Share |
The truths they don't want you to read....

Sunday, April 25, 2010

Greece and the Euro

Does anyone really understand just how the collapse of the Greek economy will affect the Eurozone?

I suspect not, and that the potential implications for the next likely victims - Italy, Spain and Portugal - are going to be just as severe and just as devastating. But, it is likely to be the impact on the strong economies that settles the future for the Euro.

As an analogy, you live with your large extended family and your sisters' husband has run up huge debts, finds himself unemployable, and now announces that he should make himself bankrupt. Unless you bung him vast quantities of cash to pay off his debts, and he promises, honestly, that he will repay you when he gets back on his feet.

Your problem is that you have guaranteed some of his debts, and if he defaults your credit rating will go through the floor - meaning the chance of you getting a loan is lower - and you will still have to pay some of the debts. Bailing him out will affect your immediate family's standard of living, so it is pain in every direction.

That's where the Euro is.

Ideally, you would have a single bank account for all the extended family, and a right of veto over any debts taken out by the family members, and you would all work together to maximise the opportunity for each member and provide a safety net for each other.

That's where the Euro isn't.

If you believe that the Euro is the way forward, then you also need to accept that a single economic control is essential, and that means a European Government setting European economic policies for the entire area and managing taxes, money supply and interest rates across the whole zone.

Local economic control in the Euro zone is economic nonsense as the principal financial levers aren't available to you, and you are dependent upon your neighbours good fiscal behaviour to support your plans. And that is where Greece and Italy are the magpies in the nest.

But giving up economic control means that interest rate policy is set in (probably) Frankfurt to benefit the majority of the Euro population. And that means that the periphery - Romania, Greece, Sicily, Portugal and the Western Isles will all have to live with policies that are designed for the urbanised, industrial cities of Europe.

There are only two credible positions: stay out of the Euro or support complete European integration. Anything else is the triumph of hope over reality.


Anonymous said...

There is a layer of politics on top of this. In late 2007 the UK quietly devalued the pound, there was not much noise in the press or the other major players because the pound was overvalued.

Late 2008 they tried it again and this time they really talked the pound down, did QE and ran a huge deficit. The UK did not get the devaluation that they wanted and it is at this point that the layer of politics on top of this comes into play.

Europe was starting to suffer the effects of a very strong Euro, a falling pound and falling dollar (and hence falling Yuan) was impacting all industry. At the same time the US had embarked on massive deficit spending, so great that normal markets would have pushed borrowing rates in the US up. But the US economy could not handle rising rates so they needed to create USD demand.

Both the US and the Euro states needed the Euro to fall in value and so the crisis in Greece was born and the effect has been satisfactory to both sides. Having a basket case like Greece in the Euro was a "card up the sleeve" for Euro states should they ever need to devalue, they have been drawing this out for a good few months and the only people suffering are Greek public workers.

Unfortunately for the UK they picked the wrong time to devalue, the other players are devaluing faster and louder.

Don't forget the benefit of the Euro is that trade between nations, some 80% of all their trade, is done in a single currency which eliminates all currency risk ... and the cost of managing that risk. That is what the Euro is really about and why it exists, it makes a more efficient and integrated European industrial machine.

Anonymous said...

Sensible economic commentary,Angus !

Obviously you are not up for election --you would not be allowed to tell these home truths.