Do or Di(v)e for Euro

The response to the trillion dollar support package announced by EU for Greece has mostly been negative. The investors feel that it is still not enough to save the sinking European pride. The pride and unwavering faith in the euro was mistaken to be the absolute truth. With pacts and regulatory bodies in place, the Europeans thought their model was unique in economics and finance; just as their political clout was.

The Eurozone countries' average fiscal deficit as a percentage of GDP is a around 7 % which is well over the limit of 3% as per the above pact.

However, today for most, including me, the Euro has failed in this present set up and so has the European Union. It is quite shocking to see that none of the Eurozone countries are within the fiscal deficit limit set by the Growth and Stability Pact. Their average fiscal deficit as a percentage of GDP is a around 7 % which is well over the limit of 3% as per the above pact.

The reason for this as mentioned by me before (http://finmadeasy.blogspot.com/2010/02/euro-has-its-inherent-risks.html) rests in the clash between the two roles played by Euro member nations. Firstly, all members maintain sovereignty in their political, economic and foreign affairs which in many ways lead to many voices and adversely makes Europe sound like one noisy and divided entity. The EU in simple terms was designed to make their voices coherent as one and a collective European opinion which the world would respect. Sadly, today the collective consensus reached in Brussels is not respected by fellow member states themselves. So what we have seen till date is that member states have put national issues before their European obligations.

Their second role is to work together as a united region and uphold the European legacy, to command respect in a multi-polar world of today. Often egos are bruised, like Angela Merkel’s in the run-up to the stimulus decision, and often issues are dealt with a strong hand in unison. But rest (or most) of the times, members go around trying to show their might, trying to not let the EU take the stage lights off them.

Held at ransom

The message markets have sent is clear. The market is no longer going to be fooled by smart talking and insubstantial measures. They want to see the real deal. Some legally bound promises and structural changes to the Euro system are essential to placate market sentiments. After the Greek catastrophe, Euro bonds are already on a thin line.

Eurozone member states need to come up with concrete plans to limit their fiscal negligence and until then no sums of money promised will be adequate enough to win back confidence. They have to act fast or otherwise, a second dip is not far away.