Tuesday, 31 January 2012

Eurozone Meltdown Latest

The Eurozone was from the outset a political rather than an economic construct. And therein lies the problem. This humble blogger worked in Brussels when it was being constructed, long before it was even first discussed at the dinner parties of the north London chattering classes. And from its inception it was always a political project promoted by the post-cold war European political elite, and endlessly pushed by Germany and France because they knew damn well they could dominate it.

And that is of course fundamentally why the UK did not join. It did not stack up financially and nor did it suit our politics. History may judge that this is the only decision that Gordy got right. Remember that Tony was all for it and it was Gordy who held the line. Good old Gordy. I knew I liked him!

The current pact being championed at this week’s European Council – a summit for EU leaders, and remember what summits are for children - is in essence Germany placing rules on all the other members telling them that if they fiddle their economies in ways that Germany does not like, then Germany will give them a spanking and turn off its financial tap. Which is frankly a bit rich as the much lauded rules that previously existed - the now amusingly called European Stability and Growth Pact - was spun as the most robust set of safeguards that would stop any Eurozone member fiddling their economy, and which Germany and France then utterly ignored when they broke them, strong-arming the other EU members to not censure them against the European Commission’s advice. One rule for the two big guys and new rules for everyone else. Plus ├ža change, eh?

Anyhoo, tonight is the deadline for entries to the Wolfson Prize being administered by the think tank Policy Exchange, where in March £250,000 will be awarded to the pointy head who comes up with the best 25,000 word solution designing a mechanism for a country to leave the Eurozone. Amazing that one does not exist, really, but there you are.

Factoid of the day - Since 1945, 87 countries have left various monetary unions around the world and amazingly the world did not end. So, not impossible then. Painful, yes, in the short term, but not impossible by any stretch.

The reality today is that Greece is now in complete meltdown. A friend of ours has just returned from Athens and reports that the public sector is hardly bothering to work at all, there are strikes galore everywhere, rubbish is mounting in huge piles on every street corner and the overwhelming majority of young people, university degrees or not, are all unemployed. It is more like Kandahar than a European city.

And of course Portugal’s borrowing costs are now 17% compared to Germany’s 2%. Remember, that 7% is considered unsustainable.

So what is the solution to this mess?

Taking a strategic view, the answer is of course glaringly obvious and every objective commentator has been prescribing the same medicine for at least 2 years:
  1. Fill up the bailout fund, which has been struggling to get to €1 trillion whereas in fact around €3-4 trillion is needed by all accounts
  2. Ring fence Italy as it is simply way too big an economy to be able to bail out
  3. Force/help Greece and maybe Portugal to exit the Eurozone
What is depressing is that none of the European political elite, having sold their souls, their electorates and their economies to the Euro project, can find the political leadership to accept undeniably painful but simply inevitable medicine.

It is utterly perverse logic for the sickest of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) to still believe that it is in any way in their economies’ interests to stay in the Eurozone. It’s as if they have signed their Eurozone suicide pact and won’t go back. They are happy to sacrifice their economies and political future on the altar of European political dogma. A Portuguese friend of ours who went home for Christmas told me that when she broached the idea that it might be in Portugal’s interest to leave the Eurozone, people looked at her as if she was completely stark raving mad. They simply could not comprehend the idea, such is the political unreal reality that the European political elite have constructed in their home countries.

How can it be in their interest to stay in? To get out of the mess they are in, they need to devalue and free up their economic policy. Neither of which they can do within the Eurozone. The choice is 5 years of pain if you leave or 25 years of pain if you stay. Madness.

Some Cragsbury predictions for you:
  1. Greece will inevitably default in a horribly unplanned manner
  2. Once that dam has broken, Portugal will follow suit sometime thereafter
  3. In the short-term, the UK pound will become a European safe haven currency for investors
  4. Germany will messily cobble things together, eventually, but it will takes years for the markets to trust the Euro again
All of which is avoidable, if the European political elite put away their arrogant, stupid pride and faced reality. Not a hope there then.

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