receiving the bailouts will be forced into draconian spending cuts. Such cuts will make governing impossible for incumbent administrations. Minority parties will simply run on platforms to eliminate the cuts - and they will likely be successful. This will result in countries receiving aid not cutting their spending per agreements. The countries giving aid will likely pull back their aid forcing their neighbors into default. The European Central Bank will be forced to print new money to stabilize the currency if the defaulting nations are not forced out. Either way, the Euro will collapse or break up.