Eurozone-Too Big To Fail? Our Fate is Linked to Theirs!

I am writing this article not because it is a page turner but a topic that is critical to the economic survival of the West including the US.  The events unfolding in Europe will impact you directly regardless of the outcome.  The European nations combined are now a larger economy than the US.  If they fail, the ripple effect will make the Depression of 2008 seem tame…  You may wonder why the European Crisis is solved, then back again and again in the news.  Hopefully this article may provide some insight…We will also tie this in with US State issues…


Following WWII, the Marshall Plan, and the ascendency of the United States, Europe sought to re-establish itself as a major world force both politically and economically.  As individual nations, each had its strengths and unique cultures and histories.  Many were historical enemies, allies or both at one time or another.  With the fall of the Soviet Union, the Eastern European countries became independent and sought to rapidly establish their place in the new world order.  The Big Three in Europe in the 60’s and 70’s were Great Britain, France and Germany.  The latter was further enhanced by the fall of the Soviet regime as Germany was able to reunite East and West Germany creating a manufacturing force to be reckoned with in the global economy. 

The forerunner to the current Eurozone was the European Economic Community/Common Market that came into existence in 1957.  During the past 54 years, the EEC has morphed into the current Eurozone/Euro Area/European Union economic and monetary union.  The trouble with trying to follow a lot of the news stories regarding the Eurozone is that it, and its component parts are referred to by a whole host of names.  For the purposes of this article, we shall refer primarily to the Eurozone (EZ) as the entity that includes Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.  All of these countries have adopted the Euro as their currency which is controlled by the European Central Bank (ECB). 

The total population of the 27 member European Union is 494 million people while the smaller EZ is slightly larger than the US at 317 million people (2006 Stats).  Using 2010 statistics, the European Union’s GDP topped $16 Trillion while the US topped $14 Trillion.  So, by combining the European nations, they were able to create an economically competitive entity with the United States.

The Underlying Problem:

When the EZ was being formed, the establishment of a common currency was the cornerstone of their economic goals.  To accomplish this task, the European Central Bank, much like our Federal Reserve, was created to monitor the Euro and the relative strength and weaknesses of the individual nations in the EZ.  One underlying weakness was the challenge to manage individual autonomous economies within the group.  Germany, for example, was a much stronger nation financially than Spain, Greece or other lesser members.  Their strength was from their lower debt load and strong GDP and employment growth. 

In addition to having to balance disparate economies, the group had no direct control over the individual nations’ public policy.  All of the European nations were trending towards socialism to a greater or lesser degree than the other during the formation phase of the EZ.  So, while trying to balance individual nation’s economies, their GDP:National Debt ratios, against a common currency, the EZ was trying to organize chaos!  The relative economic strength of each of its member would change over the 40 years to the point that at one time France was actually close to being in default of their EZ financial requirements. 

During this creation period, the EZ “Capital” in Brussels consolidated more and more public policy power over the member nations without actually having any real power to force compliance on its members.  Brussels’ encroachment on the individual sovereignty of its members became a real point of contention and in fact has kept Great Britain from entering the EZ.  To give a you an insight into the depth of encroachment by Brussels, they established a law that horses had to have passports with inoculation records maintained in a similar manner to humans.  The reason was that some of the members consume horse meat and they wanted to make sure that they knew the inoculation history of the animals they would consume. 

The underlying problems included the combining of several nations with disparate economies, high debt:GDP ratios, disparate social structures, and no central public, economic or social policy capabilities.  So, when the debt crisis threatened the default of Greece, Italy, Portugal, and Spain, there really was not a good way for the group to “fix” the problem.  The “fix” was then left up to Germany and France as the two most stable members.  But, in order to “fix” the problem, Germany and France could only negotiate the solution with the defaulting members. 

Source of the the Crisis:

The EZ members who are experiencing the highest levels of economic woes spent themself into oblivion.  (Sound familiar?)  Their labor productivity kept declining as more time off, pension age reductions, and other social programs took more and more productive hours out of their work force.  The higher the level of socialism, the higher the National Debt:GDP ratio.  There simply were not enough tax payers to pay for the non tax payers receiving benefits.  (Sound Familiar?)

When the EZ allowed more “affiliated” nations to join outside of the European Central Bank perview, nations such as Turkey and other less developed, lower labor cost nations, were given protected trade status under the EZ umbrella.  This led to the manufacturing and local trades within the EZ nations to be exported to the lower cost affiliates and reduced the GDP potential of the member nations.  There was a general failure by the EZ to recognize that labor and material procurement will always seek the lowest cost source, all else being equal.  Without the trade protection for member EZ nations, the new affiliates literally sucked the life blood out of many of the EZ member nations.  Hand crafts and labor intensive processes moved out of Greece, Italy, Portugal, and Spain to Turkey and many Eastern European affiliate nations.

The crisis then was caused by a lowering of the EZ members productivity; national debts that were growing faster than their GDP; and a loss of jobs and industries to lower cost affiliated members.  From a historical perspective, the demise was actually a continuation of what the powerful European nations attempted to do during the high point of the worldwide imperialistic expansion.  They tried to get nations they controlled to do their dirty work or perform the menial tasks and thus allow their citizens to live a more leisurely life free from toil.  Well, how did that go for them the first time around!  They failed then and they will fail now…

Default or What?

Since the Depression off 2008, we have all been sold a bill of goods under the umbrella of “TOO BIG TO FAIL”.  First of all, politicians create or allow the creation of very large private sector entities as it is easier to get donations out of one company rather than having to go to 300 smaller companies.  Government allowed the expansion of the US and European banks and key infrastructure companies such as communications companies, oil and gas companies, steel companies, and auto companies are all allowed to grow outside of what is healthy for competition and to protect against a catastrophic economic impact should one or more of the entities become bankrupt.  By allowing these entities to grow into behemoth proportions, also make them easier for the governments to take them over if they get into economic trouble…  (General Motors and Chrysler) 

Then, in the case of the US, we have allowed our States to incur such high levels of debt that there may have to be a special law written to allow for a State to file for bankruptcy protection.  In the EZ, the debt load of its weaker members has them at the brink of default/bankruptcy.  So, what is the next step? 

  • Allow States in the US, or members of the EZ, to default on their debt and seek bankruptcy protection
  • OR bail them out somehow? 
  • Or, in the case of the EZ, why not allow the troubled nations to exit the EZ and re-establish their own currencies?
  1. Allow Default/Bankruptcy:  The reason the politicians who are at the tip of the power structure do not like this option is that it takes control out of their hands!  If a State, like California, is allowed to go through bankruptcy, then the State will be FORCED to sit down with its creditors, suppliers, and employees and negotiate a mutually agreed upon plan to allow the State to survive and reorganize its debt and finances.  In the case of EZ members, the same is true.  Greece, not Germany and France, would be forced to sit down with their own creditors, (the European Central Bank is one), suppliers and employees and come up with a survival plan.  Without a State or an EZ member going through this process, there really is no long-term solution and one reason you keep seeing the “Crisis headlines” over and over again.
  2. Bail Out Troubled Nations/States:  This is the preferrable “solution” for the power brokers/politicians.  Why?  With every bailout Dollar or Euro the entity bailing out the State or member assumes more control over the State or member being bailed out.  In short, this process furthers centralization and further reduces local autonomy.  In the medium or long-term, this is not a solution as the underlying causes are not remedied…  The State’s or member’s debt, low productivity, or overspending are still on table and will rear their ugly heads in the future.
  3. EZ-Break Up the EZ:  The hard fact is that the members of EZ had hoped that the economies and thus the intra currency strengths between the northern EZ members, who are stronger, and the less stable southern EZ members, would equalize over time.  This has not happened and was a naive assumption at best.  Today, there is a 30%-40% intra EMU currency misalignment between North and South.  This is why you are seeing Germany (Merkel) and France (Sarkozy) meeting by themselves to come up with a bailout solution.  They represent the Northern Strength and are worried that if the Euro collapses, their nations will be adversely impacted.  What is somewhat odd to watch is that the Central Bank is actually tightening its monetary policies which help Germany and France to a degree but lessen the chances of Spain, Italy, Portugal, and Greece to dig their way out…  The bottom line is that the members who are in economic trouble, would have to devalue their own economy by 40% to come back to par with the northern member.  The inflation hit on their citizens would incite riots that would make those in Greece look like a warm up.  Allowing the troubled nations to back out of the EZ and re-establish their own currency and take back their own economic destiny may be the best long-term solution. 

The individual nations in Europe have very diverse histories and cultures and will probably never truly assimilate into a cohesive union as has been envisioned since 1957.  In the case of the United States, we were able to grow into our Republic, starting with 13 States and growing gradually into the 50 States.  The EZ attempted to assimilate nations that had actually been at war with one other less than 40 years prior!  It is tough enough to for the US and its States to adjudicate its differences.  The differences within the EZ are deep and the economies do not lend themselves to integration.

It may be time to stop moving towards too big to fail and go back to small enough to manage!



The bigger we allow governments, companies, financial institutions, and other core entities to grow to autocratic or monopolistic size, the less freedom we will have personally and as a nation.  The politicians tell us we have to bailout this or that entity or country or the world will collapse.  Or, that the we have to raise our debt ceiling or the world will collapse.  None of these catostropic events will occur but our loss of freedom will most certainly occur if we do not take back our own governments and stop this madness.  You will continue to read about the European crisis as they do not have either bankruptcy/default or the transitioning of one or more of the EZ members out of the EZ as options to fix their problems.  They only have bailout/centralization on the table.  The ultimate goal of the Progressives is to centralize as much power as possible and enslave more and more free people economically which will lead to a total loss in freedom due to the confiscation of private property. 

Watch Europe and you will see our fate…

RD Pierini

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