However many bailouts, the eurozone will soon be the twilight zone…(Prep, Muppets! Prep!!)
All the bailout mechanisms under the sun cannot make the eurozone work.
By Roger Bootle
08 Jul 2012
Another week, another summit. This week’s shindig of EU leaders in Brussels will be bound to focus on efforts to shore up the euro. Once again, it is likely to disappoint. The main issue is well-known; bailouts for indigent, non-tax-paying southerners at the expense of hard-working northerners.
The form book tells us that even if they come up with something, the proffered solution will be too little, too late.
But the real issue goes deeper. All the bailout mechanisms under the sun cannot make the eurozone work. Such bailouts are still, in the end, loans. Even if the interest rates are set very low, interest is due to be paid and the debt eventually to be repaid.
What would make some difference is if the money provided were not some sort of loan but rather an outright gift. Such gifts can be made in advance (although they rarely are) or after the event, when they are called write-offs. Sometimes a recipient itself turns what was once a loan into a gift. This is called a default. But northern countries understandably don’t want their past loans turned into gifts, and they don’t want to be forced to make new gifts until the crack of doom.
Yet even continued gifts under some sort of fiscal union would not bring prosperity, as we see clearly in Italy. Italian unification in 1861 married the Germanic north with the Latin south. The consequent misalignment continues to this day. If the euro holds together, this would leave the southern peripheral countries as a giant version of the Mezzogiorno.