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The Dollar, the Euro and Greece

The Dollar, the Euro and Greece

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Published by Fotis Fitsilis
This is the English version of an article that was posted on 8 May 2011 in the “Neos Agon” newspaper in Karditsa, Greece. The original version can be found in my blog: http://fitsilis.wordpress.com
This is the English version of an article that was posted on 8 May 2011 in the “Neos Agon” newspaper in Karditsa, Greece. The original version can be found in my blog: http://fitsilis.wordpress.com

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Published by: Fotis Fitsilis on Sep 14, 2012
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The dollar, the Euro and Greeceby Fotis Fitsilis*
The ongoing global economic crisis is best understood when knowing our monetaryhistory. In particular, the study of the creation of the United States (U.S.) dollar andits comparison with the other major monetary union, that of the euro area, revealvaluable information and offer conclusions about the evolution of the Europeancurrency in the future.
The birth of the U.S. dollar
The United States of America began as 13 independent colonies, each with its owncurrency. Massive inflation and different cultures, customs and traditions among thecolonies led to large divergence in the real value of the individual currencies. Afterthe American Revolution and the Declaration of Independence, in 1776, the U.S.decided to establish a central government and chose a central currency that wascalled Continental Currency. The individual currencies were exchanged against thenew currency at different rates and the first unified U.S. currency, the U.S. dollar,was released in 1793.However, the government quickly recognized that individual States, the old colonies,had to be relieved from the burden of the debt they carried. The new federalgovernment absorbed their debts into a U.S. national debt, thus allowing the Statesto make a new beginning. By doing so, the federal government guaranteed theconsistency of the new country. Additionally, by maintaining control of the newcurrency, it was able to indirectly control the debt through the mechanisms of devaluation and production of new money.
Comparing the dollar to the Euro
At first sight, one single European currency (the Euro) in a large common market of approximately 500 million people is strong enough to directly compete with thedollar. But monetary theorists and politicians with foresight (Robert Mandel, HelmutKohl and others) have long warned that without political integration, and hencecentral fiscal policy, the euro was doomed to fail. The current situation seems to justify their concerns, at least temporarily.In contrast to the creation of the U.S. dollar, the 17 member states of the Eurozonecreated a common currency without absorbing the national debts into a commondebt. Thus, in just 10 years, inequalities in production and consumption, especiallybetween north and south Europe, led into a deep debt crisis in the Eurozone, whichis exacerbated by the ongoing crisis in the global financial markets.
In a global economy that constantly produces deficits it is unlikely that the continuedprocrastination and failure to take important decisions on both sides of the Atlantic,may sooner or later lead to a major global recession.
Are Eurobonds the solution to the problems of the Eurozone?
To this seemingly simple question there are no easy answers. Different Europeanmember states use different approaches. Just note, without further analysis, that weleft out of the equation the emerging economies of Asia, India and China, which willlikely define the new rules of the global economic game in the years to come.Many economists already propose a restructuring of the Eurozone debt. This couldtake the form of consolidation of member states debts by issuing bonds (so calledEurobonds) via the European Central Bank or another central body. The issuing of Eurobonds would mean that Eurozone members would be able to borrow at auniform interest rate. Southern European countries would have obvious benefitsfrom this development, but Germany and France would have to borrow at higherinterest rates, which translates to additional costs in their budgets in the order of double-digit billion Euros a year.Issuing Eurobonds does not mean anything, if not accompanied by aggressivedevelopment policies across the Eurozone and radical reorganization of the bankingsector. Apart from a constant flow of public and private investment funds, fromnorth to southern Europe, it is necessary to design and implement a pan-Europeandevelopment program with the help of national governments, the EuropeanInvestment Bank and the European Central Bank, in a final attempt to revive thetroubled economies.
With its entry into the European Common Currency, Greece (and Portugal, Spain andItaly) lost its ability to exercise monetary policy. The question about whether it wasright or wrong is purely philosophical. This discussion should have preceded itsmembership. Nevertheless, within the European Union, fiscal and developmentpolicies remain the responsibility of national governments and through them there isstill a possibility to control public debts.Although great sacrifices have already been made to become a member of theEurozone, Greeks are asked to do even more, even in a direction that seems to beleading nowhere. The Franco-German axis, the "soul" of Europe, seems to beconsumed in non-productive "minor effort tactics", instead of tackling the problemsthat led to the debt crisis crisis in the Eurozone.

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