Saving the Euro or just delaying the inevitable?

I can't do justice to this subject in a post. The Euro crisis has so many issues and aspects. But the agreement reached yesterday is certainly important and adds to the story in a way that does sum it up to an extent.

The Euro area countries have agreed to

* Cut by half the amount Greece owes the banks (reducing their total debt and so not only the amount they will repay but also the annual interest).
* Recapitalise the banks so they are better able to withstand further shocks (say a default by Italy or Spain)
* Increase to €1 trillion the bailout fund available in case of potential default.

The markets love it and have soared, but should we be so sure?

The French President stated that 'Greece should have never been allowed to join the Euro' because they were not ready and falsified the figures. Well he is probably right and the fact that the Euro area is not an 'optimal currency area' has not gone away. Maybe this isn't the time to say France 'managed' the figures too to meet the joining criteria, but it is certainly true that Belgium and Portugal should not have the same currency.

The 'partial default' that the 50% cut in Greek debt represents is a managed way to prevent a full default. That would cause panic and probably the break up of the Euro area. That would be disastrous for trade - what does anyone do between the Euro and the 'new' currencies that would replace it? Months of lost trade, shutdowns and unemployment would be inevitable and that would affect the UK too, with 60% of visible trade done with the EU.

As one commentator said. 'What the Eurozone needs is growth'. This will solve many problems. The debt to GDP ratio will fall, and governments will have more revenue and lower expenditures, allowing them to service their debts. Growth will also allow confidence to return and the growth will become self-sustaining.

But the recapitalisation of the banks will slow growth. For banks to have more capital they have to keep more of their assets, and that means lower lending. Lower lending leads to a credit squeeze and firms can't get the capital they want. Interest rates will probably rise as firms demand more loans and the price rationing process kicks in.

Perhaps the most worrying aspect is that €1 trillion is nowhere near enough to bail out Italy let alone Spain and Italy together. The Euros inherent weaknesses remain and in all probability this is just a temporary lull in the crisis.

The BBC covers the issue here