With the n-th iteration of Euro-crisis now including taxes on depositors, felt it good to re-link an old video of Larry Summers (see below)
While events are changing by the hour and so the agreement may be revised to be less severe, I can't help but believe that the the EU continues to make the same mistakes by valuing political decisions over the economics.
This is a structural and indeed a behavioral/psychological issue, as having only a common currency benefits both sides (Germany with competitive exports, Greece with lower debt rates pre-crisis) but only if the former is willing to fully backstop the latter and if it truly leads to fiscal union (the original goal, I believe?).
In my opinion, this is exactly the same as 1992 and the exchange-rate-mechanism crisis, except that there is no way out (devaluation). Great Britain was weak economically but Germany did not want even the thought of inflation/money printing, pushing Britain into a recession. Had it not devalued, it would have been in for a deflationary/recessionary spiral - just like Spain/Italy/other PIIGS. After all, if there ~7% less money in the banking system as yesterday, it is not deflation? Devaluation is the normal market process, but because of structural limitations (spain euro = italy euro), there is no way to soften the blow. In other words, Europe is a man swimming with an anvil attached.
As a result, I don't think it's easy to say "buy Europe, it's cheap" and believe that bottom-pickers may be in for a tough struggle.
Icon source: http://www.tallahasseegrapevine.com/user/blogs/view/name_Grapevine_Spot…
I think the key problem still lies on the currency. While promoting the use of euro, this makes more developed country like Germany, Spain,Italy to bear a higher risk premium while raising funds, and raising the financial burden. Different development level and economic structure of member countries also lead to different expectation towards the currency.
Yes this is to a certain extent similar to the case in 1992, which member countries cannot resolve economic problems like inflation through currency control. But the system is different now, you cannot simply quit like Britain, so the only way to resolve any problem is to seek help from ECM, but deplorably this is how everything lack of financial discipline, abuse of the fund raising mechanism begins, you know the story.
Euro at this point makes things worse, as a few member countries has moral hazard and create overextension of credit and leverage, bubble bursts and not only that few member countries suffer, but all the member countries are suffering as currency are bringing them together. The more countries are involved, the more political problems are brought in and thus efficiency to tackle the problem is severely reduced. Look at how much time did the EU countries have spent on this, tbh it is already annoying to be an audience, not to mention if you are really in it.
In short, my opinion is that it is the common currency system which increase the burden of more developed member countries to maintain their economic momentum, which forces them to rely on ECM, which leads to moral hazard. It is also the currency which makes the whole EU to bear a few member countries' mistake, which sparks political conflicts and makes things even more complicated and less efficient.
I still highly doubt how long Euro as a currency can survive. Let see.
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