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Tuesday, 26 June 2012

The Turning of the Worm?

I find it fascinating to observe the debate over the future or fate of the €uro. Of particular interest, to me at least, is the fact that many of the pundits now talking it down and predicting its demise are the same voices that, in 1997, talked it up and sang the 'benefits' of the new currency. Among the many 'benefits' they were so keen to exploit was the removal of the need to change our money as we crossed national borders, and, for the commercial pundits, the 'level playing field' of having one currency value across Europe to remove the difficulties fluctuating currency values created when it came to trade.

Now the same things are being punted as 'disasterous' for national industries, or for control of 'the money supply.'

I don't profess to be an economist, but I do recall saying at the time of the launch of the €uro, that it couldn't work as long as every country in it was free to set their own taxes and budgets. Now I read the same comment from many of those who thought the opposite in 1997. I can't escape the feeling that at least some of this turn-around is down to the realisation that the weakening of the US$ and the GB£ in the world 'market' has sparked a 'talking-down' of the €uro, which was being punted, back in 1997 as a potential 'Currency of Refuge' and 'Investment.' Obviously, if that were to happen, the value of the US$ and the GB£ could be threatened.

There remains, of course, the problem of the differences in the economies between the various countries that use the €uro. Greece literally 'cooked the books' to get in and the tragedy is that this wasn't spotted. Maybe it was a case of the politicians overruling the accountants, whatever it was, the Greeks went on a spending spree - and so, it must be said, did several others. The quickest way to devalue a currency is to increase the supply by printing too much of it. As they culdn't do that (Frankfurt and the ECB keep a tight control of THAT at least) they borrowed which had the same effect.

A second, and perhaps less obvious problem back in 1997, was the fact that many countries were only really competitive in the export markets by allowing the value of their national currency to devalue. Italy and Spain are perfect examples of that and so is Greece. Locked into the €uro, they are no longer able to compete, so their industries are suffering badly and so do the rest of their economies. Simple accounting says that if the sales go donw, taxes fall; if jobs are lost, tax income falls. If a government has committed itself to a high spending budget and then fails to get the tax return it needs to cover it - the only answer is to get an overdraft.

The problem with an overdraft is that, sooner or later, the bank wants the money back. As my bank manager used to put it, the banks are grateful if you bank with them from time to time. If they bank with you for too long, they tend to run out of money to lend.

This weekend all the €urozone countries are meeting to try and reach an agreement of how to either save the currency, or kill it. The consensus of a majority of economists seems to be that killing it off will do almost as much damage as trying to save it.

I can't escape the feeling that there will be no winners - especially among the ordinary people of Europe.

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