Every day I read a lot on the Eurocrisis. I learn about firepower, big bazookas, sterilized purchases and doing whatever it takes. No one ever does the math. It looks like it’s up to me then.
The real problem with the Eurozone is simple, and when you see how simple you will understand why the politicians, bureaucrats and banksters keep obfuscating things with various programs, pledges and an alphabet soup of acronyms.
The Eurozone countries need people from outside the Eurozone, foreign investors, to purchase Eurozone debt. Let’s look at 2011, because the 2012 numbers have not been updated to reflect how quickly the situation is deteriorating.
In 2011, the Eurozone countries ran a joint budget deficit of 4.1% of GDP. The joint budget deficit in euro terms was €750bn. You don’t get any help from a large trade surplus; the German export machine is balanced by the other countries being import machines. This €750bn is simply not available within Europe, so foreigners are required to finance the continent.
The Eurozone has to figure out a way to close this financing gap, and that figure is last year’s. This year’s numbers are worse. Next year’s numbers will be even worse than those as the current recession shows up in government tax receipts.
What makes this situation even less rosy is that a dual-tier Eurozone has developed. Countries like Germany, France, Holland, Luxembourg, Belgium, Austria and Finland have no problem financing their deficits but the PIIGS are getting drawing very little investors from outside the Eurozone.
The ECB has decided to finance these governments in exchange for conditions, but there is no free money. Every euro in PIIGS debt that the ECB takes on is a euro in liability for the European taxpayer, particularly that of the rich countries listed above. Eventually, analysts will begin imputing these liabilities to the balance sheets of the rich countries causing their credit situations to deteriorate with those of their neighbors.
The only way out of this scenario is somehow getting the PIIGS to a point where they can finance themselves. To accomplish this, they can either remove the need for external financing by eliminating their deficits or raise more revenue. That’s it. Any other measure you read about is merely temporary, aka kicking the can down the road.