Many have said that not all is not solved in the Euro-Zone. In fact, despite the ongoing rhetoric from the ECB that they stand ready to “do anything,” in reality they have done little to this point other than just talk the markets higher. While that has worked to a large degree to suppress rising interest rates on debt burdened Euro-Zone countries there has been no progress on the“unification” of the Euro-Zone or a resolution to its mounting debt problems.

Three Problems That Still Exist

There are still three major problems with the Euro-zone that, without fixing, will lead to the next chapter in the ongoing Euro-zone saga.

1) Lack of a constitutional and monetary union.

2) Lack of centralized fiscal and monetary policy controls.

3) Lack of centralized leadership.

The lack of a centralized constitutional and monetary union has led to several years of inaction in the process of unification of the Euro-zone. While it was a “grand experiment” to run the Euro-zone under a single currency the underlying structure to make it effective long term was never achieved. The U.S. is a monetary union under which all state governments act under the central authority of the government and the central bank. The problem for the Euro-zone is that their are 27 leaders and no followers. This is why fiscal reforms remain elusive and each and every promise made by the individual governments to the ECB and IMF for assistance eventually fail.

The problem for the Euro-zone is that without a centralized leadership with the ability to issue its own debt, strong fiscal/monetary policy tools and a central bank with a “printing press” to support it, the survival of the Euro-zone in the long term is likely doomed. Eventually, smaller countries will want to withdraw from the Euro due to the pressures of austerity requirements or Germany will decide to quit bailing out bad behavior at the own country’s expense. The problem then becomes who is going to make good on all the debt held, and guaranteed by, the ECB?

There are currently many promises that have been made to the financial system by the ECB. The question is whether or not they can ultimately “cash the check.” While I do not have certain answers as to the where, the who or the when – I am fairly confident that it will be sooner than we currently imagine. I do believe that the ECB will be able to skirt by the ratification of the ESM this coming week and get some limited funding into place, however, I still believe the bigger problem comes at the end of summer when the German voters begin to voice their concerns – after all it is their money that is being wasted.

 

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