Bailout lets EU worse-off

FT, A bail-out by Bric nations would leave Europe even worse off (cht)
FT, The single currency’s true fatal flaw (cht)

How would this happen? There are many ways, but the most obvious is that as foreign central banks sell large amounts of dollars to buy euros, the euro strengthens against the dollar. As this happens, European manufacturers would become less competitive globally and their exports would drop.

This would cause a rise in European unemployment. It would also cause total European savings to decline as income drops more quickly than consumption. The only way to prevent a rise in unemployment is if all the new foreign funding was used to fund direct investment – which, given the need for transfer and welfare payments, is very unlikely.

In that case, the increase in foreign investment would simply be matched either by a reduction in domestic savings or an increase in domestic debt to counteract the rise in unemployment. So rather than easing the burden, foreign investment simply replaces domestic savings, undermines manufacturing and raises unemployment or debt.