Europe's Tragic Crisis

by David Howden

Mises Daily
January 14, 2011

At the root of the current crisis in Europe are the actions of the European Central Bank. As Philipp Bagus explains in his new book, The Tragedy of the Euro, only a realization of the true costs the euro has imposed on the continent in the past can shed light on the path to future recovery.

European member states, the European Central Bank (ECB), and the International Monetary Fund (IMF) have pledged upward of €200 billion in bailout funds to prevent the turmoil from spreading. This is a large funding drain on an already-dangerous EU fiscal situation.

Standard & Poor's downgraded Greek government debt to junk status on April 27th amid fears of default. Market analysts gave Greece a 25–90 percent chance of defaulting on its existing debt, or requiring a restructuring (a default by other words). With its hands tied within the common currency area, there was no way that the Greek government could independently raise the funds necessary to roll over its burgeoning liabilities. Greece represents only 2.5 percent of the total eurozone economy, but a concerted bailout by the EU, the European Central Bank, and the IMF to the tune of €110 billion was deemed necessary to avert disaster.

A contagion sweeping the European continent would cause Greek problems to become a Europe-wide phenomenon. Calls for a bailout to stave off contagion were plentiful, with hysteria sweeping the continent.

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