Is the Euro about to collapse?
I was asked last year by an online news agency to comment about the points made by Joseph Stiglitz, the Nobel prize winner for economics, who suggested that
the stress placed on the single European currency by its failing economies meant ‘the future prospects of the euro are bleak’. He argued that the only long-term solution to the crisis might be for Germany, Europe’s strongest economy, to ditch the Euro and have the Deutschmark back as its currency. If you believe the rumours the money has already been printed just in case the Euro collapses. He said Germany’s exit would allow the euro to fall in value, boosting exports from Europe’s stragglers, whose goods would become cheaper for the rest of the world to buy.
Dr Stiglitz, of Columbia Business School in the US, said the drastic measure would help stave off the threat of a double- dip recession posed by ‘a wave of austerity’ across the continent. I understand his argument – The pressures that the weakest economies in the euro zone are under, mean that they desperately need lower interest rates and a much weaker currency to allow them to attract more business, in particular tourism business. These countries (Greece, Spain, Portugal, Ireland, and Italy if we are honest) have economies cruelly referred to as “basket cases”, because they are on the verge of collapse in the opinion of many, having relied so heavily on employment and wealth created from the increasing prices of land and property. With the current value of the euro, their potential recovery is being frustrated by the strength of the German economy and the resulting stranglehold the Germans have over Euro zone. I believe the value of the euro is unsustainable at this level, because the only alternative for these countries is severe austerity with resulting civil insurrection, of which we are beginning to see early signs (and that is before the effect of the cutbacks have really been felt)
Why on earth will a building worker or a hotel waiter in Greece, Spain or Portugal be worried about being in the euro when all they can see in the future is long term unemployment and poverty? – they will undoubtedly pressurise their government to get out of the Euro if their employment prospects remain bleak.
Currently the only reason I can see for market sentiment currently supporting the euro, to the extent it has to date, is the sheer size of the potential buying power of the zone as a whole, and also the undoubted support from China, India and Russia who need to ensure markets other than USA. In my opinion, currency support will not be enough – if they keep the euro at the current level, these countries will also have to join Germany as bankers to the Euro zone offering liquidity through long term loan finance support – liquidity not just trade agreements.Politically, I believe the Germans will only leave the Euro as a last resort, because of the amount they have invested in the EEC and the undoubted impact on their perceived leadership of the Community.
However, in my opinion the only sensible answer is to create a second tier division of the euro and “park” some of the debt that is currently unlikely to be repayable.
If they do not set up a two tier Euro zone, with the countries mentioned above in Division 2 with a weaker exchange rate, I can only see the implosion of the euro as inevitable. If that happens, we will probably face the depression we are all trying to avoid, with higher interest rates as well.
We should not kid ourselves in UK. If the current government had not clearly and promptly declared their strong intention to pay back our debts within 5 years, market sentiment would have acted against sterling and we would be facing higher interest rates, higher unemployment and the dreaded deflation.
It could still well happen – it is all about having the confidence of the markets.
As it stands at present, we are better placed as a country to benefit from this turmoil in the Euro zone, and I believe our relative stability will attract more inward investment.
One proviso – David Cameron must resist the pressure from “Comrade Cable “ and his friends “Comrades Clegg and Alexander” to tax the entrepreneurial spirit out of our successful business owners and managers.
The only people that are going to get our countries out of this mess are the entrepreneurs in the european countries, and we must allow them some leeway with tax to create the wealth that will give them confidence to create jobs and kick start the economies in UK and Europe again.