The European Crisis May Come To A Head Soon And The Outcome May Ultimately Rest With ECB Head Mario Draghi

Wednesday, August 29, 2012 07:17
The European Crisis May Come To A Head Soon And The Outcome May Ultimately Rest With ECB Head Mario Draghi

Tags: euro | European crisis | world economy

If you didn’t realize that the Eurozone crisis has been on vacation, you may not be alone. That conclusion is a result of the inability of European finance ministers to enact a plan to sufficiently address Europe’s sovereign debt problems. In the process, those problems have only grown worse.

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So much so, that European leaders have been flying all over the continent meeting together in a flurry to come up with some type of agreement that will end the temporary mechanism (the European Financial Stability Facility) and put a more permanent one (the European Stability Mechanism or ESM) in place.
The angst about whether Greece would exit the Euro seemed to culminate in June, then everyone breathed a sigh of relief as a new party came to power in Greece and the European Central Bank promised to come to go ahead and distribute part of the funds promised earlier in April.
But there were conditions for that promised rescue and Greece has brought the whole matter to a head once again by asking for an additional two years to meet the conditional mandates.
Greece’s new government is also mandated to approve an additional €11.5 billion in spending cuts this month. If it doesn’t, the ECB may withdraw the bailout deal. Greece will run out of money in October.
And although most countries left the gold standard in the dust decades ago, Europe is still new to the concept of having faith in central banks’ judgment. So, in Europe, that faith is based more in the president of the European Central Bank (ECB), Mario Draghi.
Draghi is torn between injecting much needed liquidity into the system or
accommodating the wishes of Europe’s strongest economy, Germany, whose leadership is vehemently opposed.
If Draghi does not act and the euro collapses, no one really knows what the fallout will be like. It could be a European version of Lehman Brothers. Or the economies of China, India, Brazil, and other stronger emerging economies could take up the slack.
Either way, the real test of whether formulating a single currency backed by multiple governments can really work over the long haul. We may find out sooner than later.

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