The problem with euroland's having a single currency is no different than Asia's dollar peg in the 1990s, which ended in the Asian financial crisis. Because of the currency peg, interest rates were mispriced, i.e., too low relative to inflation rates in certain economies due to different social/political systems. Low interest rates led to spending/investment booms and large current account deficits. Affected Asian economies devalued substantially then, restructured their debt, and used subsequent recoveries in the external sector to generate current account surpluses and rebuild savings. These moves helped them emerge from the 1997-98 financial crisis on a much stronger footing.

The current issue is the Euro Commission's refusal to allow Greece to drop the euro (politics of euroland unity) so Greece (with a 12% current account deficit) is denied the option of devaluing and restructuring its debt. At the same time, euroland leaders are prevented by domestic politics to use taxpayer monies to bail out another country. Of the €750 billion package announced to be made available to a Special Purpose Vehicle, only €60 billion is in hard cash-on-hand, which is too small relative to the sums involved (Table 1, below). Of that, €440 billion are "promises" with no details on how they'll be funded-taxpayer funds or money printing or some mixture of both.

And €250 billion from the IMF is conditional on undefined terms (probably dependent on what euroland's own €440 billion comprises). Despite a mounting crisis, euroland leaders have delivered rhetoric rather than clear, implementable policies. This is why confidence has plummeted and markets are forcing euroland to devalue en bloc. But even that will not help Greece because much of its trade deficit is with other EU members, particularly Germany. Therefore, euro devaluation alone will not solve Greece's problems.

The Germans have demanded that the Greeks (and all others) further tighten their fiscal belts in the middle of a recession as a pre-condition for assistance, which is economically implausible. Large cutbacks in fiscal expenditures when an economy is already weakening will deepen the recession, cause budget revenues to plunge even further, raise the risk of a spiral in bad debt, and hand the country a banking crisis. The Germans themselves took massive fiscal spending as medicine in 2009 to tackle the recessionary impact. No wonder markets have remained skeptical.

Eoin Treacy's view My initial response to the €750 billion European bailout package was where is the money going to come from because European governments simply cannot afford it. The above report sheds some light on this question and I commend it to subscribers. The Greek crisis has exposed the contradiction of a single currency with 16 different fiscal policies and the solution appears likely to involve more than one currency and/or considerable streamlining of fiscal policy.

This article by former Austrian finance minister Hannes Androsch may also be of interest. Here is a section:

This is a clear vote of no confidence in the political management and fiscal administration of our economies. The wasted opportunities in the past; the delusion that deregulation was all that was required to ensure prosperity; the public promotion of an incentive structure that juxtaposed personal enrichment with the public good and the self-laudatory conceit during the good times, are all now coming home to roost.

It was always clear that the financial crisis couldn't be confined to a single market, if only because of the close linkages between such markets when regulatory hurdles have been removed. Once more, we must confront the issue of "too big to fail," but this time in relation to sovereign governments. Once more, we must consider to what extent the European Central Bank should pump public-sector liquidity into a market when private- sector liquidity has dried up.

Prosperity With Growth
As for fiscal policy, it is imperative to restructure public-sector revenue and expenditure, as soon as developments allow, in order to regain the long-term path of sustainability.

Prosperity can only come from economic growth, and this requires that we focus on investment in education, training and research.

We must be prepared to bite the bullet with regard to pensions and social services, something our governments have shown little appetite for to date. Sooner or later, we will have to stop trying to plug every leak in the dyke, permit some flooding if necessary, and be prepared to start again. The longer we wait, the more our economies are likely to underperform, relative to potential, for the foreseeable future.

The Euro crisis is not over and remains likely to rumble on for a considerable period. Greek, Irish, Portuguese, Spanish and Italian sovereign spreads, which contracted violently on May 6th on the bailout news, have begun to creep back up, with Spanish and Italian spreads regaining their peaks. This action continues to suggest that a new equilibrium for the risk attached to these sovereign debtors has yet to be found.

The Euro Stoxx Bank Index which also surged on May 6th has given up its entire one-day rally and returned to test the lows near 160. A sustained move above 170 is needed to break the short-term progression of lower rally highs and hinder scope for some further downside. A rally back above the 200-day moving average, currently in the region of 210 would be required to indicate demand has regained medium-term dominance.

The Euro remains a fundamentally weak currency but the commonality of its decline is beginning to deteriorate. While it continues to make new lows against the British Pound, and remains weak compared to the US Dollar, its upward dynamic against the Australian Dollar, three weeks ago, probably initiated a bottoming out process and it has Type-2 (as taught at The Chart Seminar) short-term bottoming characteristics against the Yen. These charts at the very least suggest that a blanket bearish view of the Euro is no longer justified and each currency pair will have to be judged on its individual merits.