Of course, the euro is rallying on this news, with investors grateful that some discipline was imposed and a total Greek collapse was put off to another day. But this can't possibly be celebrated as a successful solution. Italy's debt-to-GDP is not far behind Greece, at 119%. If the same solution were to be offered when Italy faces default, the EU itself estimates that the required bailout would have to be 28 times larger than what is being offered to Greece today. While Northern European taxpayers may be bearing the brunt of today's $100 billion bailout, they can ill afford $2.8 trillion. Instead, the responsibility would fall on the ECB to print the funds, and thereby devalue the euro.
Fortunately for Europe, the US is well ahead of them on the quantitative easing front. That is why some of the euro rally we're seeing may be deserved. The euro has taken a pounding relative to the US dollar because of the prevailing sentiment that its problems are worse than America's; however, no one would ever expect the US government to allow state and municipal creditors to pay 50¢ on the dollar. No, the US government's position has been that it will be the lender of last resort to all large market actors, and it will make them whole. The US has already bled its taxpayers dry and resorted to furious money-printing to forestall a Treasury rate spike. Europe's fractured political landscape is actually providing a check on its profligacy that the politically consolidated United States doesn't have.
Still, it should be clear to all observers now that the Keynesian prescription has not worked, and therefore both continental federations are facing a grim future. It may be that this Greek settlement marks the dawn of a new era of sovereign collapse. Today, for the first time since World War II, a first-world country has outright defaulted on its general debt.
Mainstream analysts had said that a day like this would never come. And yet, here we are.In a best-case scenario, Western governments increasingly accept that creative destruction is a part of capitalism - that bad debts must be liquidated fully, honestly, and quickly to make room for new growth. In the more-likely scenario, the EU's structural divide keeps it walking a middle road between bailouts and default of its weaker members, while the US refuses to accept reality until it risks becoming the largest sovereign collapse in history. Let's hope laissez-faire prevails, but invest like we know better.
For an in-depth look at the prospects of international currencies, download Peter Schiff's and Axel Merk's Five Favorite Currencies for the Next Five Years.
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