Monday, 12 December 2011

Life's unanswerable question #24: the Euro crisis

Over the past few months, I have been bemused, puzzled and worried by the situation in Europe - the near default and bailout of Ireland, Greece, Portugal and Spain.  Italy is the latest rabbit in the headlights and France is being lined up to follow (French banks have had their credit status downgraded). 

These are all countries that have been throttled by the straight-jacket that is their membership of the Euro.  They cannot devalue their currency in order to give themselves a competitive advantage over their neighbours.  They also cannot print currency to inflate their way out of the current crisis, as Britain and America have attempted to do ("fiscal stimulus" by another name). 

Since joining the Euro, Ireland, Spain and Portugal have experienced property booms, funded by interest rates that were far lower than they would have been if they'd kept their original currencies.  Money was cheap, borrowing it became easier and easier as banks funded themselves on the wholesale market.  Prudence was forgotten.  Then along came 2008 and the collapse of Lehman Brothers.  The supply of easy money dried up overnight and many banks turned to their national governments for bailouts, effectively nationalising themselves.  That's what did for Ireland, Spain and Portugal.  Spain, in particular, wasn't a highly indebted nation until it had to bail out its banks.

Greece has a different set of problems.  If you listen to the stereotypes, the Greek's are a profligate nation: they retire earlier than anyone else in Europe, have a huge and inefficient public sector and get well paid for the privilege. The average salary in Greece is €20,000 higher than the average salary in Germany.  I was therefore surprised to read on the BBC website that the Greeks pay more tax than pretty much any other Europeans and have higher levels of personal savings too.  They also have lower personal borrowings. 

As a nation, Italy is suffering from the hangover of debt that was incurred in the decades leading up to the last recession, the one at the beginning of the 1990's.  Since then, Italy has balanced its budget and does not borrow to fund its day to day operations (unlike, say, the UK and the USA).  Until the current Great Recession, they were slowly paying back the old debt.

The big question is:  will the Euro survive?  I both like and dislike the Euro:  on the one hand, having a single European currency is really useful when travelling or when dealing with invoices for my big work project (it made life so much easier).  On the other hand, the current situation was foreseeable 20 years ago during the last recession when Britain exited the ERM (Exchange Rate Mechanism), the Euro's predecessor which tied currency exchange rates together.  Ditto 40-odd years ago, when the Bretton-Woods Agreement collapsed. 

Monetary union cannot work unless the countries involved give up the rights to control their borrowings, their taxation policies and their budgets to central control.  Whether the Eurozone will get to that point is anyone's guess - right now, they're still trying to stick plasters (band-aids) over the wounds instead of biting the bullet.  Will we have another credit crunch and a world-wide Depression?  Or will the Euro collapse instead?

- Pam  (I have no answers)

PS:  Most of my background knowledge re Italy, Spain and Greece, I owe to the BBC.  Naturally, I can't find the articles on their website when I need them for attribution.

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