A couple of days after the EU cobbles together a package of loans to arrest the Euro crisis, Portugal calls a national strike against the austerity measures that are a central feature of the Euro project for an overborrowed country in the zone. It could scarcely be worse timing for the Euro’s cheer leaders. The markets did not like their package earlier this week, marking Irish, Greek, Portuguese and Spanish government bonds down. They will like political disccontent with the core policy of budget deficit reduction even less.
So why isn’t it working? The origins of the current stresses and strains lie in the way the Euro was set up. They created the federal institutions, a Central Bank, a single currency, a single market, and a lot of common law codes. They did not offer a single language for an informed European political debate or a fully operational single labour market. They did not put in place sufficient transfer payments from richer to poorer areas. They did not back up the need for proper controls over how much each country could borrow with a binding central budget to limit the overall totals of Euro denominated sovereign debt.
Now, belatedly, they are trying to impose a new discipline on member states, to curb their appetite for more borrowing in the common currency. It is a bad time in the economic cycle to do so, when unemployment is high and electorates are worried about wage and salary cuts and spending cuts. Their critics may be right in saying in some cases if the cuts are too big without a good private sector recovery the cuts can make the problem worse. The UK can benefit from its devaluation of sterling and the private sector recovery now underway. Greece does not seem to be able to do the same without a devaluation.
The idea that loan packages for Euro members in trouble on their own will solve the problem is foolish. If most or all the loan comes from EU members, it just adds to the balance sheet and deficit strains in the healthier member states. They can take those strainms for one or two small states, but cannot afford the strains for other larger countries on top.
The Euro is imposing exactly the same kind of economic torture on the peripheral countries as the ERM imposed on some members when they tried that. When the UK left the ERM economic recovery followed swiftly. The problem with the Euro is that it is an ERM that countries cannot get out of. That is what makes this rolling Euro crisis a tragedy. It is the triumph of politics over commonsense. There is more bad news to come, as there are apparently no limits to the pain they will inflict in the name of the single currency. People in underperforming Euroland economies are goign to have to get used to pay cuts and job losses as a necessary price to pay forsharign a bank account with the neighbours. Electorates of western Europe are n ot sufficiently enamoured of the political union to want to pay higher taxes to send sufficient money to countries and regions that cannot compete successfully at the common exchange rate. So the only answer offered is more cuts.
November 24, 2010
The truth is that the electorate of the UK don’t know enough facts about what other Countries in Europe do, for example; What is the state retirement age in Portugal, do they have conditions and national insurance payments in order to receive a state pension (if so how many years do they have to work), do their students pay University fees, do they pay similar levels of tax to us in the UK?
We watch rioters in France marching about a retirement age of 62! Sixty two.
How do these Countries compare on national minimum wage terms, on statutory paid holidays, on compulsory state pension contributions etc. Does Poland have to have Europe’s working time directive; a NMW, a statutory number of paid holidays, employers job creation taxes (Employers NI).
If we’re expected to pay more taxes and take more pain and yet we are expected to bail out other European Countries and increase our contributions to the EU at a time we can’t afford to, then they should knuckle down or we should get out and leave them to it.
November 24, 2010
a-tracy
Your comments about different working conditions, wage, tax rates, retirement ages, Pension and Benefit arrangements are worth comparing.
Comparison with UK and Ireland made today in the Telegraph.
Would seem that the Irish have benefit at the moment from a much higher personal allowance before they pay tax, a much lower level percentage of income tax, a much higher retirement Pension and much higher unemployment Benefits, amongst many others.
Me thinks some of the resident population should pay first, (as it was they that voted their Government in office) before they get loans from elsewhere where Tax rates are higher, and Benefits lower.
November 24, 2010
Exactly, we’re expected to fund their lifestyle whilst seeing ours diminish. I also have just been made aware of Ireland’s NMW and a tax free allowance that we could only dream of (I believe the austerity measure will still enable them to earn £13,000 pa tax free) and that 45% of Irish earners don’t pay any income tax – wonderful if your Country can afford it, bankruptcy if your Country can’t unless other mugs (aka us) step in. They need more cold turkey as they say on Spendaholics.
November 24, 2010
“Electorates of western Europe are not sufficiently enamoured of the political union to want to pay higher taxes to send sufficient money to countries and regions that cannot compete successfully at the common exchange rate.”
Our comments here earlier this week, stemming from our recent conversations with other Euroland voters, fully confirm this. The stirrings within the German eletorate are of most potential significance.
November 24, 2010
Workers in Portugal, and with no little justification, could be forgiven for thinking ‘Why are Greece and Ireland having tens of billions thrown at them and yet we need to cut our spending a lot deeper, where’s ours?’
What will the answer of the EU be to this? More importantly, what will our Chancellors answer be? The question is going to be asked, even the most bunkered-in member of Number 10 must see that, let’s hope that plans have already been drawn up and, unlike the Irish situation, it won’t be back of a fag packet politics again.
Maybe Clausewitz’s maxim could now be applied to this governments policy? ‘As soon as a policy decision is made the one thing you can be sure of is that events will render it obsolete’
November 24, 2010
As usual with the whole European project, as it now seems to be called, they rushed into the Euro without any real thought. They used what I would call a top-down approach, rather than the bottom-up approach which would have been far more logical. Small matters should have been merged is it became convenient or necessary to do so and the larger issues would have followed in due course. I worked as an engineer with Air Traffic Control before I retired, and here Eurocontrol had worked effectively for a number of years coordinating ATC methods and engineering technical standards. These weren’t forced on anyone, they were agreed because it was practical to do so, and co-operation on small issues led to more co-operation on larger issues. I’m sure the same applied in many other areas, Interpol is one which comes to mind.
But the EU did the reverse, “You will do this”, which everyone resents, and the Euro was typical of this approach. You can build a tower block by building the top floor first and jacking it up and putting the lower supporting floors in afterwards, but most sensible people would start with the foundations and ground floor. The EU preferred to build the top first, and then worry about how it is to be held up, and this is the cause of what is happening now to the Euro.
November 24, 2010
I agree with your analysis. The possible outcomes seem to be something along these lines:
1 German taxpayers agree to the necessary transfer of their taxes, devaluing the Euro;
2 Germany exits the Euro;
3 The PIGS exit the Euro;
4 A long, messy rearguard action by the Brussels bureaucrats to hold the Euro edifice together in the face of mounting civil unrest.
Of these possible outcomes, PIGS might fly would seem to be the most appropriate.
November 24, 2010
You put it perfectly if rather mildly:
“The idea that loan packages for Euro members in trouble on their own will solve the problem is foolish”
“That is what makes this rolling Euro crisis a tragedy. It is the triumph of politics over common sense.”
Madness might be a simpler summary.
November 24, 2010
Or leave the Euro. Clearly that would be the better option for the poorer countries.
November 24, 2010
Absolutely correct, the party is over in the peripheral states and now the fireworks begin. Should the Germans revert to a new DM that would be an admission of error, which is not the Germanic way. Cuts, panic then devaluation in the peripheral states would seem to be a more likely train of events. Given the passion for the Euro, John Major’s idea of parallel currencies would have solved this problem fairly easily, and could still do so. Get the public sector payroll on Punts, Escudos etc, while the Private Sector exporters ride high on a wave of Germanic Euros. Then recovery would stand a chance.
November 24, 2010
“Electorates of western Europe are n ot sufficiently enamoured….”
Maybe not. But it is being done on our behalf and without our consent anyway. Someone posted on another thread that he hoped that Mr. Redwood and others in Westminster started to become angry. A wise post. Otherwise rising public anger will have no public voice.
November 24, 2010
Is still amazes me that the “Emotive” or “Subjective” political decision making of the Eurocrats overcomes all logic and common sense. There is no doubt in my mind that we shall see a Sovereign Default within an EU Sovereign State prior to 2012.
The EuroZone cannot hold its present boundaries and must either fail or pull in its horns to those Countries closest to Germany. Without Central controls, how do they really think that the PIGS will obey them? Politicians are selfish Beasts and will bow only to those who can throw them out of Office and thus lose their perks.
November 24, 2010
An object lesson in Misian/Hayekian economics. We need more currencies, not fewer. Ex a gold standard competing currencies, and without fixed exchange rates, keep money honest. The Euro is the most dishonest of currencies, ever.
November 24, 2010
Yes-but-no-but-yes EU President, Herman Van Rompuy says Tuesday, on a visit to Stockholm; “Portugal does not need any help, it is in a very different situation to Ireland. Portugal has not suffered from a housing-market bubble, its financial sector is not oversized and its banks are well capitalized.” That will be RIP Portugal then.
Redwoodians, keep this secret; nod-nod-wink-wink. As good little Europeans, we all got bundles of them euro notes under the bed. Check the serial numbers now!!!
The first letter of the number is the euro country that issued it. Mine are P; U and X.
X is great; German, good as gold. P and U are Dutch and French; probably OK for the moment. Get rid of T; M; V and S as soon as possible; in that order.
The easiest way to shut down the single currency is to repatriate all them euro notes (800 billion worth), back to the issuing country and declare, game over. 😉
November 24, 2010
von Rompuy is being perhaps a little economical with the verite? The IMF data suggest that the Portuguese household sector has debts of around 95% of GDP, up from about 60% in 2000, and second only to Ireland among PIIGS.
November 24, 2010
OK, OK, you can check the country codes at http://en.wikipedia.org/wiki/Euro_banknotes
November 24, 2010
John
It will all end in tears, it is just a question of when, and how much damage will be done before the tissues come out.
The EU Ministers will blame everyone else, apart from themselves of course.
Me thinks its time to quit, before we actually lend any hard earned money (if we had any in the first place) to anyone.
Guarantee Germany and France will take action to look after themselves soon.
November 24, 2010
The EU Ministers will blame
a) the British for not entering the single currency
b) the British for not regulating The City well enough
c) the British political elite for being marginally more Eurosceptic than the rest of the member nations’ political classes
d) the British people for being ‘anti the EU’
They will insist that what is needed is:
a) more, faster and more intense political integration
b) member nations completely abandoning individual economic policies and to accept ECB authority
c) all member nations joining the Eurozone
d) Tax harmonisation across the EU
If they don’t get it – go back to the top of this comment and start again.
The EU Ministers will blame………………
November 24, 2010
“They did not offer a single language for an informed European political debate or a fully operational single labour market. They did not put in place sufficient transfer payments from richer to poorer areas. They did not back up the need for proper controls over how much each country could borrow with a binding central budget to limit the overall totals of Euro denominated sovereign debt.”
But these things couldn’t have been done without more political cohesion than existed. The Euro was an attempt to create the political cohesion on which it in turn depended. Part of the political cohesion it creates is that once in, it’s hard to get out. This is hardly a constructive reason for being part of it, and seems rather like carrying on with an unhappy marriage rather than face the stress and upheaval of getting a divorce. I’d say that a marriage people were forced into by deception or coercion is a good way to look at the Euro. it makes you wonder about the thought processes going on in the minds of people who engineer such a marriage.
The calculation must have been that crises such as we are seeing would force the political cohesion required. In my opinion, it’s a miscalculation.
November 24, 2010
So whose side are you on John, whose side are you on?
Reply: I am on the side of the British people, glad we won the battle to stay out of the Euro. I do not wish to see us pay the bills for the Euro as we are out of it.
November 24, 2010
When the Maastricht Treaty was the subject of what passes for a public debate in this country, one of the many objections raised against joining a single EU currency was that we could end up having to bail out other countries.
Oh, no, its advocates said, that’s completely wrong and misleading, because if you look at the treaty you’ll find that there are cast-iron “no bail-out” clauses built into it specifically to prevent anything like that ever happening.
I remember reading letters in the national press saying that, and I recall that at least one of them was from a Tory MP.
In those pre-internet days actually looking at an EU treaty to check something was nowhere near as easy as it is now – they’re here, made available on the EU’s website at taxpayers’ expense, although few taxpayers will ever look at them:
http://eur-lex.europa.eu/en/treaties/index.htm
But anyway in retrospect there would have been little point in doing so, as we now see that any treaty article which may become a serious obstacle on the path to a European federation is quietly forgotten, or cancelled by stretching the meaning of some other article beyond all reason, or simply broken.
So, here we are now, we’re not even in the eurozone and yet we’ve been drawn into bailing out other countries as part of a “Save the Euro” exercise.
And that which was once said to be clearly forbidden under the treaties has now become the norm, and accepted as such by the pan-EU political elite.
Ministers in our government connive in breaches of crucial articles in a solemnly concluded treaty to which this country is a party, and MPs turn a blind eye.
Even though ratification of that treaty was conditional upon its approval by their predecessors, and the treaty which those MPs approved back in 1992 included those “no bail-out” clauses.
Which “no bail-out” clauses have not been subsequently amended or removed according to due procedure, but have in effect been torn out of the treaties and thrown in the bin.
Or, as the French Minister for Europe put it back in May, EU leaders changed the treaties “de facto”, even though they had no legal authority whatsoever to do any such thing.
http://www.ft.com/cms/s/0/d6299cae-69b5-11df-8432-00144feab49a.html#axzz16659WA6N
“French minister says bail-out alters EU treaty”
“The eurozone’s €440bn debt guarantee scheme is tantamount to the adoption of a Nato-style mutual defence clause and marks an “unprecedented” change to the bloc’s treaties, according to France’s Europe minister.
In an interview with the Financial Times, Pierre Lellouche laid bare the French government’s conviction that the emergency stabilisation scheme agreed earlier this month amounted to a fundamental revision of the European Union’s rules and a leap towards an economic government for the bloc.
“It is an enormous change,” Mr Lellouche said. “It explains some of the reticence. It is expressly forbidden in the treaties by the famous no bail-out clause. De facto, we have changed the treaty,” he added.”
The problem being that the only legally valid procedures for changing the EU treaties are those laid down in the treaties, and they do not include:
“The treaties may also be amended as agreed by EU leaders in private meetings, without any reference back to their respective national parliaments which previously approved those treaties prior to their final ratification”.
Reply:Some of us warned against the inevitability of more transfers to less successful countries and the need for Euro bail outs. That was part of my use of the analogy of sharing a bank account with the neighbours – you become jointly liable for the overdraft.
November 26, 2010
Indeed some did issue such warnings, but they were countered by references to the legal prohibitions built into the treaty – which are still there, but are being disregarded.
November 25, 2010
The situation that has developed was always there waiting and, to make matters worse it was obvious. Back in the ’60’s I thought it had been demonstrated quite robustly that fixed exchange rates do not work. I would be suprised if anyone from that era disagreed, and all those politicians behind the Euro were from that era.
Why then would such “great minds” as Clark and Heseltine and King to name but three, be in favour? I personally have been puzzled since the Euro was first muted.
The Euro was no more than a fixed exchange rate but the twist is there is no mechanism for individual states to escape by altering the exchange rate applicable to them, by devaluation.
There can be no Englishman alive today who saw what happened to the UK when it refused to devalue who will be suprised at what is now happening to members of the Euro.
The only option now is for a break up of the Euro for it is far too late to be thinking about such things as common languages and central treasuries, and the markets know it
November 25, 2010
How long before we see officers from the diplomatically immune european police force being drafted in to “assist” with maintaining control of demonstrators ?
Or demonstrators being spirited away on european arrest warrants .
I get the impression that even this would not ring alarm bells with some in Westminster .