Here is Bloomberg animation for european debt crisis:
https://www.youtube.com/watch?v=C8xAXJx9WJ8
I kept this in my bookmarks more than a year.
Euro is failed project by its core because monetary policy without fiscal polity doesn't work.
https://www.youtube.com/watch?v=C8xAXJx9WJ8
I kept this in my bookmarks more than a year.
Euro is failed project by its core because monetary policy without fiscal polity doesn't work.
Another proposal is 'eurobonds' [1] where there were two types of government debt. Blue debts would be backed by all the eurozone countries, but could only be issued up to a certain debt-to-gdp ratio. Beyond that, governments could issue red debts which aren't backed by any other country, and which come with an orderly default procedure.
That way, the Greek government would only enjoy the great interest rates the Germans get if they were following the same strict fiscal discipline - and red debt interest rates would reflect the fact they didn't have the German government standing behind them, so there wouldn't be a bunch of the cheap debt that Greek politicians seemingly can't resist.
Unfortunately this isn't a very popular proposal at the moment; if it had come out 15 years ago, when everyone had a clean slate and Greece didn't have all this debt, it might have prevented things getting to where they are now. But the proposals to institute this now basically amount to "give Greece a bunch more low-interest loans they can't pay back, but make Germany liable for them, and a while later when greece has spent all their eurobond money make their interest rates shoot up putting us back to where we are today" which Germany, quite reasonably, wasn't interested in going for.
Borrowing to spend without considering whether you can repay is irresponsible.
Lending money to someone so that they can buy from you, without considering whether they can repay is also irresponsible.
As much as Greece is guilty of the former, Germany is of the later.
Here's an other article putting a different spin on this: http://www.telegraph.co.uk/finance/comment/ambroseevans_prit...
http://www.reuters.com/article/2015/07/01/eurozone-greece-in...
There is one big part I really don't get though. Why would Greece's creditors assume that Germany was going to cover a Greek default, just because they are both in the EuroZone? That would be like my bank assuming that the US Government would cover my mortgage if I default, just because it's denominated in dollars. That line of reasoning makes no sense to me.
Related to this, the video says: "The problem is, somebody has to pick up the tab, or else every country in the Euro area will suffer." I don't get this either. That would be like saying that me defaulting on my mortgage will make all my neighbors suffer, just because our mortgages are in the same currency. It doesn't seem like a Greek default should hurt anybody but Greece and their creditors.
Maybe an even simpler explanation for that link could be: a Greek default would make their borrowing costs so high that the government simply could not operate without being able to print money and inflate their currency.
You are nothing to a bank, a bank is huge, and fully expects some people to default on their mortgages. They can take it. However, what if everyone in California defaulted on their mortgages? Then it might cause many banks to fail, cause a financial crisis, and depress the entire US economy, including your neighbours.
The monetary union disguised the risk of lending, which was still there.
Yes, an entire country defaulting would screw a lot of creditors, but the risk of default should be priced into the loan/bond terms (interest rate, etc). That's part of the reason investors can make money on bonds, because there is a risk/reward curve they're riding, and the risk is that they won't get their money back.
I get the "too big too fail" argument, I just don't get the "monetary union puts us on the hook for our neighbors" part.
Monetary unions turn into transfer unions if the regions' productivity are not equal. This is clear from the union of states called the USA. Poor states constantly get federal money taxed from rich states. And there's nothing wrong with that; the whole country benefit from there not being ruined states in the union.
Monetary unions also don't work very well without a fiscal union, under which transfers are far more easily arranged...
Also, most of its facts are messed up: the US subprime mortgage crisis did not cause the crisis via a Spanish real-state market collapse, it just tightened credit and ultimately deflated public banks (cajas de ahorro) which have hidden political spending for several decades, and which have cost billions in the last few years. This is well documented, just as a data point: Bankia was bailed out for $29B http://content.time.com/time/world/article/0,8599,2115950,00....
The problem with Government spending cuts mandated from the outside is that they all go to health and education, instead of cleaning up the layers of bottom-feeding politicians and friends which have occupied most public companies and which are devouring the economy. The Spanish competition regulator estimates the cost of corruption in about €48b: http://www.elconfidencial.com/empresas/2015-02-10/la-cnmc-ci... (in Spanish, I found no good source in English). I can imagine that in Greece the situation will probably be similar or worse, it would be nice to have credible figures. Meanwhile inequality soars in Spain, and the number of millionaires increases: http://www.theguardian.com/world/2013/oct/10/spanish-wealth-... http://elpais.com/elpais/2015/05/21/inenglish/1432203309_060...
Any analysis which doesn't take into account these factors is superficial and will never reach the true causes. A shared fiscal policy would make European policy less transparent and easier to manipulate by the elites, unless it was accompanied by deep reform in all European institutions, which is highly unlikely. Revising the role of the ECB is much more interesting IMHO.