Yet the bottom line is simple: Europe’s problems are a lot like ours, only worse. Like Wall Street, Germany is where the money is. Italy, like California, has let bad governance squander great natural resources. Greece is like a much older version of Mississippi — forever poor and living a bit too much off its richer neighbors. Slovenia, Slovakia and Estonia are like the heartland states that learned the hard way how entwined so-called Main Street is with Wall Street. Now remember that these countries share neither a government nor a language. Nor a realistic bailout plan, either.
Lack of fluency in financialese shouldn’t preclude anyone from understanding what is going on in Europe or what may yet happen. So we’ve answered some of the most pressing questions in a language everyone can comprehend. Though the word for “Lehman” in virtually any language is still “Lehman.”
Q: Will the euro survive?
It’s a dangerous question to ask out loud. Suppose a credible rumor spread throughout Greece that, rather than accept the harsh terms of another bailout package, the government was plotting to revert to the drachma. Fearing the devaluation of their savings, Greeks would move their money somewhere safer, like a German bank. The Greek banking system would then, in all likelihood, implode.
But Greece’s economy is too small for an isolated collapse to cause any significant damage throughout the continent. (Even a collapse confined to Greece, Ireland and Portugal couldn’t take down Europe.) So the concern about a run on the Greek banking system is largely about whether a panic might spread to Spain or — worse — Italy, which could topple Europe’s financial system. Maybe that’s why the treaty that created the euro doesn’t say anything about a country’s abandoning the currency. Or why European leaders scarcely mentioned the possibility (not in public, at least) until this fall, two years into the crisis.
Q: Why is it such a bad thing for a country to abandon the euro?
If a country did pull off a surprise euro exit — and get out before everybody could take their money out of the banks — there would still be a period of economic chaos. Exports and imports would shut down. Lending would collapse, which would send companies into bankruptcy. Ripple effects would be felt throughout Europe.
The problem is thorny enough that the British chief executive of Next, a European retailer, recently offered a £250,000 prize for the person who comes up with the best plan for countries to leave the euro without destroying the European economy. (Have a brilliant idea? Entries are due early next year.)
Q: Wait a minute: If leaving the eurozone would be so awful, why would anyone do it?
It’s not all bad. Leaving the euro would allow a country to ignore demands from the leaders of other European countries. It could simply refuse to pay its debt.
After the short-run pain, weaker European countries could also see a long-term benefit. If Greece or Portugal went back to the drachma or the escudo, the cost of their exports would fall. Because it would be cheaper for foreign travelers to stay in their hotels and eat in their restaurants, their tourism industries would get a bump, too. The alternative is to spend the next decade as poor countries tied to a rich one’s currency.
Q: Why exactly does Angela Merkel always look so woebegone?
For the euro to survive in the long run, Germany — the zone’s biggest economy — will most likely need to vouch for the debt of struggling eurozone members. And it will become more expensive to borrow money if bond investors fear the country is becoming overextended.
The Germans are also wary of the widespread calls for the European Central Bank to buoy Spain and Italy by buying their bonds. If they know the E.C.B. will bail them out, what will be their incentive to act responsibly in the future? Worse, Germans argue, printing money to pay off government debt (which is what the E.C.B. would essentially be doing) is the first step to hyperinflation.
Q: What happens to the European Union if the euro crumbles?
It turns out that a bunch of vastly different countries, each with control over its own budget but all bound to a common currency, is not a sustainable economic model. And that leaves Europe with two main, and painful, options.
Article source: http://feeds.nytimes.com/click.phdo?i=77258e500030baaca27d953d7c3f33ad
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