How the ECB Will Destroy the Euro Zone

It's now beginning to look like Greece will end up leaving Euro Zone.

The problem is that the EU is a consensus body, so Greece would have to agree to leave.

The solution is therefore to create conditions that are so onerous that Greece will have to leave.

The problem is that the only way that they can really do this is by crashing their banking system so that the only alternative is to leave the currency union.

The problem is that everyone knows this, and so we are seeing a slow-motion bank run in Greece, and we're likely to see one in the rest of the peripheral nations:

Clever, huh? The only hitch is that, now that the game plan is becoming clear, rational Greeks are not choosing to wait for an EZ attack before withdrawing their funds from Greek banks and transferring them somewhere, anywhere, else. There is a gradually accelerating bank run taking place which is likely to reach criticality before a Greek-EZ policy showdown can take place.

There is a broader lesson here. By threatening to choke the Greek banking system, the EZ implicitly threatens to do the same for Spain or even Italy. They can say otherwise, but why should depositors in shaky peripheral banks believe them? Withholding euros from peripheral banking systems is a gun that goes off before it is fired. Simply brandishing this weapon is causing havoc and speeding the demise of the entire zone.

Better to put the gun away and do what should have been done all along: have the ECB assume the lender of last resort function for all EZ banks, with centralized financing of deposit insurance in particular. Don’t use the threat of a financial panic as a policy tool.

Greece should never have been a part of the Euro Zone, and considering the fact that they have more in common with the 3^rd (corruption, dynastic politics, tax evasion, huge underground economy, etc.) world than they do with Western Europe, it's arguable that they should never have been brought into the EU.

But most of the problems here, and what will cause the collapse of the Euro if it is not corrected, is that the basic system is fundamentally flawed.

It is pro-cyclical, it seems to be structured primarily for the financial industry, and it has no mechanism to address imbalances between member states.

If they continue on this path, it won't just end the Euro Zone, it could cause a breakup of the EU.