Tags: europe | greece | spain | euro

Only New Ideas Can Resolve All of Europe's Old Problems

Thursday, 14 Jun 2012 01:08 PM

By Jacob Wolinsky

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I predicted last week Italy would become the focus of the world, once Spain was bailed out. Only a few days later, this prediction came true.

Europe arranged a massive bailout package for Spain. Spain needed money to recapitalize its largest bank, Bankia. The terms of the arrangement were generous, and the aid package totaled about $125 billion.

The market was up on the news, but traders soon panicked as they realized that throwing money at Spain wouldn't solve the problems in the country.

Spain has an unemployment rate above 24 percent, and the European Union did nothing to address this issue. The country is still reeling from a huge property bubble, which burst a few years ago.

Once traders realized Spain was in trouble, they shifted focus to Italy. Italian and Spanish 10-year bond yields reached close to 7 percent, which is considered the danger zone at which a country can no longer sell bonds in the market. With Italy in trouble, the problem now is the future of Europe itself.

A few years — or even months — ago, talk of the eurozone breaking up was considered lunacy. Greek elections are scheduled for this weekend, which could lead to the country being the first to leave.

European countries and big bank have plans in place in case Greece does quit the euro.

What can Europe do now?

Lots of people are offering their opinions, but many miss the point that things have changed. A few years ago, it was evident that Greece and countries like Italy and Spain were in trouble.

The richer European countries such as Germany could have "bailed out" the weaker ones for a fraction of the costs incurred so far. In return, Germany could have demanded reforms from the debtor nations. Instead, Germany and other European countries kicked the can down the road each time a problem arose.

Now the eurozone faces a much more expensive and difficult task.

Additionally, circumstances have changed. Europe is becoming a powder-keg unseen since World War II. Greece is seeing the rise of a hardcore Neo-nazi party. A recent Pew Poll shows that only 7 percent of Greeks have confidence in German Chancellor Angela Merkel.

Europe possibly could have been saved only two years ago, but now it looks like a real union similar to the United States is impossible. It has become not only too expensive, but too torn-apart for that solution.

Right now, there are very few good solutions to offer. However, it is important for pundits to realize how much things have changed during the past two years.

The old ideas simply won't work now.

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