An interesting article on the breakup of Europe
There is a term in engineering called "scope creep". You have a basic design for a nice project and then, people start asking for things to be added. Just a little change, it won't make that much difference...
After a short time, the project is now unmanageable and never ships.
Same thing happened when the European Union formed and now they are suffering for it.
From
Bloomberg:
Euro Breakup Talk Increases as Germany Loses Proxy
Romano Prodi recalls how he persuaded Germany to allow debt-swamped Italy into the euro: support our membership and we�ll buy your milk, he said.
When Prodi toured Germany�s agricultural heartland after becoming Italian leader in 1996, he pitched �a big milk pipeline from Bavaria,� pointing to a three-year, 40 percent plunge in the Italian lira that was hurting dairy sales. �To have Italy outside the euro, a huge quantity of exports from Germany would have been endangered,� Prodi, now 70, said.
Germany got the message, allowing entry rules to be bent to create a 16-nation market for its exporters. Now, German taxpayers are footing the bill for that permissiveness as Europe bails out divergent economies lashed to a single currency with little control over national taxes and spending.
The consequences are an 860 billion-euro ($1 trillion) bill for a debt binge led by Greece, sagging confidence in the European Central Bank�s independence and mounting speculation that a currency designed to last forever might break apart.
�You have the great problem of a potential disintegration of the euro,� former Federal Reserve Chairman Paul Volcker, 82, said yesterday in London. �The essential element of discipline in economic policy and in fiscal policy that was hoped for� has �so far not been rewarded in some countries.�
The money quote (literally):
What was conceived as a club for Europe�s strongest economies was expanded for political reasons, leaving the currency union with minimal powers to police deficit spending and no safety net for dealing with countries, like Greece, that veer toward default.
�There was no discussion of that at all, of a crisis mechanism,� said Niels Thygesen, a retired Copenhagen University economics professor who served on the 1989 group led by European Commission President Jacques Delors that mapped out the path to the euro. �It was believed that if countries adhered more or less to prudent budgetary policies, that would not or could not happen.�
The original project -- simplifying trade between Europe's primary nations by creating a common marketplace and a common currency. The scope creep -- a number of nations whose fiscal policies were unsound wanted to ride the coattails of the EU thinking somehow that the EU's stability would somehow magically transfer to them.
Now, instead, it is these nations that are dragging the economies of the EU down and bringing them into an unstable condition. Greece is in the news, Spain and Portugal aren't far away and France's clock is ticking.
Like an addict, any money given to them is wasted -- they may preach reform but they will not practice it. Serious reformation needs to happen before anything will change -- conservative fiscal policies, lower taxes, smaller government. These have worked very well in the past and will continue to work if they are implemented.
Posted by DaveH at May 15, 2010 9:31 AM