This year, the Euro celebrated its tenth birthday. It was launched with great fanfare on the 1st January 1999; Rudolf Erlinger, then Chairman of the EU group of finance ministers proclaiming “we are standing at the dawn of a new era”. Portugal declared it was delighted while Finland was honoured. Perhaps sensing where this all could lead, Germany underlined the need for everyone to work harder. Still, teutonic reserve was not sufficient to dampen the hubristic mood as the European political elite quaffed vintage champagne; plus ça change ………
Ten years later, there were no celebrations. Europe’s economy has fallen into a deep recession while the stresses of the Eurozone are there for all to see. The core of Europe; Germany, France and the Netherlands are, in general, doing far better than those countries once described as being on the periphery; Ireland, Greece, Spain and Italy being good examples. While the core largely lived within its means, the peripheral nations racked up large budget deficits. Furthermore, those low interest rates, far more suited to the economies of the centre, encouraged a property bubble that has now well and truly burst.
This year, deficit spending in the 16 member Eurozone will total 4% of Gross Domestic Product (GDP), rising to 4.4% next year. The Euro stability pact, however, only permits 3%. In 2010, it looks likely that Germany’s deficit will be 4.2%, France’s 5.0%, Spain’s 5.7% with Ireland’s a whopping 13.0%. What is the point of having limits on spending in order to safeguard a currency’s credibility if they are exceeded by that magnitude? It appears Europe’s leaders are taking a leaf out of Mr Brown’s book of selective interpretation of information, honed on hazy concepts like golden rules, the commencement of economic cycles and Alistair Darling’s second home allowance claims.
Of course, the Euro was meticulously planned by experts wasn’t it? These people are clever and they wouldn’t create a single currency if it didn’t work or couldn’t cope with inclement economic conditions, would they? Well, these are the same kind of people that have had significant influence on running the world’s financial system. It is from these ranks that the regulators, central bankers and treasury ministers are drawn. Mmmm …… on second thoughts, that rather puts a different light on events.
There has been talk of the Euro breaking up. As it is as much a political creation as economic, we doubt that’s a possibility over all but the very long term. Eurocrats pretend current challenges are nothing more than hairline cracks. They aren’t; they are fault lines that have the potential to reach San Andrean proportions. In the final analysis, economic prosperity will be determined by economic performance and on that score, Europe is diverging. Consumption and property speculation are poor substitutes for exports. Several peripheral Eurozone countries will probably require bailouts and it will be interesting to see how much of an extra tax burden Germany is willing to endure to part finance them. After coughing up to pay for the re-unification of the East, it is no surprise it has put further Eurozone expansion on hold.
John Newsome can be contacted on: 01423 705123 or email:john.newsome@williams-im.com
