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Monday, 7 May 2012

Interesting Times? Or a Storm of Speculation?

Listening to the news and reading the papers one could be led to believe that the election of a "conservative" government (who must still form a coalition) and a socialist President in France is about to cause the collapse of the €uro and the EU itself. Certainly that is the impression one gets from some US papers and media and from certain sections of the UK media. It put me strongly in mind of some information the Postulant gave me last week, following her attendance at a conference in Berlin.

There are certainly problems in the EU, but the economies of the bulk of the €uro States - there are 17 of them - are a lot stronger and sounder than those of the loudest voices from outside the €urozone. The weakest of the major €uro players - leaving aside Greece, Italy, Spain and Portugal for the moment, is France. The 'hope' expressed in some UK newspapers and economic circles is that President Hollande will refuse to adopt the strict  fiscal reforms President Sarkozy thrashed out with Chancellor Merkel. Frankly, I'm appalled at the rabidly anti-German tone of much of it. The way it is presented, Mrs Merkel is painted as anti-democracy, anti-freedom and determined to force everyone into an economic strait jacket. The fact is that Germany is not prepared to let irresponsible politicians destroy its economy. They are still paying for the rebuilding of the former East German zone and are having to do it step by careful step.

Germany has bitter experience of hyper-inflation and those who think they can spend every taxpayers income as they please need to think again. Nor is Germany alone, the Dutch, the Swedes and almost all the other €uro countries agree. There will be no excess borrowing, and those who have exceeded the limits, must fall in line. The fact is that across the €urozone, borrowing as a percentage of GDP is lower than that of the UK and considerably lower than that of the US.

Will the election of a socialist President of France, or the change of government in Athens reverse the fiscal savings packages these countries must face? No, simply because they cannot borrow beyond their means. Greece is bankrupt, kept afloat only by the €urozone bailout funds. Those will dry up the moment any government there tries to exceed the imposed spending limits. France needs some major reforms, Sarkozy knew this, so does Hollande. They won't be popular, but the French political classes know they can't postpone them any longer.

I don't believe either of these elections will change a great deal, and I don't believe they spell the end of the €uro. There may be storms ahead, but I suspect the €uro is likely to emerge in the next few years as a stronger and sounder currency than either the British £ or the US $ - whether those trying to talk it to destruction like it or not.

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