Tuesday, November 8, 2011

Euro Zone Debt Crisis Was Going to Happen Eventually

The European Union was set up in a manner that guaranteed that eventually, one of its members was going to have a debt crisis.  What makes the Euro so unique is that it was setup almost like a gold standard.   Each nation does in the Eurozone does not issue it's own money.  It must be borrowed.  That borrowing must come from someone who has Euros.  This is very different from most other modern countries like the U.K., United States, Canada, or Japan.  The reason this becomes important is not during economic booms, but during the busts.

During an economic bust - or recession - people are out of work and pay less taxes.  Therefore the nation brings in less tax money.  Additionally, the increasing unemployed add to the costs of the social safety net.  Therefore as the recession goes on, countries bring in less tax dollars, but are obliged to pay out more benefits.  This becomes a problem when you cannot have a budget deficit.  The U.S. states are having that problem right now.  Greece and other Euro zone nations aren't supposed to have budget deficits greater than 3% of GDP.  That is impossible during a deep enough recession.

During a deep recession, a Sovereign nation like Japan or the United States could run a large budget deficit to counter-act the recession.  Eurozone nations cannot do that.  They must cut back along with the rest of their private sector.  Well, when a recession is caused by people cutting back, and then the government cuts back... it's only going to make the recession worse!

Even if Greece perfectly managed their finances and economy, this would've just happened to another euro zone country.  Greece just happened to be first.  MMT economists predicted this would happen several times over the years(See herehere, and here and again here).
Governments must be able to counter act recessions.  The Euro was designed without thinking about recessions.
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