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    Eurozone Crisis: A Disaster Waiting to Happen

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    The current crisis in the Eurozone, which has thrown Greece into disarray, was a disaster waiting to happen, according to many economists, one of whom told Sputnik the currency is inherently unstable.

    As talks over a third bailout for Greece begin Tuesday, many economists are watching with a sense of foreboding amid a dismal forecast outlook for the Eurozone from the International Monetary Fund (IMF), which said the euro area "remains vulnerable to shocks".

    The IMF said medium-term prospects are less bright. "Several factors cloud the outlook for growth over the next five years," said Mahmood Pradhan, mission chief for the euro area. "These include high unemployment, especially among the youth; large corporate debt; and, rising non-performing loans (NPLs) in the banking system." 

    Slow progress on structural reforms has also dampened the business climate and reduced growth potential.

    Amid this dismal outlook, many economists believe the very foundations on which the euro was predicated were creaky from the start and dates back as far as 1979 with the creation of the European Exchange Rate Mechanism (ERM) to reduce exchange rate variability and achieve monetary stability in Europe ahead of the introduction of the euro in 1999.

    Fundamentally Flawed System

    Philippe Pochet, General Director of the European Trade Union Institute (ETUI), writing in its current newsletter, said a report by his organization and the European Social Observatory, published in 1997 concluded that: "…insofar as EMU is not an optimal monetary zone, it will be vulnerable to asymmetrical shocks and adjustment mechanisms will be needed by both the national and the European institutions." The diagnosis was renewed by the organizations in both 2000 and 2010.

    Central to the problem with the euro is that member states have differing fiscal policies and taxation regimes, among many other financial indicators. For a currency to work, there needs to be harmonization of fiscal policies, which is inherently impossible in the current Eurozone, because of political differences.

    Neil Woodford, head of investment at Woodford Investment Management, said this goes to the heart of the current battle between Germany — which is leading calls for Greece to make fundamental changes to its tax and state pension regimes — and Greece. Woodford told Sputnik:

    "In a simple sense, pretending that Greece was Germany was a fundamental error. Having the same monetary policy for two economies that are so different seems to me to have been a flawed assumption from the start of the project." 

    "Ultimately, Greece shouldn't have been allowed into the euro in the first place but, having squeezed into the exclusive single currency club, it suddenly had access to deep and cheap credit lines, which it made full use of," he said.

    Martin Feldstein, writing in the magazine of the International Economic Policy in 2010 at the start of the Greek bailout crisis said:

    "The attempt to establish a single currency for sixteen separate and quite different countries was bound to fail."

    "The shift to a single currency meant that the individual member countries lost the ability to control monetary policy and interest rates in order to respond to national economic conditions. It also meant that each country's exchange rate could no longer respond to the cumulative effects of differences in productivity and global demand trends."

    Related:

    Greece Launches Technical Negotiations With Creditors on Tuesday
    IMF Projects Annual Eurozone Medium-Term Growth Outlook at 1.6 Percent
    Eurozone Cracks Reveal Crevice in Greece
    Other Side of the Coin: Euro Becomes 'Growth Killing Machine' of Eurozone
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    International Monetary Fund, economic collapse, crisis, currency union, EU integration, EU membership, euro, bailout talks, bailout program, Greek debt, Greek economy, Greek crisis, The European Central Bank (ECB), European Commission, Troika, European Union, Eurozone, Europe, Greece
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