The Gray Monk

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September 22, 2006

Euro troubles?

In recent weeks I have had the opportunity to escape the ever present garbage about our illustrious leader and find out what is happening in the world outside the Peoples Republic of Blairdom. I was a little surprised to read in the Financial pages of one of the English national daily's (International Edition) that there is increasing concern in the Euro Bank and the IMF about the future viability of the Euro as a currency. It appears that too many of the members of the Euro Zone, but most notably Italy and Spain, are experiencing a form of runaway inflation masked by the fact that their currency is managed outside of their economic system. In fact, it is now being said that Italy in particular, may have to be ejected from the Euro before their problems bring it down and tear the entire Eurozone apart.

It seems that the pressure is increasing dramatically as more of the Eastern European economies link to it as well, since their need to play catch up on wages - viz the exit of skilled workers from these countries to better paid positions in the west - and to rebuild the infra structures and manufacturing base destroyed by years of centralised soviet style controls, created inflationary pressures a currency managed for the benefit of German and French interest rates can cope with. Now it may well be unfair to blame the Germans, but there can be no doubt that the German, Dutch, Belgian and French economies would suffer badly if interest rates were put up to the levels needed to damp down the inflationary pressures in Italy, Spain, Portugal and some of the newly joined member states. One commentator likened the situation to the debacle that resulted from trying to unify the British Pound in the early 1990's - the Pound almost tore the ERM as it then was, to pieces.

It could be argued that the present situation is or was predictable. This is, after all, merely the latest in a number of attempts in Europe to harmonise economies and have a single currency. France, Belgium, Luxembourg, Switzerland all adopted the Franc and tried to maintain a single value while running independent economies. The experiment fell apart as the different economies suffered diverging growth or stagnation. The end result was that the only common thing about them was the name - and you had to add the country name in front of it to differentaite. An example was another trip to a Pre-Euro Europe when I crossed from France into Belgium and on one side got Fr10 to the £1 and on the other Fr66 to the £1! The difference - one was the French Franc and the other the Belgian Franc.

The experts predict that this wobbly state will continue in the short term. They even think it can be propped up for a while longer, but they are all clear on one thing - it cannot continue to be propped up or the problems ignored for much longer. Unless the inequalities in national economies can be resolved swiftly, the Euro is likely to go the way of the Franc. Perhaps Mr Brown's five 'tests' before we in Britain enter the Euro will be entirely academic in a couple more years.

Pass the crystal ball and I'll have another look at the future ......

Posted by The Gray Monk at September 22, 2006 12:32 PM

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Comments

Posted by: simon at September 23, 2006 10:12 AM

Posted by: The Gray Monk at September 23, 2006 11:18 AM