Monday, October 20, 2008

Rising deficits in the Eurozone can make the member nations "insolvent."

The above headline comes from Warren Mosler's blog.

And he is absolutely right.

There is no "Federal Government of Europe." Budget deficits must be financed with OPM (other people's money). Member states in the Eurozone cannot simply credit bank accounts as the the Federal Government of the United States can. Only the ECB can and it is precluded by treaty from doing so.

The risk of a "payments crisis" among Eurozone member states is real.

Past payments crises--whether in Argentina, Mexico or elsewhere--have led to currency collapse and, sometimes, blood in the streets.

Member states of the Eurozone face potential insolvency if the Fed cuts off their funding. The euro faces potential collapse if European Central Banks cannot repay the loans the Fed has made to them.

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