Excellent analysis, all-round, Sky. I completely agree with you, but probably for different reasons.
The Euro is tanking because the E.U. thought it could do the same thing the US does; borrow heavily or assume debt and largely ignore the consequences. Not all nations in the E.U. are as much to blame as others, but the E.U. as a whole assumes ultimate culpability.
What the E.U. has effectively done is to debauch its own currency, which is the surest way of destroying any economy. The US has been heavily debauching its own currency for quite some time now, but it survives because the dollar became the international reserve currency before anyone else could claim the title, and in a bigger way to boot.
What the E.U. apparently did not realize is that when faced with an inflationary crisis, is that investors - both state and private, will flock to the currency that has traditionally demonstrated the most stability. In this case, it's the dollar. They buy dollars, which are heavily buoyed by the incredible GDP of the US, thus reducing the supply of dollars, thus increasing the value of each dollar at the expense of their own economies.
Europe needs to undergo a major correction of this fiscal policy, as you mentioned. I believe that the market would do this most effectively, and perhaps you have your own ideas, but in any case we are agreeed upon the fact that the change will be painful.
My beliefs are colored by Milton Friedman's observation that inflation is like a drug for nation-states. Few people like taxes, but everyone loves getting free stuff. Thus, printing currency or devaluing currency to pay off debts incurred by public expenditure is a very popular political move. People see the benefits immediately, but they often fail to notice that their unit of currency buys less today than it did last year, or they blame the fact on other factors.
Like any drug, the greater the "high" is, the greater the corresponding "low" will be. And like any drug, the "lows" are a lot more permanently damaging than the "highs". Even worse, you'll need a greater high each time to overcome the previous low, hence the trend towards exponential inflation.
The US is something of a special case, because of our unique position, but we can't keep this up forever. When we go down, it's going to be painful for everyone.
Economies around the world will be thrown into chaos as the price system undergoes a radical restructuring. No amount of E.U. fiscal reform is going to change that.
My greatest fear is that after the fact someone will try to step in and introduce a global currency. God help us if that ever happens........and now I'm going off on a tangent.
In any case, good analysis, Sky
