Europe exercises nuclear option to save euro. Will it -- should it -- work?
Image by viZZZual.com via Flickr
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.
Follow me on Twitter at @theticker.
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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