German Chancellor Angela Merkel and French President Nicolas Sarkozy have come up with a proposal to save the euro.  This plan could actually work, if only it had been implemented 5 or 10 years ago.

To quote this summary article, “It says governments that allow their deficits to exceed 3 percent of their GDP should be automatically sanctioned and asked to lay out a plan for reducing spending.  It also says that countries that continue to flout spending rules will face a series of increasingly strict sanctions.”

First, this proposal is too little and way too late.  The problems are already here.  Greece is basically in default.  Italy is now on the brink.  The other PIIGS, Portugal, Ireland, and Spain, are still in major trouble.  All of these countries could come up with a plan to reduce their deficits to 3 percent of their GDPs right now and it would not be nearly enough to get them out of the woods.

Second, there were already conditions in joining the European Union for countries to limit their deficits and overall debt.  They were unenforceable words.  Why would this proposal by Merkel and Sarkozy change any of this?  Just because they write out specific penalties?  But what happens when a country like Greece just ignores the sanctions?

I am not sure if this whole thing is just for show or if they are serious.  Can they really believe that this proposal will save the euro?

The problem with Greece and others is that they are welfare states.  Their governments have made these grand promises that cannot be kept.  It is much the same way as the U.S.  The difference is that the U.S. controls their own money supply and relies on the Federal Reserve to create new money out of thin air to fund its debts.  It also doesn’t hurt that the U.S. dollar is still considered the world’s reserve currency.

Greece does not control the European Central Bank.  However, the bankers probably do and the bankers are owed a lot of money from Greek debt, Italian debt, and so on.

Eventually, I think the European Union will break apart.  The big banks will get bailed out.  Greece will officially default along with others.  Then the welfare statists will be in for a shock as they will be unable to sell government bonds to anyone to fund their welfare.  So they will separate and form their own currency and central bank.  Hopefully some people will learn a lesson from this.