Curse of Debt (3) - Collapse of the Euro

Over the last year, economists and political commentators have been writing the obituary of the Euro. They claim it is about to collapse and disappear. This has not happened yet, and it may not happen for a long time.

Political power usually trumps economic reality.

Many of the members of the EU have built up high levels of debt, as politicians borrowed to pay for po9litical promises that they could not afford. When interest rates were low, the burden was just bearable, but now interest rates are blowing out, the load is too heavy to bear. We could be forgiven for expecting them to default on their debt.

European banks have lent huge amounts to countries who could not afford. That practice would usually lead to the banks taking a huge loss when their clients default.

However, the politicians do not want that to happen. They will come up with all sorts of solutions to prevent economic conditions from become the economic reality. None of the solutions will solve the problem, but they will keep things going until a better political solution can be put together.

If the situation gets really bad, the politicians will force the ECB into quantitative easing (the economically correct name for printing money). This may lead to massive inflation, but politicians have always preferred inflation to spending cuts as a tool for eliminating debt.

Modern banking system and modern money systems are rotten. They will eventually collapse, but do not hold your breath. Political power will need to collapse first.

Read more at Blessed Economist