Archive for June, 2012

Euro: What next?

Wednesday, June 13th, 2012

This crisis is now so politically complicated that it appears beyond solution until a real calamity occurs. Everybody now more or less agrees that the following developments are a must:

  1. Fiscal Union
  2. A fully functional ECB able to print money
  3. Eurobonds
  4. Banking Union
  5. Structural Reform
  6. Balanced Budgets and less government debt

In Euroland Germany has all the money. In the short term it refuses to use this for the benefit of Greece, Ireland,  Spain, Portugal and Italy, unless those countries embark on, or complete, 5 and 6 above. Germany has also signalled that in the longer term it will require 1,2,3,and 4, but not until everyone is on board with 5 and 6. In the meanwhile it appears to be German policy to eke out just enough to keep the euro afloat, in the hope that the various banking insolvencies on the horizon can be staved off.

Politically the above list cannot be delivered, because the voters in all the affected countries are fed up with the mess their leaders have got them into and are no longer willing to bear any burden in its solution. If we set to one side the dysfunctional muddle of the governance and management of the euro and look just at its value, we get quite close to a core issue.

Normally a currency in a crisis of the magnitude the euro is in would be on everybody’s sell list, its value would plunge and the economy would be able to take advantage of its renewed competitiveness and recover. This has not happened. Such is the mess in the debtor countries of euroland, that any sort of recovery, which allows for structural reform and debt reduction, cannot occur with a euro which trades anything above parity with the US dollar. This is not happening. It is because, instead of having a value relating to the old frank, peseta and lire it has a value influenced by the mighty D mark. It probably sits midway between where the D mark  and the weaker currencies would have been. This is low enough to make German goods cheap and high enough to make the rest look expensive. In other words everybody has lost except Germany, which, having completed its own structural reforms post unification, has gained a huge competitive advantage right across the world.

It is  impossible to predict what is going to happen. There is now a log jam of ideas and indecision. Euro politicians are caught between what has to be done and what their voters demand. To break the jam will require an event. Greece defaulting may not be enough. Spain or Italy going down would be another matter. Meanwhile the United kingdom has to start thinking about its own future. It will not be part of the closer ties needed to make the euro survive but it may not be able to remain in an EU where states have limited sovereignty over their economies.

It is time to think about these things in the mainstream rather than on the fringe. For we can  be sure that the whole European structure is shaking and some of it will fall. When repairs are complete, whatever happens, it will look very different to what we see now. If it is to survive with its single currency intact, it will require a level of pooled sovereignty and one nationhood beyond anything into which the island people of Great Britain will  agree to go. We need to start planning, just in case.