spotfxtrader

Most EU sovereign debt is held by banks within the eurozone. The weaker states, (Greece, Ireland, Portugal, Spain and Italy) are increasingly unable to service their loans, which they have been doing by borrowing more in the open market when the loans roll over. Some have already ceased to be able to function, i.e. Greece, while Ireland is close. This is causing the banks holding these loans to have to consider the possibility of default. Weakness in the banking system would damage the economies of the eurozone countries, harming tax receipts and impacting the ability of the states to service their debt. Thus the prevention of damage to the banking system is the reason why the EU does not want to permit member states to default. So… they are funding a bail out fund to lend to the weakest countries that can’t borrow on the open market. This merely replaces the damage done by default with damage inflicted by other means.  The burden of this bailout fund is being borne by the healthier states, through increased borrowing and increased taxation. The increased borrowing increases the interest burden, and pushes indebtedness towards levels where the credit worthiness of the healthier borrowers becomes questionable. The increased taxation bears down on economic activity, all of which acts as a brake on economic activity. Damaged economies produce lower tax receipts so the health of the healthier nations deteriorates. The possibility of escape can only come from economic activity accelerating, and yet the policies being implemented are diminuishing the possibility of this occurring.

Thus taking on more debt and forcing the bail outs on the weak, such as has happened with Ireland, will not work. It is merely delaying the inevitable, and demonstrates the politicians’ fundamental failure to comprehend the situation. Added to this is the suspicion in which the politicians are held, since their routine deceit and contempt for their constituents, the sovereign peoples of europe whose interests they are meant to represent, will now fuel the fury they will face when the effects of their policies are felt in people’s real lives.