European policymakers are still enjoying their famously long, languorous summer holiday. The vacations will end in the coming days, with Germany’s Chancellor Angela Merkel scheduled for a series of meetings with leaders from France, Greece and Italy this month. Meanwhile, at a more rapid pace, Europe is in the midst of a massive run on bank deposits in Greece, Portugal, Spain, Italy and Ireland. While the last out-of-office auto-responses zip across the continent in multiple languages, the bank runs continue to accelerate.
Europe’s trip down the highway to hell began with an original sin. At the birth of the euro, nations that adopted it and formed the European Monetary Union (EMU) gave up their national currencies. They could no longer “print” money to pay for expenses (despite the longtime use of keystrokes for this purpose, the image of stacked, crisp bills somehow hangs on). The European Central Bank, comparable to the US Federal Reserve, could increase the supply of euros, but individual nations could not.
Like each of the US states, each nation in the EMU became a user, rather than an issuer, of money. But each country kept control of taxing and spending through its own treasury. The design flaw—think major miscalculation here—was the absence of a unifying body that could move resources from country to country in the event of local trouble, as the US government does between states.
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