By Jason Jenkins
In a recent interview with CNBC, former Fed Chairman Alan Greenspan stated that the Eurozone is doomed to fail because the divide between the northern and southern countries is just too great.
The statement is based upon the fundamental make-up of Eurozone participants and that they will never be able to work together. There was an expectation during its creation in 1999 that the southern members would behave just as those countries in the north. His example, the Italians would behave just like the Germans. The exact opposite has happened.
What came about was a system where the northern countries began subsidizing the excess consumption of those in the south. Throw in a global economic downturn and then all of a sudden you have a sovereign debt crisis.
Greenspan predicts that as the fiscal problems of Portugal, Spain, Italy and Greece grow worse, the influx of goods from Germany and France will dry up. When this happens, the standard of living for the southern Eurozone members will decline.
He added: “The effect of the divergent cultures in the Eurozone has been grossly underestimated… The only way to have several currencies from divergent nations lumped together is if they are culturally close, such as Germany, the Netherlands and Austria. If they aren’t, it simply can’t continue to work.”
The U.S. Has Grave but Solvable Debt Issues
Greenspan feels that, to a very large extent, what’s driving the United States at the moment is Europe due to the fact that there’s one single integrated global stock market.
As for our debt problems at home, Greenspan said it will be difficult to get any sense of consensus on Capitol Hill to solve problems. The current political environment is the most polarized he has seen since the beginning of his career.
A necessity in solving the U.S. debt would be to address the revenue aspect of the budget. He said we can accomplish this by eliminating tax breaks, loopholes and other measures that drive down federal revenue.
Furthermore, he went on to say, “Much fiscal policy is implemented, not through spending increases, but through tax credits and other so-called ‘tax expenditures’… The markets should respond to them as they do spending cuts, with little contraction in economic activity. We thus could get a very large positive impact on the deficit from such reductions, with minimum negative impact on the economy.”
Greenspan gave his support to the President’s Simpson-Bowles Commission deficit reduction plan that was presented months ago to help rein in federal spending and boost revenue, but that plan was met with stiff resistance from lawmakers on both sides of the aisle in Congress.
The former Fed boss said, however, “the presumption we can rein in our budget deficits without inflicting some fiscal pain is utterly unrealistic.”
Greenspan’s Assessment is Playing Out As We Speak
The take is that the euro cannot survive because of the differences between Eurozone members. Eurozone dysfunction has shown itself in the negotiating processes to save Greece. There was no actual restructuring of their institutions, which is needed going forward. Expect more problems for the Eurozone and the euro in the very near future when Italy’s well-being is on the table – and there are no easy fixes for the EU’s third-largest economy.
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