GOD SAVE THE EURO
December 6, 2010 5 Comments
A recent headline in the Times of London trumpeted “An €85 Billion bailout for the Irish Government from the International Monetary Fund and Europe has been settled”.
It got me wondering about the fact that, apart from Greece, the four sickest countries in the Eurozone are Ireland, Italy, Spain and Portugal which are all Catholic countries, and whether this was just another case of Catholics coming into a relationship inadequately protected.
Humour aside, the Euro does appear to be struggling somewhat.The major hedge funds are betting against it, as recently reported in the Financial Times:
“Traders and hedge funds have bet nearly $8bn (€5.9bn) against the euro, amassing the biggest ever short position in the single currency on fears of a Eurozone debt crisis. It suggests investors are losing confidence in the single currency’s ability to withstand any contagion from Greece’s budget problems to other European countries.”
As someone living in France (and with a 10 year residency card just renewed), I love the idea of a United Europe, the ability to cross borders at will and to not have to carry a wad of francs, drachmas, lire, guilder, pesetas, deutschmarks etc with me every time I move about, but I have to admit that I am wondering about whether it can survive. So far we have only had to deal with rescuing some of the smaller Euro members, but Spain which is the 4th largest economy in Europe is starting to look pretty shaky.
The Wall Street Journal on September 16th, 2010 highlighted the housing crisis as one of the critical economic challenges facing Spain.
“Some 1.5 million unfinished, unsold or unwanted residential units stand scattered across the country, products of a still-deflating housing bubble that threatens to undermine Spain’s broader economy for years to come. It is the hangover after an epic fiesta, a period Spaniards now refer to as “cuando pensábamos que éramos ricos”—”when we thought we were rich.”
By comparison Ireland is estimated to have about 250,000 vacant properties.
The tab for the Greece bailout was about €110 billion, and now Ireland is an additional €85 billion. How can Europe afford to bail out a larger economy such as Spain? As one economist put it “Too big to fail is one thing, too big to bail is another”.
The survival of the euro appears to not anymore be just something that the British Euroskeptics are crowing about, but also something that is being pondered by economic analysts and in global trading rooms. The question seems to boil down to whether Germany has the stomach to keep bailing out Eurozone failing economies, even with the €750 billion rescue fund that has been established, as there is still argument over how it will actually work in practice and whether it has actually bought us all anything more than just some breathing space.
The other issue is whether the countries bailed out can actually service their debt, as to date there are not great signs that they have either the ability or the courage to reign in their budget deficits.
In Greece tax evasion is the national sport and has been raised to Olympic levels.
As the Wall Street Journal reported earlier this year:
“Greece has one apparently simple option for reining in a budget deficit that has roiled financial markets: Clamp down on widespread tax evasion, which costs the country an estimated €15 billion ($20.5 billion) a year, an amount that would pay off a big chunk of the budget deficit.”
The Greek Government has introduced austerity measures but some seem to have relatively little real impact other than to gain some popularity with the masses, like a new tax on luxury goods such as cars over €30,000 and yachts, which is estimated to raise about €100 million, which is just a spit in the Adriatic. They haven’t yet really tackled some of the tougher issues like the fact that public sector workers get an additional 2 months pay annually.
How does the Greek economy survive when it has to service debt interest that alone represents about 7-8% of GDP? Its only choice may be to default on its sovereign bonds, withdraw from the European monetary union and revive and devalue the drachma. It would probably be the best cure for Greece, but may be the beginning of the end of the current Eurozone maybe bringing it down to a German-French currency only.
On the other hand, there is a story about a French person who is revived from cryogenic suspension in the year 2110. His first questions are about what has changed in France over the last 100 years. He is told that everything is wonderful. The retirement age is still 62, English is the national language, life expectancy is 200 as most illnesses have been eradicated, France is the leading rugby nation in the world (well it is a joke), and a baguette costs just 100 Rupees.