Euro Mess

Euro Mess

Introduction

Banks functioning in today's world are not subject to the concept of free-market institutions. They are subject to some government interventions who typically finance them. It is true that survival of banks is dependent on various policy frameworks and privileges by government interventions. The recent European Union Summit of November 2011 had limited the losses that European banks will take for financing the irresponsible Greek government to 50 percent. The summit highlighted the game of the political elite and continues to bail out the government of Greece and other peripheral countries. European government supports the survival of the euro currency. For this purpose they have to rescue government with public support and money. The central creditors of such governments are banks. Thus, banks stocks are soared with time and policies. The euro spending mess is similar to the domino effect. It works in a circle. Banks dealing in euro currencies have financed many irresponsible governments such as Greece for government expenditures. Greek government is now a day's facing serious economical debacles. As a consequence, European governments rescue banks by bailing them out directly or by giving loans to the Greek government.

Discussion

The idea of a common currency is critically flawed because member countries have different and dissimilar economical and political structures. Economist favoring the structure of currency integration took high risk with respect to the various economies. The process of currency integration actually narrowed down the difference in productivity without any internal adjustments in cost of labor. One of the least apparent reason for euro crisis is incompetent banking functions. Central banks following euro as the base currency are not competent enough to make suitable policies for the Europeans Unions. Theoretically, European Central Banks are independent of politics and are dominated from the obsession of inflation in Germany. According to this theory, euro markets have protected themselves against inflation through tight credits. Tight monetary policies worked in case of Germany and build it as the most productive economy in Europe. It worked as an export powerhouse where the exchange rates were determined by the global markets forces. This policy frame work disturbed the other members of the euro zone. They were left alone in the state of recession buffering the impact on economic downturns by fiscal defects.

The Origin of the Catastrophe: Credit Expansion

Euro suffered from market risk exposure when the bank expanded the credit facilities. Investments in risky ventures are the major reason for failure of euro expansion. Entrepreneurs induced by artificially low interest rates engage in new investment projects, decreasing interest rates are profitable only in the short run. Lower interest rate carries adverse economic impacts in the long run. Most of these investments create money form a weak banking system since these were not financed by the actual saving. Such projects filled bankruptcy soon because they lack in the generation of money. Minimum inflow of money has significant traces upon the European banking system. This resulted in the distortion of the productive economic ...