By John Newsome on 28th July 2011

It is comforting to know that high street financial institutions just want to hold our hands and guide us through life's trials and tribulations. NatWest delivers 'helpful banking' and Lloyds is with us 'for the journey'. Santander and its customers are 'together' while Halifax offers 'a little extra help'. The warm fuzziness tends to disappear though when it comes to getting a decent rate on your savings. After being attracted by the superficially high return, the liquid platinum monthly high yield sterling capital tracker gold account never quite cuts the mustard, does it?

Now, a purchase of 10 year Greek sovereign bonds offers a yield of close to 20%. However, it probably wouldn't last long because the chances of bond investors avoiding a 'haircut' (a forced partial write-off of their investment) are close to zero. That is because the interest alone on Greece's current debt burden would consume approximately one third of government revenues and even that makes the heroic assumption that Greece could borrow at rates available to the solvent. In reality, lenders would demand a premium as a result of Greece's lousy track record.

The sorry tale of Greece's financial implosion underlines the folly of a single currency open to all. The Euro needs Greece as much as Dominique Strauss-Kahn needs another long weekend in Manhattan sans femme. The original Euro stability pact permitted annual deficits up to 3% of GDP but Europe's peripheral spendthrifts are now well into double digits. The Germans were correct about limiting deficits but when push came to shove, there was no adequate enforcement mechanism to ensure serial offenders were brought to book.

If Greece still had the Drachma, it would at least possess a soft currently to act as a safety valve. Its trade position would naturally improve and the rocketing cost of borrowing would long ago have forced it to act with greater prudence. Unfortunately, by being in the Eurozone, it is stuck with Germany's currency but without its economy.

The slow motion Greek car crash is just another example of what must happen, will happen. The single currency is more a political project than economic which is why, in its current form, it is doomed. Eurocrats told us the Euro would be strong, it would reduce the costs of trade and promote efficiency. In reality, it has allowed the feckless to self destruct and subsequently imprisoned them in an uncompetitive straightjacket. Eventually, the single currency will retreat to the core nations for whom it makes much more sense.

A decade ago, many were calling for the U.K. to abandon Sterling and adopt the Euro. Today, the silence is deafening and we should be grateful the government of the day had the intelligence to decline the opportunity. It's not something we've often said but it is only fair to give credit where it is due; well done Gordon Brown.


John Newsome can be contacted on:
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