Tuesday, March 12, 2013

The Euro has problems, big problems

One reason the euro holds together is fear of financial and economic chaos on an unprecedented scale, another is the impulse to defend the decades-long political investment in the European project. Today we continue to see the parties involved say that they remain committed to propping up nations like Greece. Its departure from the euro, Angela Merkel, Germany’s chancellor recently stated, would be “catastrophic”. Yet, Mrs Merkel is not ready to take the action needed to save the euro once and for all. This means that the euro zone remains vulnerable to new shocks.

Markets still worry about the risk of sovereign defaults, unsustainable deficit spending, and of a partial or total collapse of the euro. It is possible that the currency is built on a unstable foundation so flawed that it can't continue. Common sense suggests that leaders should think about how to manage a break-up. Some may be doing so, but having described a split as bringing economic Armageddon, leaders dare not be seen planning for it. Like Greece, the austerity-wracked economy of Portugal is expected to muddle forward. Economists remain skeptical that growth will pick up in 2013, as the government forecasts.

The government's austerity measures and labor reforms in Portugal will cause many workers to see their wages drop by up to 25%. On top of pay cuts and tax increases, the measures will make it easier and cheaper for companies to fire workers, will introduce more flexible timetables, and will cut holidays and overtime rates. Mr Carlos who is a member of the central committee of Portugal’s hardline Communist Party recently said,  “I don’t believe that workers will passively accept a cut in pay”. If not be prepared to continue seeing this play out on the streets of that troubled nation. The problems are many, and the economic problems facing the Euro-zone are big, the other thing that is for sure, is that they are not going away.

Footnote, this was written before the crisis in Cyprus and our eyes again focused on the banks in Europe. If you have not read it the post referenced below goes into the possibility of a bank run in Europe;


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