Monetary Union But Not a Fiscal One

Ever wondered what happens to a Monetary Union thats not a fiscal union?? Just looks and understand whats happening in Europe and observe the actions of politicians and hence decide where the things would be moving.

Please understand the issue - Here you have a group of countries coming together that formed a MONETARY UNION expressing their sovereign belief in a SINGLE CURRENCY - EURO. Now the financial and economic health of the system was as diverse as you can get. Germany was and has been the strongest of the lot economically and financially. They are a global export powerhouse and the cultural elements play their part as well in keeping it in a good financial status. Others like Spain, Ireland, Greece, Portugal, Ireland when entered into European Union had a fantastic run given sudden access to easy and cheap credit. But the politicians squandered the chance letting the debt flow into assest like property in case of Spain, Portugal and Ireland. For others like Italy, they did not have a property bubble but underwent a public debt bubble wherein the government kept on spending since the private sector growth and productivity gains in the last decade have been nothing to talk home about. Hence, you had investments into the wrong areans wherein someday when the rate of access of credit was bound to surpass the decreasing Rate of Return on investments, the EROSION OF CAPITAL started and hence then we had the fiascos we are undergoing right now.

Historically, over the years like in eastern block a country would ususally devalue/ default on its obligations leading to an inflationary bust/ boom and then the economic activity starts all over again. It was made possible by the individual countries having their own independent currencies and central banks - thus having independent monetary status. Now, after the formation of ECB these nations cant take that path, other than ECB agreeing to devalue EURO which would be a death knell for German dominated (ECB) politicians because Germans would never want to carry the corpses of bad debt of their neighbours.

Hence, this may be a wonderful opportunity for the Germans in specific and world to go shopping in Europe, ofcourse after the fog clears a little bit more.