The Current Weakness of the Euro

Mark Sandford February 2010
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The recent loan of 72 billion granted to the Republic of Ireland provides graphic proof that all is not well within those countries currently trading in the Euro. This was triggered by widespread concern by investors that two of the country's biggest banks were on the verge of going bankrupt, having amassed huge debts of over EUR 100 billion. Customers of Allied Irish Bank and Bank of Ireland were both withdrawing cash, amidst fears that both institutions were effectively insolvent.

This comes on the back of a propertyy boom in Ireland, where mortgage lending was allowed to grow unchecked on the expectation that house prices would go on rising for ever. The start of the credit crunch in 2007 soon put an end to that. Consequently both banks found themselves high and dry with loans that were liable to go completely toxic. The Irish government only made the situation worse by agreeing to underwrite the debts of both banks.)

The Euro was created as a common currency for the member countries of what was previously known as the EEC or European Economic Community. The two chief architects of this project were Helmut Kohl and Francois Mitterand, determined to forge their own agenda regardless of the consequences. They both also disregarded advice given by professional economists, who laid down some basic truths. From the moment, it was issued and used on a daily basis, the Euro would be subject to market speculation by brokers and investors on a global basis like any other currency. They also deluded themselves that the creation of a common currency would be a panacea for all economic ills. Evidence over the past decade has proved exactly the opposite.

The nations most enthusiastic to join the Eurozone were not surprisingly those countries with traditionally weak currencies such as Greece and Italy. The rules over adopting the Euro were also fudged so that these countries could join, notably over government debt as a percentage of the countries GDP and also over budget deficits. This has come full circle to haunt everybody.

Greece has been forced to begin a severe austerity programme as its government apparently owes over EUR 300 billion. The country has ultimately lived beyond its means for several years and the bill is being called in. Without other structural reforms, the nation's trading sector is unlikely to generate more wealth or create more jobs. This is what needs to happen if the government desires to boost its own tax revenue and cut the deficit. Now the Greeks have been forced to confront the issue of a bloated public sector, freeze wages within it and also raise the age of retirement.

Spain is another country, grappling with huge unemployment that has rocketed to over 19% of the working population. Again the government is forced to grapple with a budget deficit, apparently the third biggest in the Eurozone. The Spanish have not helped themselves either by refusing to undertake labour market reforms that would make Spain more competitive. It is harder to make someone redundant in Spain or certainly Italy. If these countries desire to achieve greater prosperity and create more jobs, then they must create a business climate that encourages inward investment.

It does not take a lot to realise that the recent crisis within the Eurozone has completely knocked on the head any debate within the United Kingdom over whether or not we should give up the pound and join the Euro. No government of any persuasion would or should touch it with a bargepole. Like it or lump it, the EU would have to fundamentally reform the current limits on budget deficits just as a start. Nor should we ever lose control of managing our own interest rates.

Mark Sandford - Permission granted to freely distribute this article for non-commercial purposes if attributed to Mark Sandford, unedited and copied in full, including this notice.

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