On the weekend of May 08, 2010 the finance ministers of Eurozone countries and representatives from the IMF came up with a debt stabilization plan worth Euro 720 Billion. The idea is to provide loan guarantees and bi-lateral loans for members of the European Union that run into trouble with their debt loads. The most recent being Greece with Portugal, Spain, Italy and Ireland looking to run into trouble based on the yields their bonds were commanding in the bond markets.
Is it me or does anyone else see the folly of this grand plan? In essence the plan places all the citizens of the European Union on the hook for the profligacy and poor fiscal management of the citizens in countries that have intentionally or unintentionally run up huge budgetary deficits and the corresponding debt loads in relation to GDP.
Member countries are not supposed to run annual spending deficits of more than 3% of their GDP. Well all of the Euro countries are doing that right now and in the process building up huge debt loads. This is welfare statehood at its best. And how do they plan to get out of the situation? By coming up with a scheme that uses more debt issued by countries that can or cannot afford to and then using that debt to provide funds to countries that have completely messed up their finances. In essence where it was a few countries digging their own fiscal graves it is now all Eurozone countries in the same pit helping the others while at the same time not realizing they are digging their own at the same time.
Historically, when countries have borrowed in essence to support their currencies, the programs have failed miserably. This will be no exception. While the countries participating can agree to these lofty ideals and financial support, under the European Union there is no ability to monitor whether or not beneficiary countries are actually meeting their targets for debt reduction. This means that there is a source of funds with no accountability or consequence for failure.
There is no doubt in my mind there were a lot of very smart people in the room that weekend. But the lack of common sense was truly astounding. Here is a simple proverb that if followed by everyone on the planet would make sure these situations never happen. "The man who makes one dollar and spends 99 cents is a happy man and the man who makes one dollar and spends one dollar and one cent is an unhappy man." Try it, it works.