The Glue that Holds the EU

While any country threatening to default on its debt causes ugly waves in the global economy, things get particularly nasty when it involves a member of the Euro Zone. So nasty in fact, it’s a wonder Europe’s leaders ever let it come to this. The situation in Greece is shedding a lot of light on who uses the Euro and whether the currency bloc is such a good thing for both the continent and the global financial system.
From its onset, the Euro Zone was fundamentally a political creation driven by motives other than perfect monetary policy.  Laymen citizens from Europe’s smaller countries were enticed by something bigger then themselves and pressured their elected officials to make it happen.  On the other side of that table sat ambitious European Union policy makers giddy to lead grandiose, history making integration. It was to be the re-emergence of Europe as a global power, this time united and stronger than ever. It was this kind of hubris that led European leaders to trump economic realities with political considerations.
When the 11 nations (Greece was excluded) locked their currencies in January 1999 in preparation for the Euro, it was already clear rules were going to be bent.
Admittance conditions stipulating budget deficits not exceed 3% of GDP and that debt must remain under 60% of GDP were not met by members Italy or Belgium. When Greece with its massive debt joined in 2001, a year before the introduction of euro notes, its path was cleared for admission by the precedent set my Italy and Belgium and fudged data.
Once through the doors, Greek hit the Euro’s low interest borrowing buffet table slathering taziki sauce of everything, vamping up spending and debt instead of cutting deficits and liberalizing the economy. By the time the recession hit, Greek’s balance sheet was bloated with debt, the economy was floundering and nation was set to tank. Unfortunately Greece’s situation isn’t unique and is endemic of how much the Euro Zone was expanded. The  are now major worries the crisis will spread to Spain, Portugal and Italy and  infect the continent’s monetary and banking system. How did this happen? Politics and emotions surpassed numbers and economics. A good lesson for any investor.