The Euro

[AgentAxeman 221]

The euro? It's a great success, says Mandy as Greece turmoil sends single currency into worst ever crisis

 

 

Lord Mandelson triggered incredulity last night by insisting Britain should join the euro - just as the currency struggled with the worst crisis in its history.

 

The Business Secretary played down turmoil in the eurozone by claiming the single currency had been a 'remarkable success' and said it was in Britain's long term interests to sign up in the future.

 

But he was accused of 'living in cloud cuckoo land' after EU politicians failed to quell market panic over Greece's fiscal crisis.

 

Eurozone leaders pledged 'determined and co-ordinated' action to help Greece deal with its vast deficits, as they attempted to shore up the euro.

 

But traders were alarmed at the lack of detail offered about the plan, a weakness which prompted a sell- off late in the session.

 

The euro slid by 1 per cent to $1.36. It was little changed against the pound at 1.13.

 

EU nations led by France and Germany met yesterday at a summit in Brussels to discuss the rescue.

 

Afterwards EU President Herman Van Rompuy said eurozone members would take action if it was 'needed to safeguard financial stability'.

 

Any final plan is expected to involve a mixture of loans or guarantees from the richest eurozone nations plus technical support from the International Monetary Fund and European Central Bank.

 

Despite the turmoil, Lord Mandelson said the crisis had done nothing to dampen his enthusiasm for Britain eventually joining the single currency.

 

He admitted that being outside the eurozone had given the UK more freedom to respond to the downturn, but insisted: 'I think in the longer term it would be in Britain's interests to be part of the eurozone.'

 

Speaking on Radio 4's World at One, he added that the euro had been a 'remarkable success'. 'It is strong and that is why it is going to remain intact,' he said. But Matthew Elliott, chief executive of the

 

Taxpayers' Alliance, said: 'Greece is a living example of why you should never give up control of your own currency, and Lord Mandelson must be living in cloud-cuckoo land if he thinks we should still join the euro.'

 

He added: 'There is no way that British taxpayers should bail out Greece or the euro. The British economy and public finances are in a bad enough state as it is, without dishing out yet more of our money to solve the EU's self-inflicted problems.'

 

Gordon Brown yesterday said Greece's woes were a eurozone problem, but refused to deny that British taxpayers could be forced to contribute if Greece were forced to go to the IMF.

 

Greece's deficit has spiralled to more than 12 per cent of economic output in 2009 - which is more than four times the eurozone's limit.

 

Edited February 12, 2010 by AgentAxeman

[Happy Face 29]

I've not followed the Euro at all so this is totally uninformed and a genuine question, but is this like the people who're saying there's no global warming because the snow's been awful this winter?

 

Hasn't the Euro on the whole been rather succesful?

[ChezGiven 0]

Unionsts everywhere are trying to deflect the need for their members to take cuts since the crisis is not of their making.

 

No, true but 50 years of near continous economic growth (give or take the odd bump) which created the vastly over-funded, under-efficient public systems in southern Europe wasnt their making either.

[Richie J 0]

Seems to me that a big drawback of joining the Euro now would be a loss of face. Imagine how happy the Frogs would be if we came with our tail between our legs, saying actually we'd like to join up after all. It really used to wind them up that we thought we were too good to be part of it, as they saw it.

[AgentAxeman 221]

I've not followed the Euro at all so this is totally uninformed and a genuine question, but is this like the people who're saying there's no global warming because the snow's been awful this winter?

 

Hasn't the Euro on the whole been rather succesful?

 

well i suppose that depends on your definition of on the whole. on the whole the richer powers have been way too greedy (self interested) and this has forced the current economic imbalance. if youre referring to the overall growth of the euro then i suppose that yes in a way it has been succesful, in the same way most currencies were in the boom years and look what happensed then. imo, its sucess is built on a house of straw with no substance.

 

Thinking the unthinkable

 

Stephanie Flanders | 13:32 UK time, Thursday, 11 February 2010

 

All eyes are on Brussels, as we await more details of the "co-ordinated measures" on offer to help Greece. There's just one problem. Even a bail-out - if that is what it turns out to be - won't solve the basic problem facing Greece, or the eurozone.

 

Let me explain. Greece has two big problems: a debt problem and a competitiveness one. A "bail-out" won't solve either - at least, not a bail-out that any self-respecting German would be willing to consider.

 

We may get a bit more clarity today on the support that Germany and others are planning to offer Greece. More likely, as I said yesterday, we will have to wait until the next week's meeting of European finance ministers. That is what today's statement suggests.

 

But we can be fairly sure that whatever deal is struck, it will not make Greece's debt problems go away.

 

The best that Greece can expect from its eurozone partners is a promise to underwrite Greek debt, or some form of bilateral loan to tide Greece over. The first would cut the risk premium on Greek debt and make it easier to service. The second would give them cash to get them through the next few months, when nearly 10% of their debt comes up to maturity.

 

But neither would do much to lower the stock of debt hanging over the economy. Or lessen the need for swingeing cuts in public services and tax rises over the next few years. Indeed, if Berlin has anything to do with it (and we know it will) - Mr Papandreou's government could come out of this with an even tougher schedule for cutting the deficit than it had before.

 

So, it won't make the debt problem go away. It probably won't make the burdens on the Greek government - or its people - that much easier. It just goes from being 'impossible" to merely "intolerable".

 

It goes without saying that it won't solve Greece's competitiveness problem either. I promised a post today on the long-term structural problem underlying this eurozone crisis. Happily - or perhaps unhappily - Martin Wolf beat me to it, in a superb column in yesterday's FT. As he says:

 

"So long as the European Central Bank tolerates weak demand in the eurozone as a whole and core countries, above all Germany, continue to run vast trade surpluses, it will be nigh on impossible for weaker members to escape from their insolvency traps. Theirs is not a problem that can be resolved by fiscal austerity alone. They need a huge improvement in external demand for their output."

 

As I showed in my piece for yesterday's BBC News at Ten, it's no accident that the countries in the firing line in this crisis are also the ones whose competitiveness has deteriorated the fastest within the eurozone since the single currency began.

 

This chart tells the story, from Janet Henry at HSBC.

 

HSBC chart

 

German unit labour costs have barely budged since 2000, and German inflation has been lower than the eurozone average. As a result their exports have gradually become more and more competitive in world markets. Whereas Greece, Spain, Portugal and the rest have had relatively higher inflation, faster wage growth, and thus growing unit labour costs - and falling competitiveness.

 

This is why there is no comfortable route of this for the Pigs (Portugal, Italy, Ireland, Greece and Spain) - though for some the path is tougher than others.

 

As I've said many times in the context of the UK, it's tricky to cut borrowing as a share of GDP when your GDP is itself shrinking or stagnant. It is more or less unthinkable that Greece would manage to do this and achieve the real cuts in wages and living standards that would be necessary to seriously improve their competitiveness within the eurozone.

 

Martin Wolf says that higher German domestic demand is the solution (or a big part of it). That would certainly help. So would a weaker euro - though remember, in the current situation, the biggest beneficiaries of a weaker euro would be German exporters.

 

But imagine you were coming to the situation for the first time. You knew nothing of the Bundesbank. Or the history of the single currency project. Or even the market impact of the failure of Lehman brothers.

 

If you were such an unworldly creature, you might come up with two, more ambitious proposals for tackling Greece's fiscal and competitiveness problems head-on: debt restructuring for Greek bondholders; and a higher inflation target for the ECB - say, 4%, instead of 2%.

 

I touched on the first of these, briefly, on the Today programme this morning.

 

If you could pull it off, restructuring Greece's debt (with some suitable "haircut" for private bondholders) would actually lower the real burden of its debt, making the path out of this more plausible. Of course, Greece would pay a price for it in the markets. For a long time. But it's not as if it's never been done. And it's not as if the alternative path for Greece is much brighter.

 

"Unthinkable", you may say. "Remember what happened after Lehmans was allowed to go bust - and everyone in the world holding private bank debt started wondering whether they were next?"

 

The memory of that is indeed one of the many reasons that a debt-restructuring is not being seriously considered. You could be looking at Lehmans, cubed, if the markets started seriously questioning every developed country sovereign bond.

 

But the international community has now accepted that we need ways to restructure private debt without all hell breaking loose - ways to make private bondholders bear some of the burden when banks get into trouble, not just taxpayers. A few years from now, I wonder whether we will be saying the same about sovereign debt problems as well.

 

So much for unthinkable number one. What about unthinkable number two - a higher inflation target for the ECB?

 

This post is so long already - and this is so unlikely to happen - that I won't belabour the point. But this is something that was discussed, a little, when the euro began, and especially when the membership extended beyond the European "core".

 

Arguably, a higher inflation target for the eurozone would help the less developed economies on the periphery grow faster in real terms, not just nominal. It could also make it easier for countries at the periphery to cut labour costs in real terms - without actually lowering people's nominal wages or suffering deflation. And it could weaken the euro, which might help growth as well.

[snakehips 0]

I wonder how things would be now had our oil come on stream just 5 or 6 years earlier. Would we have joined the EEC?

 

Or if Wedgewood-Benn had had his way in taking the oil production into State hands?

 

We'll never know. Ifs buts and maybes.

[AgentAxeman 221]

I've not followed the Euro at all so this is totally uninformed and a genuine question, but is this like the people who're saying there's no global warming because the snow's been awful this winter?

 

Hasn't the Euro on the whole been rather succesful?

 

 

for you Happy, in furtherance to your question...

 

 

For wealthy countries, such as the UK, the cost of being a member of the EU is greater than the benefits they get out. The best estimates put the annual net cost to the UK of EU membership in the region of £40.5 billion. Much of this money pays for the outdated and wasteful Common Agricultural Policy (CAP), while a sizeable amount goes towards the structural funds which transfer money to poorer areas of the EU.

 

The costs of EU membership could be holding back faster developing countries, particularly the UK, which has a more global economy than many member states. For seven out of the last ten years, EU GDP growth has been lower than that of the USA. This is largely the effect of EU regulation making it less easy to do business. In 2006, the EU's Enterprise and Industry Commissioner, Gunter Verheugen, estimated the cost of EU regulation to be 600bn euro per annum. This is the equivalent of the EU losing the entire output of a medium-sized country like the Netherlands every year! This situation becomes more concerning when one considers how hard it is to reform the way that the EU spends money. Several attempts to reform the CAP have failed to reduce its cost substantially, while the 2005 budget negotiations also failed to agree to a slimmed-down budget. This is because it is almost impossible to reach an agreement between 27 countries. At present, EU leaders are hoping to negotiate a reform for the next budget cycle, starting in 2013.

[NJS 4494]

As I understand the principle was to ensure the economies of all the states were broadly in line - a supposed requirement for joining in the first place. Unfortunately as was perhaps inevitible, the gap between France and Germany (and the UK if we had joined in) and countries like Greece has become over-stretched.

[NJS 4494]

For wealthy countries, such as the UK, the cost of being a member of the EU is greater than the benefits they get out. The best estimates put the annual net cost to the UK of EU membership in the region of £40.5 billion. Much of this money pays for the outdated and wasteful Common Agricultural Policy (CAP), while a sizeable amount goes towards the structural funds which transfer money to poorer areas of the EU.

 

Does that include the benefits to industry or just from a state viewpoint?

[ChezGiven 0]

For wealthy countries, such as the UK, the cost of being a member of the EU is greater than the benefits they get out. The best estimates put the annual net cost to the UK of EU membership in the region of £40.5 billion. Much of this money pays for the outdated and wasteful Common Agricultural Policy (CAP), while a sizeable amount goes towards the structural funds which transfer money to poorer areas of the EU.

 

Does that include the benefits to industry or just from a state viewpoint?

 

Direct costs and benefits, not indirect. Therefore, the advantage to UK export trade from the free flow of goods and capital is not included.

 

The CAP is one thing that can get me right on my high horse with the frogs, they love to bait us with it too. Blair was meant to secure the re-negotiation of CAP in 2012 (iirc) on the basis that we would forego the rebate that Thatcher got us. Unlikely to happen imo.

 

Fucking lazy arrogant french cunting farmers [missing stevie].

[NJS 4494]

Fucking lazy arrogant french cunting farmers [missing stevie].

 

Agreed but tempered by lack of any empathy/sympathy for UK farmers.

[Rob W 0]

I wonder how things would be now had our oil come on stream just 5 or 6 years earlier. Would we have joined the EEC?

 

Or if Wedgewood-Benn had had his way in taking the oil production into State hands?

 

We'll never know. Ifs buts and maybes.

 

 

the mad-eyed tea drinker DID set up a state oil company - it was called Britoil and took 50% of all the acreage after a certain date

 

For political reasons it was in Glasgow and was run by a vast bureaucracy

 

It was the first casualty of Thatcherism and gradually turned into a more regular oil company before being bought by BP.................

[Rob W 0]

For wealthy countries, such as the UK, the cost of being a member of the EU is greater than the benefits they get out. The best estimates put the annual net cost to the UK of EU membership in the region of £40.5 billion. Much of this money pays for the outdated and wasteful Common Agricultural Policy (CAP), while a sizeable amount goes towards the structural funds which transfer money to poorer areas of the EU.

 

Does that include the benefits to industry or just from a state viewpoint?

 

also we don't have to fight a World War every 35 years is a bit of a benefit I guess