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ANSWERS / European Issues

Let's try and tackle all of these together.

First let's make some distinctions. The European Union, or EU, is composed of 28 nations which operate primarily as a single market for purposes of trading goods and services. 17 of those members form the Eurozone, or EZ, and are a currency block which uses the Euro or € as their currency. It is important not to confuse these two, and it is this latter EZ that we want to talk about.

When the EZ was first formed and the Euro created, the main thought was the tremendous advantages a single currency gives to member states. It makes it easy to compare prices, there no currency conversion costs, corporate accounting becomes miles simpler, and so on. The thought was always that as time passed the various economies would grow closer together in economic aspects such as competitiveness, salaries, etc. What was not anticipated (by most) was that instead this very transparency which the new Euro created would also throw a spotlight on the significant differences in national work ethos, saving patterns, competitiveness, national labor laws, and other production and govenment fiscal features. This spotlighting has actually accented rather than diminished the differences.

Why does Europe appear to be coming apart at the seams over the Euro?

Some of the issues mentioned above are structural beyond the monetary/banking and fiscal aspects which we will to discuss here, but certainly if the monetary/banking portions were to be stabilized, it would give the EZ and individual countries a number of years of financial quiet to deal with the other issues. On the monetary/banking side, countries have been vying for bank deposits as these can act as multipliers in the current system. In order to induce those from other countries to deposit, banks have offered numerous inducements and then to top it off, countries have dueled each other to provide the highest amount of deposit insurance, with some countries, such as Ireland, going for limitless insurance. As the financial crash intensified, the banks started collapsing due to liquidity issues (see ANSWERS main page) and it became apparent that those countries with a high sovereign debt level plus running deficits higher than formally allowed under the EZ treaty could not make good on their deposit insurance guarantees. Essentially all hell broke loose financially and the European Central Bank (ECB) started taking extraordinary (some say illegal) measures to back these countries so that they could back their banks.

Did you follow that "what backed what" chain? Just to repeat, the Central Bank had to back the countries so that these could back their banks! The banks were bankrupting the countries. Under our Real Money Economy, bank runs would disappear and this whole problem would go away.

Why are there riots in Greece?

Greece is one of these countries needing very excessive backing for their banks. As the various EZ bodies became tired of funneling more and more money into Greece, the ECB and others demanded that they get their act together. This is not a punishment as it is often viewed, but rather a consequence of years of attempting to get "everything for nothing" by the citizens and politicians – I know that's a bit strong, but there is more truth than fiction to it. Consequently the Greek government has been forced to sharply reduce services to live within their means. Now you need to understand that "their means" are today significantly below what they could have been had they not accumulated decades of debt. And that is why there are riots in Greece.

And if you think I sound judgmental – here in the US we are simply able to hold off the evil day because we can print our own money, whereas the Greeks cannot print Euros. In economics we call what we are experiencing here in the US a stable disequilibrium.

Why are there bank lines in Cyprus?

The issues with Cyprus are very similar to those of Greece, except that Greece came first and the EZ countries (and ECB) were getting rather tired of paying for the debts of countries (read that banks) which had misbehaved. Plus, a major portion of the depositors were Russian and the EZ did not want to bail out those not within their borders – and some say that a lot of these deposits were of questionable character. So, instead of the past "bail-out" funds sent, the EZ decided it was time for some "bail-in". Now what does that mean? You likely understand that a bail-out is where an entity not directly involved in the situation (usually tax payers or a central bank) provides funds to rescue the situation. In contrast, bail-in is when creditors more directly involved are forced to participate. These can be bondholders or even depositors. In Cyprus the EZ bodies first decided that all depositors should take a hit, whether having a deposit guarantee or not; however, the Cypriot government stopped that action and so only the uninsured depositors were forced to convert their deposits into useless shares in bankrupt banks – even to the tune of 60% confiscation! Further, there was a "temporary" restriction put on taking Euros out of the country (called capital controls) which at this writing is still in place – in effect we now have two different kinds of Euros: those in Cyprus which you cannot take out, and those everywhere else. By the way, Iceland also instituted a "temporary" export restriction on their currency – and 4 years later it is still in effect – so much for "temporary".

I think now you can understand why there have been bank lines in Cyprus. If you knew that your bank was bankrupt and depositors were being forced to "bail-in" to help save the bank, wouldn't you also line up to get out as much as you can? You will also be interested to know that numerous other countries are now creating legislation prescribing bail-in situations – with Canada being a lead example. I am sure that does not give you the warm and fuzzies when you think about your bank.

On this website we do present answers to these situations, but they are very difficult to implement as single nations within the EZ structure unless the EZ as a whole were to change their monetary/banking system centrally or a country were to leave the EZ.



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