Between a Printing Press and a Hard Place

As the crisis threatens to spread, the grand vision of the European Union is cracking. And the only thing financially that makes the US different: Its own printing press.

Judging by the U.S. stock market's midweek gaiety, you'd have thought that Europe's financial system was operating on faraway Mars. Even as Greek bonds traded as high as 24% on Wednesday -- a sign of big trouble -- folks chose to focus more on the array of companies in America winning the beat-the-number earnings game.

Why Greece matters to US investors

(How the ratings agencies have any credibility, after missing the housing bubble, is beyond me, but that is another story.)The bonds of a union are tested With sovereign debt imploding (i.e., yields on government bonds rising) and credit default swaps blowing out across Europe, the situation is rapidly coming to a head. It's difficult to see how the members of the European Union will resolve this problem. Either Germany will have to cave (which it may be in the process of doing), or somehow the euro is going to fracture, with Greece or Germany leaving the monetary system.

The euro's problem is the problem that had always lain in its future: getting the disparate countries of Europe, with their different policies and different histories, to agree to pursue the same path in difficult times. Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 304, 314, {"configCsid": "MSNmoney", "configName": "player-money-4x3-articles-inline", "player.vcq": "videoByUuids.aspx?uuids=b9f3324e-666e-4666-9941-700be31d8b4b,6c60ace1-b7f8-4fd3-95b0-127edfd023cc,38c8f721-63df-4cfb-8643-38c22398d52b,f828a090-e826-4137-9fc7-8d1940218dfd,762c249a-afe6-4cce-85fd-f507847398a5,c4c5fd01-a6fc-4ecd-a42d-97c3695f3285,8556163d-5606-43e5-a1f4-64b039aa1ff0,cda15ecb-0d99-4d20-85ab-c0989f00fc59,1f16a8ca-4a29-474f-992f-e47b4773c974", "player.fr": "iv2_en-us_money_article_Investing-ContrarianChronicles-inline"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=b9f3324e-666e-4666-9941-700be31d8b4b,6c60ace1-b7f8-4fd3-95b0-127edfd023cc,38c8f721-63df-4cfb-8643-38c22398d52b,f828a090-e826-4137-9fc7-8d1940218dfd,762c249a-afe6-4cce-85fd-f507847398a5,c4c5fd01-a6fc-4ecd-a42d-97c3695f3285,8556163d-5606-43e5-a1f4-64b039aa1ff0,cda15ecb-0d99-4d20-85ab-c0989f00fc59,1f16a8ca-4a29-474f-992f-e47b4773c974;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');Given how the euro was constructed and how seemingly lost the people running the show in the European Union seem to be, I don't know what they'll be able to do to extricate themselves from this quagmire -- because even if Greece can be "solved," Portugal, Spain and Italy could be next. In the interim, I expect that sometime soon the European Central Bank will begin blanketing the banking system with euros "just in case."

Greece, in the end, will probably have to restructure its debt. (Depending on how Greek bonds ultimately get restructured, the holders of that debt are probably looking at a hiccup to the tune of $150 billion to $200 billion.) And who knows what will happen to the euro if Greece is actually kicked out (though that would in all likelihood be the best thing for the currency).

Meanwhile, the stumbling block to a bailout has been Germany, because it doesn't want to come to the rescue of Greece or other nations. At the same time, however, German banks have plenty of exposure to Greece's sovereign debt.

Ironically, the structure in place to try to preserve the value of the euro is the very structure that's potentially causing it to come undone: The individual countries have no printing press to create euros. (Whereas here in America, we print money at the drop of a hat -- and give banks do-overs -- and the dollar is considered a safe-haven currency.) How will the Greek fire be extinguished? It will be interesting to see how the EU tries to kick the can -- the insolvency of Greece -- down the road (which seems to happen with all problems, rather than actually attempting to solve them). But I suspect that whatever happens will be some form of politically expedient money printing and debt reneging, as opposed to real structural reform.

We in America have many of the same problems, and if austerity was foisted upon us, I'm not so sure we wouldn't have union members marching in the streets just as we're seeing in Greece. The Greeks seem oblivious, and we are similarly oblivious. However, we have a printing press, and we're willing to use it.

Again, perversely, for the moment we are the one-eyed man in the land of the blind, because money printing has "worked" here for now, with the negative consequences to be reckoned with later.

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Greece, in the end, will probably have to restructure its debt. (Depending on how Greek bonds ultimately get restructured, the holders of that debt are probably looking at a hiccup to the tune of $150 billion to $200 billion.) And who knows what will happen to the euro if Greece is actually kicked out (though that would in all likelihood be the best thing for the currency).

Meanwhile, the stumbling block to a bailout has been Germany, because it doesn't want to come to the rescue of Greece or other nations. At the same time, however, German banks have plenty of exposure to Greece's sovereign debt.

Ironically, the structure in place to try to preserve the value of the euro is the very structure that's potentially causing it to come undone: The individual countries have no printing press to create euros. (Whereas here in America, we print money at the drop of a hat -- and give banks do-overs -- and the dollar is considered a safe-haven currency.) How will the Greek fire be extinguished? It will be interesting to see how the EU tries to kick the can -- the insolvency of Greece -- down the road (which seems to happen with all problems, rather than actually attempting to solve them). But I suspect that whatever happens will be some form of politically expedient money printing and debt reneging, as opposed to real structural reform.

We in America have many of the same problems, and if austerity was foisted upon us, I'm not so sure we wouldn't have union members marching in the streets just as we're seeing in Greece. The Greeks seem oblivious, and we are similarly oblivious. However, we have a printing press, and we're willing to use it.

Again, perversely, for the moment we are the one-eyed man in the land of the blind, because money printing has "worked" here for now, with the negative consequences to be reckoned with later.

Continued: The hyperinflation campMore from MSN Money

 1 | 2 | next >

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