Insufficient European Stability Mechanism

How much money is enough to prevent a wave of debt defaults across Europe in the wake of the impending Greek bankruptcy? €500 billion may be an insufficient European stability mechanism to pay debt and, more importantly, to calm markets. The possibility of an insufficient European stability mechanism has emerged again after the recent Greek elections. The vote in Greece is so widely split among various political parties that it may not be possible to form a government coalition. The result will be new elections in the second half of May. The problem with that is that the next installment of the Greek bailout package is due in June. Greece will only receive the money if it has completed a number of austerity measures that were part of the bailout deal. What currency traders and European investors suspect is that Greece will probably default on its debt. Thereafter, Spain, Portugal, Ireland, and even Italy will perhaps be at greater risk of default. It that turns out to be the case half a trillion Euros may be an insufficient European stability mechanism.

What Will Happen to the Euro?

The austerity measures in place throughout Europe are likely to lead to a Euro Zone economic contraction. Based on that likelihood the Euro has fallen. Now, as traders discount the likelihood of a Greek debt default the Euro has fallen farther along with Euro Zone stock markets. A prolonged debt crisis in Europe has already taken its toll on the Euro. An insufficient European stability mechanism in the case of the need for a bailout of Spain, Portugal, Ireland, or Italy could require more money. As voters in debt ridden countries vote against austerity and for growth voters in solvent countries might well vote for an end to subsidies. It may well be that voters across the continent will vote for growth and not austerity. That may well be the best choice, to grow out of a recession. However, if European nations follow the lead of the Bernanke Doctrine they will print money in order to buy bonds, keep interest rates low, and promote growth. A little of this medicine might be a really go thing right now but a lot of it will devalue the Euro over the long run.

Is a Cheap Euro All That Bad?

Europe has the same problem, to a degree, as the USA. Its Asian trading partners buy Euros as well as dollars in order to keep their (Asian) currencies cheap. By doing so these nations keep their export driven industries strong and drive the Euro and dollar higher. If Europe ends up with a cheaper currency its exports will be more cost effective and it may see a revitalization of its industry. The answer may not be a larger Euro Zone bailout fund but rather policies that lead to growth instead of recession and jobs instead of frugality. Besides a cheaper Euro making European products more attractive it will make Asian products more expensive, driving Europeans to buy homemade products. Both results could bring more jobs and prosperity to the Euro Zone. Maybe Europe ought to take a hint that an insufficient European stability mechanism needs to be tuned up to bring back jobs, make Euro denominated products more competitive, and eventually bring down Euro Zone debt.