Two weeks ago, I applauded as European leaders finally forced their mega banks to take a haircut. But events this week have illustrated how fragile their plan is. The union is too multifaceted to deal with the extraordinary mess the so called best and brightest have managed to create.
As Tom Walkom points out in The Toronto Star, what began as a noble experiment fell victim to arrogance:
The arrogance emerged in 1999 when Europe’s leaders, smug with success, transformed this quite workable trade agreement into a far more ambitious scheme — a full-fledged monetary union.
Based on a new currency called the euro, that union was a step too far. It tempted fate.
And in the end, it brought on itself the wrath of the gods who, as the ancient Greeks knew well, like to smack humans when they get too uppity.
The idea of a common currency -- like the so called "liar's loans," which fueled Wall Street's profits for over a decade -- came with problems no one thought were of consequence:
From the beginning, the monetary union was fatally flawed. That it attempted to link entirely disparate economies through a single currency was difficult enough. Economically, countries like Portugal and Spain had virtually nothing in common with Germany, France or the Netherlands.
But its real flaw was lack of back-up. A central bank was established to issue the new euro. But unlike the Bank of Canada, this European Central Bank is explicitly forbidden from acting as a lender of last resort when regional institutions get into trouble.
More important, and again unlike the Canadian or American federations, the 17-member eurozone has no mechanism for transferring money from rich areas to those in need.
That, too, is explicitly forbidden.
It's possible that the Europeans can save themselves. But creating a bigger pot of money is only a stop gap measure. They need a central bank with more sweeping powers than just the ability to print money. However, those powers would infringe on the national sovereignty of all seventeen European nations. Getting to that kind of agreement is much more difficult than getting the private banks to take a haircut.
Sophocles knew how the story went.
This entry is cross posted at The Moderate Voice.