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Europe exercises nuclear option to save euro. Will it -- should it -- work?

Cash Money - 100 Euro Notes

Image by viZZZual.com via Flickr

Years from now, this may be the moment that we look back on and say either, "That was the moment when the euro was saved," or "That was the beginning of the end for the euro."


With its $1 trillion TARP-style program enacted over the weekend, Europe's finance ministers threw all-in behind the euro in a sink-or-swim effort designed to save the super-currency. Some commentators have called this a "shock and awe" campaign. Others call it the nuclear option. Translation: when you exercise the nuclear option, you're out of options. It's like being a gunfight and you run out of bullets. Your next move would be to throw your gun at the other guy.

The quotes from Europe's finance brass sound almost personal, like they're protecting a loved one: "We are going to defend the euro," Spanish Finance Minister Elena Salgado told reporters. "We will do whatever is necessary."

The euro may actually be more dear to the 16 Euro zone member states than a relative. They've all tied their future to the thing, which is starting to look less like a balloon and more like an anchor.

The big cash infusion has been great for the European and U.S. stock markets. But have soared upward today, showing their confidence that Europe may not -- MAY not -- collapse in a quickly spreading black plague of debt.

Ironically, however, it has done nothing to help its intended recipient: the euro. After getting a temporary boost from the plan, the euro is giving back its gains already and is shrinking to parity with the dollar. That's bad for Europeans but good for Americans who want to book a European vacation.

The problem with having a super-currency has always been that the union is only as strong as its weakest member. And as happens so often in life when you chain a weaker element to a stronger one, the stronger one does not -- as hoped -- lift up the weaker one. Instead, the weaker one drags down the stronger one.

Europe really has no choice right now but to stand by the euro. Although you can make an argument that the eurozone ought to at least temporarily kick out Greece, have it return to its drachma and let it print money to inflate its way out of its crisis. It won't be pretty, but it will work. With a super-currency, each member state has the power over its own revenue and budget but not its monetary policy.

Instead, the debt problems in Greece, Spain and Portugal (and perhaps the U.K. and France) have forced the eurozone to inflate the entire super-currency, which, if you live in the prosperous, live-within-your-means German, you're going to naturally resent. Greek debt problems now mean higher prices at a Berlin Imbiss. With this step, Europe follows in the U.S.'s footsteps, Miller Tabak equity strategist Peter Boockvar writes:

"The Bernanke school of money printing has spread its wings in a big way as the Europeans have followed in the foot steps of choosing to inflate away its debt problems and bide time rather than deal with the issue of solvency and too much debt. Banks and bondholders have now been bailed out while Greece will go through a depression and others will see painful economic contraction."

As I've written before, there's no way to save Greece pretty. That story is over. The hope now is that the debt contagion will be ring-fenced around the Club Med nations along the Mediterranean coast and not spread to England and Germany.

The euro is now 15 years old. (Adopted in 1995, introduced as currency in 1999, coins and notes entered circulation 2002.) As with many adolescents, it hasn't turned out the way its parents hoped. It has been a disappointment and its worried Mom and Dad are trying one last big intervention, hoping the wayward child doesn't bring down the whole family.

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By Frank Ahrens  |  May 10, 2010; 2:00 PM ET
Categories:  Deficit/debt , The Ticker  | Tags: ECB, European Union, Germany, Greece, Member State of the European Union, Monetary policy, Spain, Stock market, United States, debt crisis, euro, european bailout, european debt crisis, eurozone, greek debt crisis, super currency  
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Comments

Euro zone agreement was in 1999. Conversion to Euro in 2000/2001?

How's that 15 years?

More like 9/10.

Posted by: leopard09 | May 10, 2010 3:54 PM | Report abuse

I'm not so sure the actions over the weekend "saved" the Euro. Quite the contrary. To be sure, the bailout may have postponed the day of reckoning for a year or so. Still, the individual Eurozone countries can now spend with reckless abandon, knowing full well that they'll be bailed out no matter what. In other words, the Euro is dead as a serious currency. It's now just one more kind of Monopoly money.

Posted by: John991 | May 10, 2010 3:54 PM | Report abuse

suckers.

Posted by: 11kap | May 10, 2010 4:02 PM | Report abuse

Nuts.

Elena Salgado is Spain's Finance Minister. In other words, she is the person directly responsible for the dire conditions of the Spanish economy, including a soaring government debt and unemployment above 20%.

This lady comes out and launches a $1 TRILLION piece of meat to international speculators. No wonder the vultures are enjoying the feast.

And European taxpayers will be left with a $1 TRILLION bill. What a genius!!!!

Posted by: tropicalfolk | May 10, 2010 4:17 PM | Report abuse

Kicking out Greece for failing to meet minimum standards of financial integrity may be the more just and fair action to undertake than to sacrifice the Euro to a country that is unable to be financially responsible.

Posted by: TabLUnoLCSWfromUtah | May 10, 2010 4:55 PM | Report abuse

Famous last words: "We will do whatever is necessary." Saving the Euro is like saving Private Ryan... a very costly enterprise with odds favoring a total collapse of the currency and perhaps the entire EU.

Why save Greece? It is not worth one Drachma, nor one Euro either.

Posted by: alance | May 10, 2010 8:58 PM | Report abuse

European union, of which Greece is a very small part of, will continue to get richer and richer compared to American Union (aka USA) as evident by how MUCH MORE valuable Euro is compared to US Dollar.

WHY?
Because Europeans are not suffering from a party of Lunatics as US is with the Republican party and Europe is not suffering from a right-wing (aka Lying) war-mongering media as US is with such lying machines as Fixed news, Talkradio, Wall Street Journal, CNBC, etc. etc., as a result of which:
1- European Governments invest much more of their People's money (Taxes) in their people and cities via such things as Universal nationalized health care, Universal education to Ubiquitous (electric powered) public transportation etc.
2- European Governments do not waste their people's money on Unnecessary Wars (Iraq War, Vietnam War, etc.) or on a Gargantuan Military

So Euro is KING and will continue to be KING, will continue to be MUCH MORE valuable to the US Dollar, as long as the above problems (FACTS) with US exist. More on these points here:
http://anoox.com/blog/Real_News.34892

You can bank on the above statement as being FACT.

Note as of this writing Euro is a MIGHTY 1.28 vs the pathetic US Dollar, so much for having to save Euro given that it is MUCH MORE VALUABLE than US Dollar already.

Posted by: RealNews1 | May 10, 2010 9:29 PM | Report abuse

The european socialists are running out of other people's money to spend.

This bailout will be a complete disaster.

Euro, dollar, they are all just empty paper promises, who cares which is higher. Gold will go to $2000 and then on to $5000.


Posted by: skeptic11 | May 10, 2010 10:38 PM | Report abuse

If the EUR goes down, it'll be good for European exporters though generally bad for consumers due to oil being denominated in USD.

Taking Greece into the Eurozone was a mistake, but the currency will survive, even if it comes down to France, Germany and Benelux. If it weren't for the debts Greece owed to other EU banks, they would have let the country default. That would have been a salutary warning to the other profligates in the EU.

As for the predictions that the EU will unravel, extremely unlikely. It's a free trade zone. The USA doesn't unravel when CA has payment problems.

Posted by: Matthew_DC | May 10, 2010 10:51 PM | Report abuse

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Posted by: itkonlyyou52 | May 10, 2010 11:25 PM | Report abuse

The big point here is that the European Union is showing a commitment to the Euro.

The Euro is in for some tough times over the next few years, as member countries are forced to admit that they are spending more than their revenues.

Posted by: postfan1 | May 11, 2010 1:52 AM | Report abuse

"(...) the union is only as strong as its weakest member"

How about the USA, then? Let us ignore a primary deficite twice as high and government debt rate per domestic income higher than that in the EU currency countries, but let us remember redundancy notes in California; the world's 9th largest economy unable to pay wages. Luckily, that quote from the article did not apply upon governor Schwarzenegger's actual bankruptcy declaration.
Debt is a real threat to our societies. For example, most new cars on US and EU roads are leased, making their "owners" feel wealthier than they are - yes: Many people sleep well under loads of debt and payment obligations. If that does not change, then both Europe and the USA "in 15 years" will loose against a new super power nation in South East Asia. China still does not share our both values in (Greek origined...) democracy, freedom of speech and separation of powers.

Posted by: LarsMach | May 11, 2010 2:07 AM | Report abuse

Seems to me that the Countries which adopt a shared currency, and expect their citizens of one or more Countires to pay their and each others bills, should also adopt common laws, a common language, and possibly common leadership in order to support that currency. Either that, or separate. And looking at the majority of Europe now, it's like most of Europe needs to define "What" it is that they want. Becuase I think that that is what the real problem is here! So choose: English or Swedish or none at all ?

Posted by: jralger | May 11, 2010 5:19 AM | Report abuse

No they should have let them default but NO THE POLITICIANS DON'T WANT THERE BANKER BUDDIES TO LOSE MONEY !!!!! SO OBAMA GAVE THE FED A GREEN LIGHT TO BAIL THEM OUT SO HIS BANKER AND THE FEDS BANKER BUDDIES DON'T LOSE MONEY.
SO NOW THE US TAXPAYER IS ON THE HOOK FOR BAILING THEM(ANOTHER COUNTRY OUT) BUT WAIT !!!
ALL THE NUMBERS POINT TO IF THEY HAD NOT DONE THAT ON MON MORNING FRANCE WOULD HAVE DEFAULTED SO IN REALITY IT WAS A BAILOUT FOR FRANCE !!!!!~!!!!!!!!!!! AND THE AMERICAN PEOPLE GET SCREWED AGAIN AND AGAIN AND AGAIN AND AGAIN !!!

Posted by: yourmomscalling | May 11, 2010 11:13 AM | Report abuse

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