Monthly Archives: August 2012

Grexit? what about the PICS?

Grexit – Greece exit of the Euro

PICS – Portugal, Ireland, Cyprus and Spain.

Lets face it, the Eurozone is in a chaotic mess.

Angela Merkel is getting it in the neck at home of the continual and almost open-ended support she is committing the German taxpayer to.  The cost of the bailouts, rescue packages, transitional stability funds and the many other ways in which the Germans are putting their hand in their pockets is costing Frau Merkel a huge amount of political capital.  Not to mention the IMF contributions (at least usually that money makes its way back eventually).

I was reading an article in the economist whilst on holiday about the options for the German chancellor and it set me thinking about the problems that the ‘keep Greece in at all costs’ was causing.  The impossibility of leaving the Euro or being kicked out has been built-in with the treaties that put the Euro in place.  This itself is the political straightjacket that is impeding a solution.

The disorderly collapse of the Euro would be a massive disaster for all of the world economies and that is why a long, hard look at the Euro needs to be taken.

Why isn’t it working?

The eurozone is composed of 17 countries whose economies are not the same.  Some are strong industrial economies and some are agrarian, some are mature and developed and some are developing.  The EU (all 27) generates a stable market place to facilitate trade and allow free movement of labour and capital (2 mobile factors of production).  The single market allows each nation to maximise their comparative advantages and grow their economies while trading in a conducive environment.

The Eurozone as a subset is a problem.  The richer northern european industrial economies are benefitting at the expense of the less competitive economies of the south.  But this has been a slow building problem which has come to a head as the Global financial crisis continues to remain unresolved effectively.  The sticking plasters are not going to cut it.

Spain et al, are hurting and the medicine is only going to kill the patient.

If the Eurozone expel or allow Greece (and others) to exit then the fallout will be horrendous as capital flight becomes a tsunami as investors run before any devaluation of their assets can take place.  Any notion of a secret, planned introduction of a new currency that could occur over a weekend are utter fantasy.

Austerity isn’t going to help any of the weakest economies because they cannot regain any competitiveness while domestic demand is collapsing due to falling living standards and spiralling unemployment.  There are only so many reductions in costs that can be achieved.

So, we can’t keep pumping in bailout money, we can’t allow Greece to run for it and escape its debts (or the rest will leg it too, if Greece doesn’t have to pay why would others?), we don’t fancy the cost of exits or collapses (the numbers are getting into trillions).  Basically the political project, the Euro, is Fecked (well it is if there is no fiscal convergence)

Or is it?

What if  a different monetary union was set up for the southern economies?  After all, in the EU we have another distinct currency union that is working effectively with similar economies, I am talking about the Sterling zone.

Would a southern Euro work better than a chaotic mess of Euro failed countries with weak currencies?  The benefits are there for all to see.  They are similar economies who traditionally trade with each other anyway.  They are all struggling to cope with competitiveness with more efficient Eurozone economies.  It would stem the flow of northern european imports to these economies and stimulate domestic demand (as the imported goods would be more expensive).  It would generate some flexibility to stimulate the smaller groups economies.

In short an Exit of a chunk that could be controlled and managed without killing the patients.

At the moment we are facing the disorderly exit / expulsion of  Greece and the PICS or a semi-permanent transfer of cash to prop them up indefinitely.

So better to plan now and act sooner rather than later.

Think of it not as expulsion or exit but relegation from the Premier League to the championship ( and the Eurozone can make some parachute payments in the meantime.)

It’ll hurt like hell but it might be the way forward.



Olympic rebound?

A summer of crappy weather (3rd in a row, at least) usually has a detrimental effect on the economy.  In any other given year Gideon Osborne would be expecting to be culled in a cabinet reshuffle when parliament reconvenes in September.

Luckily for him (and sadly for the rest of us), the staycations that many of us have had to endure due to falling real terms income for the 2nd year in a row, and a duff exchange rates will mean that he will probably keep his job.

Add to this the injection of foreign money as many have come to watch the Olympics and Gidders will be able to sleep less fitfully for a few nights.

‘Ah but’ I hear you say, ‘What about the poor retailers that are being squeezed by the Olympics impact on their business?’  A fair point but this will just blunt the edge of the super olympic bump.

Why a super Olympic bump?  Because #teamGB have done superbly well.  There is a correlation between England doing well in the world cup and the optimism experienced on the FTSE100, I expect this super performance for #teamGB to have a wider positive impact.

We are having the mother of all ‘Bread and Circuses’ periods, as we need to be distracted from a double dip recession, weak government, U turns, Global financial turbulence and corruption oozing out of the very institutions we have relied on for years.

Distraction, the key to government survival in times like these.  Just as in football Half-time (Recess) has come at the right time for the coalition.  Weeks of patriotic goodwill will create a feeling of general wellbeing for many and this will change the mood music that was beginning to sound like the funeral march for Dave & Nick.

So, in September, a reinvigorated coalition will come back from their hols and tell us all will be well and Nick will tolerate the lack of Lords reform and dress it up as some sort of Libdem victory.  Increasingly he is being seen as the emperor with no clothes.  Taken a gamble on a deal with a heartless Bitch that is the Conservative Party, and the resulting busted flush has left the Libdems in real trouble.

The figures for the July quarter will be interesting reading but the growth will be seen as a recovery in progress.  Sadly it is a little happy blip in an otherwise bleak economic period for our unbalanced economy.  I know that we won’t fall for the spin this time.

The pre Olympic negativity of the SNP will be forgotten as #scolympians are feted and paraded through the dreich streets of Edinburgh and invited (like Rupert Murdoch) for a Tunnocks tea-cake with the FM.  A Damascene conversion to a pose of I love #teamGB although he’ll never utter the words.  The Unionist bump in the polls will leave Herr Salmond in a sweat for a while.  The ‘why we love to be British’ will be trumpeted long and loud as an antidote to the separatist agenda.

Amazing how many uses sporting events can be put to.

So many reasons to be cheerful for having the olympics, pity it’s not just about how much fun we had watching.

(oh yeah, and well done to Kevin the teenager for a great win in the Tennis singles v Roger Federer.)

Bail out? the buckets are too small

The euro crisis has become an ongoing sore.

The markets are jittery and the governments in the eurozone are crapping themselves.

Austerity means different things in different countries.  If Britain was to feel the cold, clammy hand of death that is greek austerity then we’d all be on the streets protesting.  Our Austerity is much more British and involves limited cutting in the spending rate.  Not actual cuts but reductions in growth.  The austerity agenda has been a calamity.  It has sucked demand from an, already, over supplied market.  The cuts in Government spending has created a period of High Unemployment and recession.  So it’s working then?

Austerity was the wrong economic choice.  didn’t work in the 30’s won’t work now.

The Neo-liberal approach to economics is disastrous.  Resulting in a market driven (remember it is jittery) approach that is unstable and driven by the most human characteristic, GREED.  It cannot ever possibly be sustainable.  Some will get very rich while the overwhelming majority suffer.  Not a very positive outcome is it.  (Remember 2bn people on a dollar a day)

How many more decades do we have to follow this market focussed view before we say enough?

And so back to Europe.

The prospect of a Spanish collapse or an italian one has us all a tremble.  There was a reason why there were differential exchange rates.  It had to do with prevailing conditions in these economies.  They weren’t all the same.

Italy is not Germany!

Greece is Not Germany!

Spain is not Germany!

With one currency we are missing these points.  Without budgetary integration the differences (subsumed for a while) have created cracks in the eurozone.  The economies of these countries are different.  A United states of Europe needs a United states of Europe based budget.  ‘Over my rotting corpse’ is too often the response.  Sovereignty is important to most countries.

Europe isn’t ready for political (and therefore fiscal) integration.  The economies are too diverse and behaviours too different (tax evasion is an olympic sport in Greece and Italy).

A greater Germany approach to Europe will not work long-term.  It is appreciated that German taxpayers are keeping the Euro on the rails but it is a step too far.  Delor’s plan was too much, too soon.

A common market with few (if any) barriers to trade was what was needed, but full (or even) limited fiscal integration wasn’t needed.  We are not creating a federal united states of Europe.

Within the USA there are similar problems of regionalisation, poorer regions that struggle due to a single currency (Nevada for example) and we in europe are replicating this problem.

The solution?

Stop bailing out the eurozone economies and scrap the euro.  It hasn’t worked and to hang on is only postponing the recovery.  We do not have big enough buckets to do the bailing.  The disintegration of the Euro needs to be managed, not chaotic.  However, I see capital flights the moment this is announced (or before as rumours circulate).  It will be painful.

I know this sounds eurosceptic. I’m not.  An EU of trade and cooperation is as far as we need to go (ECHR notwithstanding).  The economics of that trade are hampered by the Euro not aided by it.  The inability of sovereign nations to manage their economies due to a currency straightjacket cannot continue indefinitely.

The experiment has failed.  Accept it and move on (or row back obviously).

Either we speed the train towards a federal United States of Europe or we say stop!

We are not ready.

The bailout plans are sticking plasters to avoid the difficult question of what is our strategic goal.  A question ‘we’ have ducked for decades, where is the EU really going?  We know but don’t want to say it.  United Federal States of Europe.

Good luck selling that.  So we haven;t sold it, just crept along the road to it.  Political Cowardice is too strong but conveys the point.