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For European Union, Failure Is Not an Option

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Saturday, 15 May 2010 01:22 PM Current | Bio | Archive

The Spanish newspaper El País reported that French President Nicolas Sarkozy threatened to pull out of the euro unless German Chancellor Angela Merkel agreed to back the European Union’s bailout plan at a meeting last weekend in Brussels.

The newspaper based its account of the threat on comments made by Spain’s premier, Jose Luis Rodriguez Zapatero, made at a meeting of socialist politicians.

What should we make of that?

What’s for sure is that what is happening these days in Europe is simply mind-boggling but not “euro-apocalyptic,” just yet.

Interestingly, Merkel on Thursday had warned: “If the euro fails, Europe will fail.”

I respectfully disagree, at least for now, because of the very simple reason that there is too much at stake for Europe to fail.

This doesn’t mean we won’t have to get accustomed to a weaker euro, which will help Germany more than it will help Greece, Portugal, Spain, etc., by making Germany, and the euro zone’s other strong export-oriented countries, more competitive.

I would become extremely negative on Europe the day that Germany starts considering the return of the German mark as its currency again.

Yes, that would signal the final nail in the European coffin.

But, relax; there is no reason to worry about such a nightmare scenario, yet.

And it will probably never happen.

For now, the euro zone, not the European Union, is facing a full blown fiscal deflationary drag.

So far, the European Union and the European Central Bank have been obliged to compensate for the debt excesses of the “Club Meds” and the related overexposure of European banks to these periphery countries. This obligation could start to raise inflation expectations in the euro zone, which shouldn’t please the ECB, that’s for sure.

Europe will have to accept to grow with a weaker euro, but that’s not the end of the world.

No one should underestimate the consequences of a substantial weaker euro.

Such a diluted currency will have unpleasant surprises that could, but hopefully not, turn into “black swans” which would be hard to avoid anywhere. (“Black Swans” are high-impact, hard-to-predict, and rare events that are beyond the realm of normal expectations, to paraphrase author Nassim Taleb’s theory.)

Never forget, the European Union, according to the IMF, is the largest economy in the world with a GDP of $16.447 trillion in 2009 after contracting 4.08 percent. By way of comparison, in 2009, the U.S. had a GDP of $14.266 trillion; China had a GDP of $4.91 trillion; Japan had a GDP of $5.073 trillion and Brazil had a GDP of $1.574 trillion.

The European Union’s main import partners, as of 2008, were China, the United States, Russia, Norway and Switzerland . Its main export partners were the United States, Russia, Switzerland, China and Turkey .

Bottom line: Yes, the European Union is literally too big to fail.

The same cannot be said of the euro.

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HansParisis
The Spanish newspaper El País reported that French President Nicolas Sarkozy threatened to pull out of the euro unless German Chancellor Angela Merkel agreed to back the European Union s bailout plan at a meeting last weekend in Brussels. The newspaper based its account...
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2010-22-15
Saturday, 15 May 2010 01:22 PM
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