Over the past few months, apocalyptic talk of the "END OF THE EURO" has surfaced as weakest-link euro zone countries like Greece have teetered on the edge of default, threatening to bring down the rest of the euro zone with it.
Europe has some serious issues, but the following explains why a complete euro breakup is just about as likely as the National Enquirer correctly proclaiming Michael Jackson has risen from the dead.
Why the euro won't disband
So, if some members of the euro zone are bringing the others down, why don't they just get out? Unfortunately, it's an extremely complicated issue. For one thing, the treaty that signed the euro into being doesn't even include an exit plan for members. You could say this is like not having a prenup because you don't want to talk about divorce… or getting married where there is no legal policy in place for divorce.
Even if the euro zone could somehow get around the huge vacuous question mark of how to kick a member out, at this point a weaker member leaving could cripple just about everyone involved.
For Greece, leaving the euro and going back to a (devalued) currency would be an economic nightmare. Case in point: Let's say you have $1,000 in a U.S. savings account. President Obama announces, "Attention citizens, next week we will be switching the money in your accounts to a new currency that isn't worth as much as the dollar. Hope you don't mind." If this were to happen in Greece, citizens would pull their money out as fast as they could, which some economists say would trigger an economic "self-implosion."
Then there's the fact that Greece would most certainly go bankrupt. If you owe someone $30, have 20 one-dollar bills in your piggy bank, and then overnight someone converts the dollars to a weaker form of currency, you'd have a big problem (as would this "someone"). You still owe the $30, but now your currency is worth less. You're even more in the hole.
Kicking Greece to the curb isn't a great option for top-dog countries like Germany and France, either. Economists speculate that it would cost Germany MORE if Greece were to leave the euro (and default on their loans) than dragging them along and helping them out.
Bringin' the bailout $$$
"Bailout" is a dirty word these days, but the euro zone doesn't have a whole lot of options at this point. Last week, Greece--literally weeks away from bankruptcy--received 8 billion euros in bailout money (Portugal and Ireland got some, too). The immediate crisis is averted for now, but replacing debt with more debt isn't a cure. If big changes aren't made, the problem could resurface in a matter of time.
"Merkozy" song & dance
That's why Germany and France are trying to get some new rules passed in the euro zone. Today, Angela Merkel of Germany and Nicolas Sarkozy of France met to come up with new plans to help keep other teetering countries from going broke. They agreed on a proposal that would create a permanent bailout fund and impose penalties on euro zone members who don't keep their deficits in control. (The current euro zone deficit limit is 3% of total economic output. For comparison, the United States' estimated 2011 budget deficit is 9.8% of our GDP.)
You might be thinking, "That's nice…but how is it going to fix the immediate problems, like the fact that Italy is running out of cash?" Well, in order to secure more bailout money for countries like Italy, Germany and France need to convince markets that Italian bonds won't default. In some ways, it's a song and dance to the tune of, "Look how we're fixing the problems! Everything's going to be fine! Buy Italian bonds…and Spanish ones while you're at it…FOR THE LOVE OF IT…or we're all screwed. We swear they'll pay you back. Jazz hands!"
Moral of the story: don't ditch the extra euros you have lying around from your European vacation just yet.
Does this whole debacle remind anyone of our 2008 financial crisis? What similarities and differences do you perceive?