By Kate Connolly, Los Angeles Times.
November 30, 2010
"'If we keep bailing out the rest of Europe, we'll end up going down with the sinking ship,' a dressmaker in Potsdam says.'"

"Reporting from Berlin —

Germans braced for even more turmoil in the Eurozone after a multibillion-dollar rescue package for Ireland failed Monday to satisfy financial markets alarmed at the cost of having to bail out heavily indebted partners that share the common currency.
With indications that not just tiny Portugal but the large economies of Spain and even Italy may also need rescue deals, some German commentators debated whether the time had come to rethink membership in Europe's single currency"..............

http://www.latimes.com/news/nationwo...,7372376.story

If the Euro keeps falling in value will the EU dissolve? How long can Germany keep bailing EU partners out?

EU will not be dissolved but it might be the beginning of the end for the euro as the currency union. The weak countries can be squeezed out of the currency cooperation, or Germany can pull the plug because costs are excessive. But it is the choice between plague or cholera.

Lack of discipline has played a significant role in why it has gone so wrong. Politicians have not respected the rules of the Stability and Growth Pact (Euro constitution) that would keep countries on the right economic path. Politicians have been thinking short term and must now pay the bill afterwards. They do not respond to it and has turned its attention to Portugal as the top candidate for the next rescue package. But Spain, Belgium and Italy also have large debts and budget deficits. They were punished by having to pay a higher interest rate to investors who buy government bonds. Therefore, the debt crisis can last a long time yet, and at worst, there is a risk that the euro as the currency union is driven into a death spiral.

At worst, the euro as currency union risks to collapse. The rescue packages to Greece and Ireland are only firefighting. Debt packages means that countries can borrow money outside the financial markets in three years, but then the money should be repaid and the debt backlog is not diminished and rescue packages will not solve the countries' underlying problems. Countries face a bitter cocktail of strong public spending cuts, higher taxes and unpopular reforms of pension systems in the coming years, and there is an imminent risk that they are not achieved.

Financial markets do not believe that the indebted countries could stand on its own economic legs when one billion aid packages expire. That is why interest rates across the countries have skyrocketed in the government bonds issued by countries to help packages.

Greece is punished with a yield premium of 9.25 percent compared to the German interest rate, and Ireland is punished with a yield premium of 6.85 percent. But the focus is also directed against the three other indebted euro countries, Portugal, Spain and now Italy, punishable with a yield premium relative to the German of between two and five percent. Portugal and possibly Spain will be the next countrys. As the days pass, pressure grows. EU rescue fund of 750 billion can manage Portugal and possibly Spain, but then the box empty and must be replenished.

The European euro currency is one of the biggest political prestige projects in EU history, and politicians will extend infinitely far to save it. 16 European countries today have changed their currency for the euro. One bright spot is that the debt crisis are sending the euro down against other currencies. There is nothing that is so bad that it is no good for something else: a weaker euro benefit European exports.

How long Germany can go on is the big question, but I think they will go very far.

Your comment should have been a separate topic- spot on Seehund!

Originally Posted by Seehund

EU will not be dissolved but it might be the beginning of the end for the euro as the currency union. The weak countries can be squeezed out of the currency cooperation, or Germany can pull the plug because costs are excessive. But it is the choice between plague or cholera.

Lack of discipline has played a significant role in why it has gone so wrong. Politicians have not respected the rules of the Stability and Growth Pact (Euro constitution) that would keep countries on the right economic path. Politicians have been thinking short term and must now pay the bill afterwards. They do not respond to it and has turned its attention to Portugal as the top candidate for the next rescue package. But Spain, Belgium and Italy also have large debts and budget deficits. They were punished by having to pay a higher interest rate to investors who buy government bonds. Therefore, the debt crisis can last a long time yet, and at worst, there is a risk that the euro as the currency union is driven into a death spiral.

At worst, the euro as currency union risks to collapse. The rescue packages to Greece and Ireland are only firefighting. Debt packages means that countries can borrow money outside the financial markets in three years, but then the money should be repaid and the debt backlog is not diminished and rescue packages will not solve the countries' underlying problems. Countries face a bitter cocktail of strong public spending cuts, higher taxes and unpopular reforms of pension systems in the coming years, and there is an imminent risk that they are not achieved.

Financial markets do not believe that the indebted countries could stand on its own economic legs when one billion aid packages expire. That is why interest rates across the countries have skyrocketed in the government bonds issued by countries to help packages.

Greece is punished with a yield premium of 9.25 percent compared to the German interest rate, and Ireland is punished with a yield premium of 6.85 percent. But the focus is also directed against the three other indebted euro countries, Portugal, Spain and now Italy, punishable with a yield premium relative to the German of between two and five percent. Portugal and possibly Spain will be the next countrys. As the days pass, pressure grows. EU rescue fund of 750 billion can manage Portugal and possibly Spain, but then the box empty and must be replenished.

The European euro currency is one of the biggest political prestige projects in EU history, and politicians will extend infinitely far to save it. 16 European countries today have changed their currency for the euro. One bright spot is that the debt crisis are sending the euro down against other currencies. There is nothing that is so bad that it is no good for something else: a weaker euro benefit European exports.

How long Germany can go on is the big question, but I think they will go very far.

My question is, how have Greece, Ireland, Portugal and Spain been able to cover up their vulnerability for so long? Surely the people underwriting the coutry's debt were aware of the problem - did they not conduct a review before allowing them to step into the abyss - so who are the underwriters of this debt?

It is difficult to answer. It can be a conscious choice that they have suppressed it, but it may also be that they have misread the problem - which I think is the answer.

European politicians believed that when you are part of the euro zone, you are part of a safeguard against speculation. It now appears that speculators just move the focus somewhere else. That is what has happened to the weak economies. Instead of being a victim of currency crises, these countries have been victims of credit crises. Investors will not invest in their debt, and interest rates rise. This makes it more expensive for them to finance the national debt and it thus becomes difficult for them to do something about the crisis through expansive economic stimulus policy.

But it all went well until now? Yes, that's the question. During the boom, the euro and the European Central Bank interest rate policy helped to inflate the upswing - and not least a massive construction business - through the low single rate. Normally one would have raised interest rates when the economy went into overheating. That can not be done in The European Economic and Monetary Union (EMU), one-size-fits-all monetary policy. If EMU countries are not an "optimum currency area" because of the large competitive differences, then the problems should ideally be solved temporarily by greater solidarity among countries.

There are also high-ranking EU diplomats and politicians who talk about the necessity of establishing a kind of mutual insurance principle as the strong economies "insure" credit worthiness of the public debt of the weaker ones. This will allow their interest to come down. However, it is difficult to imagine such a system without it will be followed by interference in the countries' economic policies which benefit from the scheme. Can you imagine officials coming down from Brussels or Frankfurt and sit in when the Italian government must make new budgets? If the model can be sold to Berlusconi should stand unsaid. But it is hardly a popular bestseller!