Can the Euro Survive? (Part 2 of 3)

If the countries vote and move toward fiscal and political union, the Euro can survive. But it requires sovereign governments to give up their individual rights. It is doubtful that Germany and many others are truly willing to move fully in this direction, especially, since the economic divergences are going to continue to widen. Germany in my estimation is not going to trade away their economic might or political freedom.

Moreover, it will require debt restructuring within the Euro Zone. Soros proposed a European Fiscal Authority, which in partnership with the ECB, could establish a Debt Restructuring Fund. In return for Spain and Italy taking on structural reforms, the fund would hold a significant amount of the country’s debt. The fund would purchase debt of the troubled countries by issuing T-bills. The debt would be a joint obligation of member nations and thus they would be able to borrow at a lower rate, currently 1.0%. If it held half of a troubled nation’s debt, the rates on the other half would fall as well. This is a very logical and thoughtful approach if lenders (Germany) are willing to transfer wealth to the debtors.

It would be very costly for Germany if the Euro fails. At the end of this year, the claims of the Bundesbank to other debtor nations are estimated to exceed $1 trillion dollars. If the Euro fails, these obligations could become worthless. Given the incredible cost of a Euro failure, the Germans will always do the bare minimum to keep the Euro afloat. However, the bare minimum will only exacerbate the divide between the Northern and Southern Europeans and in the end, the Euro will fall.