European Debt Woes Continue Due to Toxic Greek Debt

Investors are bracing for another tough week in international financial markets after a weekend fraught with new indicators that the European Debt Crisis is far from over.  It seems that not a week goes by without some new mini-crisis on the Continent, plaguing economic recovery thanks in large part to the spread of toxic Greek debt.  This weekend, Germany’s economic minister, Phillip Roesler, announced that an “orderly default” of Greek bond holdings is on the table as an option of last resort to stabilize the rapidly slumping Euro, which is at a 7-month low against the dollar.  Meanwhile on the other side of the Rhine, the French financial sector reeled under the pending downgrade of premier French banks due to their heavy exposure to Greek debt.  Moving South, Italy’s escalating bond yield rates provide early evidence of a similar sell-off of Italian debt that precipitated the Greek financial decline, and already this morning, the Dow is down over 100 points as investors prepare for mayhem in the marketplace.

The EuroZone crisis was not caused by the economic collapse of three years ago, which merely served as the shock that put the wheels in motion.  But those wheels were already primed, springs compressed to the breaking point, because the real problem was systematic and endemic – the liberal welfare state.  As long as the market was up, investor confidence was high, and GDP continued to grow, the facade could be maintained and the charade continued.  But when the market collapsed under its own weight, and GDP took a turn for the worse, the generous welfare policies of European nations quickly became unsustainable.

Of course, had Europe remained as it were before the advent of the Euro, this crisis would have been relatively well contained in Greece, whose currency would have been decimated by its prior transgressions with little impact on other nations.  But when European leaders decided to link their monetary policies, yet leave fiscal policy at the discretion of each nation, they sowed the seeds of disaster.  Now the fate of Greece is tied to every other European nation like a string of dominoes poised on the verge of collapse.  If Greece defaults, its fall will tip the next domino – Spain, Portugal, Italy, who knows?  And when those nations go down, and the bond rates on other Continental debt rises, soon even the stable European countries look vulnerable.  Thus the countries who made smarter fiscal choices during the boom years must bail out those who did not, all the while wondering where the bottom of the debt lies.

At this point, the question is not whether the Euro can be saved, but how long it will be before it collapses.  Already significant discontent is brewing in Germany, as German tax dollars are sent to shore up Greece’s exorbitant welfare state.  To add insult to injury, the Greeks aren’t even thankful, in fact, they’re protesting the minimal austerity cuts that the European Commission required in order to approve the 110 billion euro aid package.  Plus the debt that banks took in exchange for that deal, is toxic, and the French banking industry is finding out the hard way what happens when your asset sheet includes too much toxic debt.  Will France have to bail out its banks, whose stocks crashed 15% overnight, for the sins of Greece’s leaders?  The intricate web of contagion has its tentacles firmly entwined around the European financial market.  How long will the German people be willing to put up with it?

Of course, there is the other alternative — centralize the Continent’s various fiscal policy regimes.  Put that way, it doesn’t sound so unpalatable, but what that would mean is the elimination of the sovereignty of debtor nations.  Sure, full control would rest in the European Commission, but it doesn’t take a genius to figure out that the real control will be exercised by the countries with productive economies and low debt burdens, aka Germany.  Its almost unthinkable that after two disastrous world wars and the almost complete destruction of their economy in 1945, Germany is on the brink of achieving through economics what they twice failed to achieve through war.  In his remarks over the weekend, Phillip Roesler began laying the groundwork for such a possibility, saving that a Greek default would require “reestablishing the affected state’s ability to function, perhaps with a temporary restriction of its sovereign rights.”  Not so long ago that remark would have set off alarm bells across Europe, but now they have no choice but to accept Germany’s aid.

The take-away for Americans is that unless we want to end up like Europe, we need to get off the liberal welfare train before it runs headlong off a cliff.  The Euro is being systematically devalued because of toxic Greek debt, and that of other nations, and the irresponsibility of Greek’s fiscal policy, as well as Europe’s in general.  The only solutions are to either let the Euro die and move quickly back to national currencies across Europe, continue to bail out the irresponsible countries at the expense of productive ones, or embark on a drastic course of fiscal policy centralization and the completion of Europe’s unification, with the new capital in Frankfurt, Germany, the location of the European Central Bank.  This is the ultimate result of liberal democracy, but if we make the same mistakes and the American economy collapses, who will bail us out?