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The 'separation principle' and the euro

Stephanie Flanders | 10:40 UK time, Friday, 4 March 2011

The European Central bank can afford to ignore the likes of Greece and the Republic of Ireland when it sets interest rates - for the same reason that the eurozone can afford to bail them out. They're small.

Between them, the crisis economies on the periphery account for about 18% of eurozone GDP. Germany alone accounts for 30%, and it grew by 3.6% in 2010.

Jean-Claude Trichet

Strong hints yesterday from Jean-Claude Trichet that the ECB would raise rates next month will not have gone down well in Portugal and Athens. They need higher interest rates like a hole in the head. But as these governments will have learned by now, that is how the eurozone works. One interest rate very rarely fits all.

For most of the single currency's first decade, the ECB's policy rate was probably too high for Germany - and too low for the booming periphery. Germany's domestic consumption grew by just 1% a year, on average, for the first eight years of the euro. Consumption growth in Spain, Portugal and the Irish Republic was many times that. And we all know what happened to house prices and the level of private debt.

Still digesting the enormous costs of unification, German workers saw their real wages squeezed in this period, as German companies slowly re-built their competitiveness, while the countries at the periphery had a ball.

Now, as any German politician will happily tell you, the shoe is on the other foot. Now it's Spain, Portugal and the others who must sacrifice short-term growth for long-term competitiveness. For them, even a record low interest rate is probably too high. For Germany it looks too low.

This, say the true believers in the euro, is how you would expect a single currency to work among such a diverse collection of states. When one group of countries is down, the other is up - and vice versa. Only gradually do they see-saw toward the same path.

A logical consequence of this dynamic is that interest rates will go up this year, even if several eurozone economies are still going down.

Except, these days it isn't really "one monetary policy fits all". Because the European Central Bank is still providing large amounts of exceptional support to eurozone banks. And most of that support is helping the periphery.

On the same day that Mr Trichet talked sternly about "strong vigilance" on inflation, the ECB was announcing that these refinancing operations would remain in place for at least the next three months. To the surprise of some market-watchers, there were not even any efforts to further limit funding for banks now "addicted" to ECB support.

The ECB president was keen to stress the "separation principle": there's monetary policy, and there's exceptional support for the banking system and woe betide anyone who confuses the two. The Greek, Portuguese and Irish governments will see less of a distinction, but they are very glad that the ECB does. Arguably, the ECB's refinancing operations for the banks are playing a much more important role in supporting their economies right now than the official interest rate.

Make no mistake: the separation principle is very important indeed to the ECB. In a messy time for the eurozone, it is a source of pride to the ECB that its interest rate policy has stayed "clean". You may not agree with its judgements, but even the critics will accept that interest rate policy has been set according to the economics, not the politics. Yesterday's press conference was a case in point. Happily for the periphery, the rest of the ECB's response to the crisis has been a lot messier.

Comments

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  • Comment number 1.

    Anyone remember the ERM? That didn’t work very well, and neither is the Euro. What you have is a number of different lengths of rope tied together, with different strengths of individuals on each end. They are all trying to walk down the road together. But instead a tug of war is taking place. One size fits all simply wont work, eventually, one or more of the participants will fall on their faces and there is a risk that all the others will be pulled down as well.

  • Comment number 2.

    Thanks for this new post Stephanie. I had spotted that on your previous post there was a comment pointing out that the real economic action was taking place at the European Central Bank press conference! I took a look at the reference and there is good viewpoint and a real basis for discussion for the UK.
    "Also I would now like to spell out the difference between the two as fortunately we do have an inflation rate in the Euro zone which is directly comparable to the UK one. In January UK Consumer Price Inflation was measured at 4% and in the Euro zone it was measured at 2.3%. We do not yet have February figures for the UK but they will be way above the 2.4% of the initial estimate for the Euro zone. It would appear that the Governing Council of the ECB do not agree that inflationary trends are “temporary” and the result of “one-off” factors and they do not agree this at 2.4% which is much lower than 4%!"
    http://t.co/uYstYAX
    I suspect that this debate will only grow and grow as we approach meetings of the Bank of England.

  • Comment number 3.

    Post 01 @ 12:44pm on 04 March 2011 - 'Averagejoe' makes fair and valid points.

    Once a country loses it's own currency - it loses control of it's basic sovereignty and ability to adapt to it's population's wide spectrum of needs.

    The Euro, as a currency, has failed to meet the majority of
    new EU Nation Member States' actual economies. To join the EU a nation is forced to use the Euro - what kind of democracy of the European Union is that?

    Who decided that the Euro was a worthy condition of Membership of the EU?

  • Comment number 4.

    #1. Averagejoe wrote:

    "Anyone remember the ERM? That didn’t work very well, and neither is the Euro."

    You are wrong... The Euro is working very well indeed. Europe has not been destroyed by the turmoil in the World's financial systems and is withstanding the shocks quite well - far better than we are, or will.

    The Euro provides the source of salvation for Europe. It provides the single market with the trans-national financial stability that is vital to the eventual recovery of the economies of the separates countries of Europe.

  • Comment number 5.

    #3. corum-populo-2010 wrote:

    "To join the EU a nation is forced to use the Euro - what kind of democracy of the European Union is that?"

    OK let's be logical and you have your own currency in Timbuktu or where ever you live and try trading with the rest of the world, buying goods, food etc. and selling what ever it is you sell.

    You obviously work for the money changers and want to remain in their servitude. Do you work for a bank? If not, why are you wanting to give them so much of your hard earned money?

  • Comment number 6.

    "The ECB president was keen to stress the "separation principle": there's monetary policy, and there's exceptional support for the banking system and woe betide anyone who confuses the two. "

    What a wonderful piece of sophistry! Woe betide the ECB president when the 'markets' decide the 2 are synominous!

  • Comment number 7.

    It's the periphery that will be separating!

    This is the folly of having monetary union when the individual countries have not converged.

    For the likes of UKIP the euro is achieving what they want - the break-up of the EU.
    And whilst I have no time for the soft-racists, there is the very important point of democracy.
    It's clear that European governance isn't democracy, but, let us remember, neither is Westminster governance.

  • Comment number 8.

    Why did Iceland join the Euro?

    Answer - their banks' greedy gambling destroyed the country's credit status and its currency - joining the Euro was the only option they had left.

    Will the UK join the Euro?

    Yes - probably.....

    Except unlike Iceland, it will be the combination of the coalition driving the economy off the same cliff that the disgraced Irish government fell off last week, then the run on Sterling which will follow.

    Faced with th £20 litre of petrol and the £15 loaf of bread, what choice will we have then?

  • Comment number 9.

    "This, say the true believers in the euro, is how you would expect a single currency to work among such a diverse collection of states. When one group of countries is down, the other is up - and vice versa. Only gradually do they see-saw toward the same path"

    It remains to see whether the presumed convergence will actually place, or whether other pressures or events de-rail it.

  • Comment number 10.

    4. At 1:14pm on 04 Mar 2011, John_from_Hendon wrote:
    ...........
    You and I will always differ on that one John. I believe the future lies in a debt free money supply issued by the state, rather than replying on money issued as debt by private banks. Although possible, it’s highly unlikely we could implement that for the Euro.

  • Comment number 11.

    • 4. At 1:14pm on 04 Mar 2011, John_from_Hendon wrote:
    #1. Averagejoe wrote:

    "Anyone remember the ERM? That didn’t work very well, and neither is the Euro."

    You are wrong... The Euro is working very well indeed. Europe has not been destroyed by the turmoil in the World's financial systems and is withstanding the shocks quite well - far better than we are, or will.

    The Euro provides the source of salvation for Europe. It provides the single market with the trans-national financial stability that is vital to the eventual recovery of the economies of the separates countries of Europe.
    …………..
    I’m not sure it has survived the shocks better. Germany is strong because it is a net exporter, which keeps its Government debt low. The other countries are not any better off than us, with huge amounts of debt. Our only salvation will be the creation of debt free money allowing government spending to remain (stimulating economic activity in a downturn), whilst cutting government debt. Eventually Greece will default on its debts as its people through ’revolution’ reject debt repayment. This will risk destroying the euro in the process, or they will have to be cut adrift, by producing their own currency again.

  • Comment number 12.

    In addition to my last point, surely the only way you could avoid the break up of the Euro is for the wealth to be redistributed from the wealthier parts of euro land to the poorer parts. I cant picture the Germans being receptive to that idea. In some respects what’s going on in Europe is no different to the transfer of wealth from the US to China. One with massive wealth surplus, the other with massive debts. This is what happens when you have 20 years of economic growth on the back of debt, due to incomes dropping in real terms due to an over accumulation of wealth in the hands of the few.

  • Comment number 13.

    Well I'm not sure of the effect that increasing interest rates will have on the bond markets when Portugal, Spain et al try to roll over their current debts. Doesn't sound as if it will exactly help them avoid needing a bail out.

    And as for Germany's willingness to keep paying, did no-one notice the election results there last month and the consequent prospects for those due in the next 12 months? Angela Merkel may effectively be out of office within a year, replaced by clearly more Euro sceptic politicians put there by an increasingly frustrated electorate. And what then?

  • Comment number 14.

    No one has yet explained to me how the net importers in the Euro Zone can support their debt in the long-term. When someone does or when the Euro Zone invents a mechanism for transfering Euros from Germany to the other countries for free, I'll be happy with the Euro. Until then, I fear for the day when France and Italy have to be saved.

  • Comment number 15.

    "For most of the single currency's first decade, the ECB's policy rate was probably too high for Germany - and too low for the booming periphery. Germany's domestic consumption grew by just 1% a year, on average, for the first eight years of the euro. Consumption growth in Spain, Portugal and the Irish Republic was many times that. And we all know what happened to house prices and the level of private debt."

    I'm probably missing something, but does this stack up? It's saying that for the peripheral countries the rate would have needed to be higher. But at the same time it's saying the rate was already too high for Germany. So if it had been raised wouldn't Germany have been even more disadvantaged than it actually was?

    The key is in the next paragraph:- Germany was "still digesting the enormous costs of unification..." It was this which gave rise to the severe divergence in the respective economies' positioning and which meant that no "one size fits all" interest-rate policy could possibly, in fact, fit all. A highly untypical combination of circumstances.

    Now Germany's economy is thought to need a higher rate (we're not told why, is inflation on the rise in Germany?) and the peripherals' an unchanged one. But the UK is thought by some to be in the same boat in that respect as the peripherals, and to need a low rate for the same reason - the property-price bubble and the banks' balance-sheets' exposure to a price-collapse. JFH, and others, reject that for UK - but then by the same token isn't it equally ill-advised for Spain, Portugal and the others? In which case the one-size-fits-all policy does seem to fit after all...

    Interest-rates can be used either to (try to) influence inflation or to influence the exchange-rate, but not both at once. It was with the latter aim that they were kept as high as they were by the ECB, against Germany's domestic interests, during the Euro's first decade - to prop-up the Euro.

  • Comment number 16.

    Response to post 05 @ 1:19pm on 04 March 2011 - 'John_from_Hendon'.

    I have only posted on EU Member Nations forced to give up their currency and use the Euro as a condition of membership of the EU - as you well know, if you had read my post.

    So please DON'T distort my comments or take them out of context. Thanks.

  • Comment number 17.

    I guess everyone should be pleased that the banks, the ones that caused it all, are not sending countries into default with high interest rates even though they are supported with taxpayer monies. As compassion from dishonest bankers is unlikely, it is only a sign that some spineless politician has convinced their banking overlords that the people may have reached their end in transferring wealth upwards.
    The only fact that really matters is that the taxpayers will continue to pay to secure the wealth of the wealthy while their governments kow-tow to the bankers and beg for mercy. The zenith of capitalism is that even governments are for sale.

  • Comment number 18.

    The euro has problems, but it has one big advantage. People within the eurozone do not have to finance the "turn" or profit that money changers make, to the same extent that we do in the UK. This amounts to several billions of pounds each year, and is effectively a privately levied tax on trade between the UK and the eurozone.

    This advantage is well worth having. It is an important reason why the UK should cooperate with the eurozone members to correct the flaws in the system, that the stress of the world economic crisis has exposed, with a view to eventually joining.

  • Comment number 19.

    #4. The Euro provides the source of salvation for Europe. It provides the single market with the trans-national financial stability that is vital to the eventual recovery of the economies of the separates countries of Europe.

    I haven't seen anyone argue that the failing U.S. states (like California) should be broken up into separate currencies, which does suggest that a large single market brings benefits and stability that you don't want to quickly undo in a crisis. However, the thought of being run by Brussels hardly inspires confidence.

    The key to whether it is worth switching to the Euro is our relative standing in the world. The more we sink as a first world nation, the more we loose any benefits of having our own currency.

    I think it is inevitable that we will join the Euro purely because of oil, and maybe other key commodities. I think within 10 years or so, there will be the beginnings of a world government, which will allocate the production of key commodities like oil. This will come about because of the failure of markets to fairly distribute oil without wars. In this scenario we will want to, or be forced to, join up with our nearest neighbours to get the strongest voice at the bargaining table.

  • Comment number 20.

    It all boils down to the fact that it is : " Better to be healthy and wealthy rather than sick and poor." This applies to countries and economies as well as people. It just is not so easy when you have had spendthrift chancellors not taking care of our resources in the past.

  • Comment number 21.

    The ECB president was keen to stress the "separation principle": there's monetary policy, and there's exceptional support for the banking system and woe betide anyone who confuses the two.

    That principle's working well for the nations that signed up to the Act of Union (1707) then isn't it?

    Can anybody see the distinction between Monetarist policy amd exceptional support for the banks here in the United Kingdom?

    QuantitiveEasing, low BoE base rates and Government-backed taxpayer guarantees handed out to the Midshires, Halifax, Royal Bank of Scotland et. al? All names that conjure up places on the fringes of the Union, far from the economic powerhouse of the Home Counties.

    Student grants for the Scots? Free prescriptions for the Welsh? Are the English calling for a new Parliament in Westminster over the unfairness of supporting those fringe economies?

    What are the Germans bleating about? Do they have visions of the next Reich? Should we all become as little Fätherländer as them?

    One government + One bank => One nation?

    European Parliament + European Central Bank = European Union.

    "Sauce for the goose is sauce for the Gander." (As they used to say back home.)
    ~~~~~~~~~~~~~~~~~~~~~~~~~~
    Anyway,with or without political and cultural union, the economic levers available to Government-directed central banks ARE monetarist policies, aren't they? (This mushroom doesn't think they fit the definitions of "fiscal" anyway.)

    And as has already been said, the forex traders cannot distinguish between German euros and Greek ones.

    A distinction that makes no difference...?

    Can anyone explain how Mr Cliché hopes to maintain this grand game of smoke and mirrors?

  • Comment number 22.

    The dilemma for the Euro has been that whilst it is taking a long time for the Single Market to develop its full potential - a process very delayed by the intrusion of cheap imports from China - the governments of the EU have, like good social-democrats, felt the need to fully develop the aspirations of their populations. This meant borrowing money under any circumstance but the Euro made it so much easier to pursue that seeming advantage.

    Now the borrowing music has stopped and the debt is the problem. The way to deal with it is to sort out an agreement with the banks so that a sensible path can be constructed to get out of this minefield. As it stands it seems that governments are frightened of what the banks may or may not do and the banks are terrified of what the governments could do. It is time for both parties to find a resolution. There is no alternative.

  • Comment number 23.

    If the ECB raises its interest rates that will have the effect of devaluing the £ versus the euro. That would be inflationary for the UK...as if we didn't have enough problems with inflation already.

    Of course it would also make our exports to the EU cheaper too.

    So in fact, this more or less mirrors the same debate in this country about whether to raise our interest rates or not ie inflation or improved exports and growth (theoretically).

    The only difference being, we have no control over the ECB's decision.

    Chances are we'll have to raise interest rates if the EU does, just to retain a semblance of parity and therefore keep the status quo.

  • Comment number 24.

    The direction is set ... the weaker and messed up EU member countries ... like the UK will have to operate their own currencies and be responsbible for themselves.

    The problem for the EU ... that if the ECB interest rates go too high or too quickly ... there will be plenty more EU weaker member countries joining the UK operating their own currency.

    This I think also means that idiot politicians' GDP growth in the Eurozone, is likley to be held by the 'stronger members' who are able to operate the Euro ... and pressure will grow for the weaker EU countries to leave the EU and/or Euro currency and form their own new trading block.

    The other issue is what is actually left of the EU at the end of this process and as weaker members tend to do better being out of the Euro/EU ... this is the beginning of the end for the EU/Euro ... Hooray!

  • Comment number 25.

    All this user's posts have been removed.Why?

  • Comment number 26.

    If the EU raise interest rate and the Bank of England don't follow the pound will devalue against. Now is the time to move some money out of the GBP and into the Euro.

  • Comment number 27.

    stillpuzzled asked ---- " Are the English calling for a new Parliament in Westminster over the unfairness of supporting those fringe economies? "

    I did. But I wanted it in York.


    JfH (4) maintains that Europe has not been destroyed...... Ask the average Greek or irishman what they think. Or ask a Norwegian. Destruction, or otherwise, was a function of the games the banks were playing - not which country you lived in, or whether it used the Euro.

  • Comment number 28.

    #21
    "And as has already been said, the forex traders cannot distinguish between German euros and Greek ones."

    But the bond traders most certainly can and what price are they going to put on Portugals and Spain's interest payment if the ECB raises the base rates? And at what point will it become obvious that they can't even afford the interest on their current debts let alone new ones?

    It doesn't matter if you are pro or anti the Euro, the accounts have to balance and they don't. And as the elections in Germany last month showed, the Germans are getting very fed up with paying for every one else's party with their own hard work. Probably within a year Merkel will be out of effective power and probably out of office too. Replaced by those with a much "harder" view on the debts of other Euro nations. What then?

  • Comment number 29.

    A good blog after 2 bad ones.
    Thank you Madam Stephanie.

    The interest rates should go higher, all the European countries who didn't had the competency to become a developed nation should pay the price of enjoying for so many years.

    By the way UK govt. doesn't have any other option but to help Ireland as Ireland is one of the biggest trade partner with UK.
    GOD help MR CAMERON to make UK more Competitive so that they trade with other nations too, hope he is taking the country on right track.

  • Comment number 30.

    At the heart of it all is confusion. The euro was embarked-upon as a political project aimed at giving a powerful impetus to the drive towards "ever-closer union". Nobody thought through the implications for the natioanl sovereignty of the various parties - except perhaps the British, who smelt a rat and balked. Hence we still have a vestige of our sovereignty - the power to issue our own currency.

    It hasn't done us much good:- unable to devalue the (common) currency the Greeks and the Irish are being forced into steep internal devaluation by fiscal means. Able to devalue our currency, we British are being forced (by the present government anyway) into - guess what? steep internal devaluation by fiscal means (on top of having devalued our currency).

    So what good did staying out do us?

    All the same, joining isn't a no-brainer because of the afore-mentioned pall of confusion surrounding the political implications of a common currency. I agree with what's already been said:- that without willingness on the part of the more successful economies to transfer wealth to the less successful in times of need a common currency is meaningless. It's as if in the UK the Barnet formula had never been dreamed-up, Scotland, Wales and Northern Ireland had been left to stew in their own juice, and yet all the time their economies continued to be run from Westminster as if they were colonies while the South-East's dominance continued to grow.
    That seems to me a pretty fair analogy for the attitude the Germans display towards their weaker partners in the Eurozone and, if it is, we'd be just as ill-advised to join in the future as we undoubtedly would have been in the past.

  • Comment number 31.

    It's just politics.

    The banks spend their newly printed money on food and oil, driving prices up, so the state authorities raise rates that will eat into banks profits. Banks know they can't pass on the rate hikes to the retail consumer, because nobody can afford it.

  • Comment number 32.

    #16. corum-populo-2010 wrote:

    "Response to post 05 @ 1:19pm on 04 March 2011 - 'John_from_Hendon'. I have only posted on EU Member Nations forced to give up their currency and use the Euro as a condition of membership of the EU - as you well know, if you had read my post. So please DON'T distort my comments or take them out of context. Thanks."

    Let me try to understand your complaint. You are saying an EU member nation was 'forced' to give up its currency as a condition of joining. Which country was that? Which country was 'forced' to give its currency? What you seem to be mixing up is that after a country has fulfilled the financial entry requirement for the Euro it can then join - it always has the option of not fulfilling the entry requirements if it so wished. The new entrants wanted to join the Euro because of what it offers - price and financial stability over a huge market. Only deluded idiots (like the ...) do not want that!

    I don't think I took your remarks out of context at all - I just took exception to them!

  • Comment number 33.

    What a ridiculous article. What's up, Steph, not getting enough tabloid airtime?

    For any group of civilised people working as a society you will have a spread of productivity. Currency union is not the problem, the problem comes when the haves hold back from assisting the have-nots. How do you think the deprived ex-industrial heartlands are liking the sound of your blogs on UK interest rate rises? There are people in Germany for whom rate rises will hurt as much as for some in Greece. This is not a national issue. Germany is coming to realise that holding all the cards makes a poor game. The key for this system to work is that the wealthy recognise their success depends on all our success. Does this mean that the governments of Europe have to recognise that they cannot operate as an island? Yes, of course it does. Welcome to the realisation that no man is an island. Does this mean we all have to adhere to a homogenous cultural identity? No, it doesn't, and anyone who purposely confuses the two is not your friend.

    But back to the popularity-stoking nationlism, Steph, as you were....

  • Comment number 34.

    Those who are still rather sanguine about where this is leading re the Euro should perhaps go to the FT website and look at the articles published today entitled "Inflation scare: déjà vu all over again" in the Lex column and "Portugal Rail operator stalls on 500m Euro bond". The latter article also has some interesting links to the backgound on Portugals imminent default/bailout.

    Any bets against another Euro crisis before the end of June?

  • Comment number 35.

    The European Central bank can afford to ignore the likes of Greece and the Republic of Ireland when it sets interest rates - for the same reason that the eurozone can afford to bail them out. They're small.

    Between them, the crisis economies on the periphery account for about 18% of eurozone GDP. Germany alone accounts for 30%, and it grew by 3.6% in 2010.
    -------------------------------------------------------------------------
    If I was Chief of the Bundesbank and reading that, Steffie, I would be looking forward to sleepless nights for a long while.

    The 'dead wood' represents more than half the strongest economy? That sounds like a recipe for some wealthy individuals and hostile sovereign wealth to have a go at taking out Italy or France - perhaps Italy AND France - through the markets the next time the PIIGS are in trouble.

    Good job we are not in the Euro!

    Tell GO to get some extra locks fitted at the BoE and Treasury ...

  • Comment number 36.

    4. At 1:14pm on 04 Mar 2011, John_from_Hendon wrote:
    #1. Averagejoe wrote:

    "Anyone remember the ERM? That didn’t work very well, and neither is the Euro."

    You are wrong... The Euro is working very well indeed. Europe has not been destroyed by the turmoil in the World's financial systems and is withstanding the shocks quite well - far better than we are, or will.
    -------------------------------------------------------------------------
    True as long as you overlook the fact that we are helping to bail out Ireland. True as long as you overlook what has happened to one of the EU's 'Jewels in the Crown' - Spain - despite having some very well run banks. True if you overlook the fact that France has rather been staggering along for three decades, doing quite well ... but staggering. True if you overlook the disaster that is southern Italy.

  • Comment number 37.

    #36. Up2snuff wrote: "True as long as you overlook...."

    I repeat - you want to give all your money to the money changers then? You want to keep the bankers in the style they have become accustomed to, leeching the lifeblood out of the British people?

    There needs to be an understanding that the UK imports most of its needs for life and now exports very little of consequence. A large proportion of our food comes from our European friends, but we have to buy using Euro so, we have to pay the money changers for the fruit and vegetables we need to live. You want the bankers to continue to take (a cut from) the very food we put in our mouths! When this does not need to be the case! Please justify yourself.

  • Comment number 38.

    9. At 1:45pm on 04 Mar 2011, Cassandra wrote:

    "This, say the true believers in the euro, is how you would expect a single currency to work among such a diverse collection of states. When one group of countries is down, the other is up - and vice versa. Only gradually do they see-saw toward the same path"

    It remains to see whether the presumed convergence will actually place, or whether other pressures or events de-rail it.

    ____________________________________________________________________________________
    It depends on scale and spending strategy of EU budget. But even divergence does not necessarily mean split or collapse as long as loosing entities can be convinced that they would loose even more when left to their own devices. Eternal centre and periphery problem. I guess that one of the advantages of Germany (and to a lesser extent -USA) is policentric structure: Munich, Hamburg, Cologne, Dortmund, Dusseldorf, Frankfurt and Berlin -it's a heritage of history. It can not to be easily created on a pan European scale, but certainly a good target.

  • Comment number 39.

    The Euro experiment was always going to face a choice at some point.
    The NICE decade has only delayed the inevitable. The choice can no longer be put off, and is political, not economic.
    Member States have to make a choice; fiscal union or not.
    If they choose fiscal union, then in a few years time it really will be the United States of Europe. If they don't then the whole project fails.
    I have never liked the EU, I'm old fashioned and would rather my elected politicians make decisions on my behalf. I also don't want the EU to implode, as this would, unfortunately, have disasterous consequences for the UK.
    European politicians surely know that decision time is not far away, though I doubt the long suffering european voter will get a say.
    Funny how the EU bangs on about freedom and democracy for every continent but ours.

  • Comment number 40.

    re #37
    J_f_H, I agree we export less than we import but we make our UK money from our enlarged services sector on the currency exchanging. Er, who took the biggest hit from the creation of the Euro? It wasn't car makers or software developers or steel producers ... . Who was it?

    And are we not European food dependent because of our being in the EU? I seem to recall that the rules require us to import food from European 'partners'.

  • Comment number 41.

    @38. Suav wrote:

    "I guess that one of the advantages of Germany (and to a lesser extent -USA) is policentric structure: Munich, Hamburg, Cologne, Dortmund, Dusseldorf, Frankfurt and Berlin -it's a heritage of history...."

    That's a perceptive observation, IMO (and one which I must admit had never struck me).

    And the centre v. periphery problem is perennnial if not, as you say, "eternal" (with the exceptions you name). One hears much the same complaints from the French concerning Paris, for instance.

    But I think it requires rather more than just that the peripheral countries cling on out of self-preservation - ie because they see no alternative however disgruntled their peoples may be. That's hardly a recipe for success. When these states joined they did so in a burst of enthusiasm, wholly positive. It takes positive sentiments to keep a union of states welded together, because the natural tendency (once differences arise) is fissiparous.

  • Comment number 42.

    Comment 33. At 7:58pm on 04 Mar 2011, D_I makes a very valid response to this particular article & the general tone of Stephanie's recent blogs.

  • Comment number 43.

    Unless member nations of the Eurozone are allowed to fail there can be no market economy to force efficiency across their national economies. We have already seen Greece handing out suicidal socialist largesse with each public pay packet and pension all of which past folly is now being subsidised by German workers.

    Efficiency comes from competition not cooperation yet it is cooperation that is being forced on the stronger EU nations to bail the weak out. The net result leads to an averaging of EU national economies that can then not compete with ruthlessly single-minded nations like China.

    We have the EU angling to create a state supported banking system while the UK's Mervyn King has just stated that there is no place in a market economy for organisations that are immune to failure. Those two views are in clear conflict.

    Unfortunately King then ruins his speech by adding a purely political statement: "Why do banks in general want to pay bonuses? It's because they live in a 'too big to fail' world in which the state will bail them out on the downside." There is of course no objective connection between bank bonuses and the bailout - bonuses were paid long before the bailout and they were paid in all the large banks not just those who needed help later.

    Irrational views from the EU and the UK from top rule makers are only overshadowed by the general and insane consensus that what we need more credit leveraged growth at the same time as a less risky financial system. A less possible state would be hard to come by and while we have economic lawmakers spouting that sort of politically inspired garbage both the EU and the UK will struggle to improve their globally competitive game whatever their currency strength is.

  • Comment number 44.

    @38. Suav wrote: "I guess that one of the advantages of Germany (and to a lesser extent -USA) is policentric structure: Munich, Hamburg, Cologne, Dortmund, Dusseldorf, Frankfurt and Berlin -it's a heritage of history...."

    I think the main advantage Germany has is a national constitution that places emphasis on economic stability and prudence. Britain and the Allies wrote that constitution after WW2 in the knowledge that the war was largely the result of German hyperinflation in the 1930s, and of course everyone was keen to avoid that reoccurring.

    In particular Article 115 (Procurement of credit) places stringent rules on government borrowing and states that:

    “exceptions shall be permissible only to avert a disturbance of the overall economic equilibrium.”

    Unlike say Greece or the UK where no such constitution limits parliament’s borrowing power which then occurs for all manner of trivial reasons, including unsustainable public sector growth, which is why we are in a mess and Germany is not.

    It is one of life ironies that the stringent rules on government borrowing we and others forced Germany to obey were thought good enough for Germany but not for Britain. A serious mistake...

    Currently I believe that Germany proposes altering is constitution to place a numeric limit on national borrowing related to a very small % of GDP (presumably to limit the future possible damage caused by Greece et al) and I for one wish the UK would do the same. Only a politician proof constitutional cap will ever stop elected politicians borrowing cash to pauperising their own voters.

  • Comment number 45.

    12. At 3:05pm on 04 Mar 2011, Averagejoe wrote:
    In addition to my last point, surely the only way you could avoid the break up of the Euro is for the wealth to be redistributed from the wealthier parts of euro land to the poorer parts.


    Why ?

    Let us suppose that the ClubMed and Ireland leave the Eurozone and enjoy the false (because there is no true economic independence any more) dawn of setting their own interest rates and devaluing their currency, do you really think economic convergence (with Germany) will accelerate.

    All that will happen is that they lose the benefits of a large market. Benefits of independence are a myth; within years they will be pegging their 'new' currencies to the Euro just as do several other economies world wide.

    Any evidence that these countries were better off before Euro membership. No.

    The UK will be forced to join within the next 5 years. This will be an economic choice heavily resisted by politics and hubris.

  • Comment number 46.

    In a free society it is the market that would set interest rates, not central bank money manipulators, which benefits insiders. Repeal legal tender laws and allow people to form their own view of what constitutes "money", instead of being corralled into a political elite managed truck system.

  • Comment number 47.

    My German friends are now very cynical and uncertain about the long term benefits of financing the Euro, 2 years ago it was only half way down the poitical agenda.

    Whilst the Euro is presently standing ground through the global mess, the effect of a Portugal, Spain or even Italy demanding a bail out would re-ignite this very sensitive flammable subject in the 'heimat', and quite justifyable so.

    The financial and economic benefits of Eurozone membership appear now, to some EU members, to have been dislodged by the EU politicians in persuit of some indefinable political agenda. So long as Germany, the UK, the Nederlands, Denmark and others pay all the bills and these useless politicians continue to be uncontrolled then life for the ordinary citizen within the EU major contibuting nations will not improve.

    The European nations still has enormous economic potential, our science, business, technology, financial, entrepreneurial and education institutions are still wonderful but not for much longer in the incompetent hands of dogma driven socialist politicians, in particular those from the 'begging bowl' nations.

    In one company I once worked for we had a saying to our contractors, suppliers, politicians included. 'Have you heard of the ####### Golden Rule?' 'We ######, have the gold and we rule', wake up Germany, the UK and others, we are sponsoring our own decline.

  • Comment number 48.

    re #45 and #47
    Richard,
    Good to have you posting here so I can elicit a bit more info about attitudes in Germany to the EU and/or Euro. You may have picked up on the news, post-Barnsley, that UKIP appear to be picking up lots of new support from young people.

    You didn't add that extra bit last week on this subject: is there a perceptible INCREASE in the number of grumblers or naysayers on the EU and/or Euro in Germany?

    And has the disquiet always been spread over the age range or was there a weighting to one age group and has there been any a perceptible recent change in that as well?

    Am grateful for any info you can add on this.

  • Comment number 49.

    41. At 09:16am on 05 Mar 2011, torpare wrote:
    @38. Suav wrote:

    "I guess that one of the advantages of Germany (and to a lesser extent -USA) is policentric structure: Munich, Hamburg, Cologne, Dortmund, Dusseldorf, Frankfurt and Berlin -it's a heritage of history...."

    That's a perceptive observation, IMO (and one which I must admit had never struck me).

    And the centre v. periphery problem is perennnial if not, as you say, "eternal" (with the exceptions you name). One hears much the same complaints from the French concerning Paris, for instance.

    But I think it requires rather more than just that the peripheral countries cling on out of self-preservation - ie because they see no alternative however disgruntled their peoples may be. That's hardly a recipe for success. When these states joined they did so in a burst of enthusiasm, wholly positive. It takes positive sentiments to keep a union of states welded together, because the natural tendency (once differences arise) is fissiparous.
    I can not agree more. On the other side of the possible range of developments you have Greece (Pergamon, Ephesus, Cyrene, Black Sea colonies – funny more than 2000 years on people are still keeping family ties! (I lived in Greece for a bit, and in Russia and know it first hand from both sides)) where there weren't sufficient centripetal forces to hold the conglomerate together and, for a time, the offsprings outgrew the centre. British Empire is another point in case (well, many mixed cases). What I am most interested in is how can paneuropeism and transatlanticism (to name them like this) coexist.

  • Comment number 50.

    The European Union (EU) will be discussing interest rates on loans offered to Ireland as the EU Bloc seeks a "comprehensive package" to deal with the debt crisis.
    Olli Rehn, EU Commissioner for Economic and Monetary Affairs said that interest rates is only one key issue which will be discussed in the context of the "comprehensive Package" for the EU.
    Rehn further said that he expected that this issue of pricing policy will be looked at from the overall European perspective of safeguarding financial stability in the euro area and ensuring debt sustainability of all members."
    The EU approved an aid package totaling 85B euros to debt-stricken Ireland in November last year. The loans carry an average interest rate of 5.8%. I believe the interest rate is too high for Ireland to sistain its debt.
    Enda Kenny said that the new government will seek to renegotiate the terms of the bailout package with the EU and the International Monetary Fund (IMF). I believe since then the IMF has agreed to lower interest rates.
    At the EU Summit on February 4, EU leaders agreed to adopt a comprehensive "anti-crisis package" the details of which are being finalized and will be presented at the Summit March 24-25.
    The situation is complex, but solvable. I'm eager to hear what comes from the Summit March 24-25.

  • Comment number 51.

    GeoffBerry, Germany has “gold” because of this particular advantage (among others, but mainly)
    http://en.wikipedia.org/wiki/File:Gini_Coefficient_World_CIA_Report_2009.svg

    and an export driven economy is a way (and the only practical one that I know about) to keep it. Look what had happened to Japan when they moved from hight 20' to low 30'. This is (my private observation) the difference between small enterprise being still subjectively viable and becoming none viable.

  • Comment number 52.

    I have been listening to Cleggs speech. I am not a wealthy widow/pensioner I have my new tax code and i will be paying more tax this year. where is the justice in that!

  • Comment number 53.

    Up2snuff@48

    Pleased to detail for you.

    My friends are former overseas work colleagues, professional Engineers now mainly retired of excellent education, moderated opinions and accute awareness of German and World events. This is my brief analysis;-

    Most Germans are proud of what they have achieved in the past 40 years through discipline, hard work, social responsibility and a self belief.

    A fundamental difference between my perception of the EU and my friends is that in the UK we have been very badly let down by our UK politicians of all political persuasions, in fact UK politicians have been held in ridicule in many parts of the EU for many years. As UK citizens we are generally held in good respect by Germans, except our boozy tourists, and certainly the 'lions led by donkeys' has been played back to me many, many times.

    Germany for their part has had a political leadership that has always been not only good for Germany but excellent in using the EU to promote German interests, especially Euro funded exports, which in a manufacturing economy as large as Germany's is a 'must do' for Germany economic wellbeing.

    Why the changing attitudes?

    Not easy, but Germanys hard earned self reliance and prosperity has been slowed since reunification and now just as jobs, bank loans and social cohesion were improving along come more immigrants from the extremes of the EU, the Greece and Ireland issues and potentially others, to create the cynicism and uncertainties that seemed to be overcome since full integration with the FDR.

    In simple terms, the question being asked, 'why are we continuing to accept the risks of the EU failing economic sector by personal sacrifices in our living standards, especially we Germans, having put so much into making the EU and the EuroZone a success for many other people to date?'

    That is a very valid question and one which the outstanding Chancellor Merkel will have to find acceptable answers and the appropriate policies in the future. I wish Germany well.

    PS. I am not, or never have been in any political party, the UK people have been the victims of an abundance of failed politicians for 40 years and the present situation certainly looks to be perpetual and that is a good reason not to change.

  • Comment number 54.

    With all your writing about interest rates and inflation, perhaps it would do you good to read Bernanke's latest logic.
    The Federal Reserve is telling us that INFLATION is needed to overcome the "overhang" created by debt. Of course inflation doesn't create employment; it just distorts prices up.
    Mr. Bernanke says that he can end inflation whenever he wants; he just has to increase the American-near zero interest rates. This isn't exactly the truth, but the truth ain't pretty: If inflation ends, deflation takes hold and guess what?
    The American economy will collapse into a third world entity, somewhat like Zimbabwe. What's more, you can't turn inflation/deflation on and off like hot and cold water.
    Also, Bernanke's plan (such as it is) fails to promote stability, or to accomplish (or even try) bank reform. For three years the Fed has been assisting banks to get rid of bad debts (which the banks caused themselves via subprime). These banks STILL HOLD BAD DEBTS. Are you ready for this?
    The Bank of International Settlements, the FASB and the government say it’s fine to keep two sets of books. In most other countries, persons who keep two sets of books end up in prison.
    That is what QE1 was all about – bailing out the financial sector, but these bad debts that haven’t already been sold to the Fed, are still on the balance sheets of financial institutions.
    Fed created INFLATION raises the real value of assets but artificially; these bad debts seem to be appreciating when in fact they are not. Toxic debts held by banks are worth about $0.30 on the dollar (and falling). All the INFLATION in the world won’t RAISE THE VALUE OF A BAD DEBT.
    BERNANKE POLICIES WILL FAIL.
    QE1 provided 14% real inflation in 2011.
    QE2 will provide 25% to 30% inflation in 2012.
    QE3 will give us hyperinflation, and there will be a QE3.
    Mr. Bernanke has lied to Congress. What will he tell them when he has to admit he created $1.7 TRILLION, which has been monetized into INFLATION while he still holds the official interest rates just above zero.
    But here's the clincher: real rates on the 10-year Treasury-note has gone to @ 5%.
    Stunned? You should be.
    So, in addition to other economic problems, the ECB is facing an American problem, abd simply put; THIS IS NOT FAIR!
    In short, if the United States raises interest rates, its economy will collapse...Sound familiar. Remember Japan in 1992 and they have been depressed since that time. Marked to market you would find the Fed to be insolvent and this a insolvency has existed for some time.
    Now you can understand why the Fed and its banker owners DO NOT WANT the Fed audited.
    Is Britain holding American bonds? Buying American bonds? Is the EU holding American bonds? Buying American bonds? My advice would bel STOP!
    sTOP NOW!
    American capital is about $60B and they have about $3 TRILLION on the balance sheet. Do you understand why American interest rates must be so low. The stock and bond markets must be held up artificially so that the Fed’s balance sheet won’t collapse.
    What many do not understand is that almost all of what is on the Fed balance sheet has been created out of thin air and monetized. Part is EXPORTED in dollar balances; the rest of the inflation pass into the economy - your economy, my economy, the EU economy.
    QE1 and QE2 have spread ACROSS THE GLOBE. This INFLATION inflates more strongly day by day. Food prices have gone sky-high and in countries where food makes up 75% of income the result has been the overthrow of one government after another.
    These problems lie with central banks, including those in Europe (including the UK) and the US. It's a fraud, and its a fraud too big to fail. There can be no recovery because the worse is yet to come:
    As inflation goes up, unemployment goes up but wages stagnate so that the rich can stay rich.
    People worldwide are just not understanding the dilemma of the US, UK and Europe. It is a BIG part of why we see the revolts in North Africa and across the Middle East: The reason for change is higher food prices. The poor workers are tired of their pittance & governments that turn their regal backs.
    As you know, historically when we have bad periods in North Africa and the Middle East that the dollar has rallied BUT NOT THIS TIME. The dollar is falling not only against the six major currencies, but also against gold and silver.
    Real inflation is more than 7%, headed for double that, as a result of QE1. Next year the result of QE2 and stimulus 2 will start to drive up inflation again. Next year we will see inflation in excess of 20% and in 2012 and 2013 we will the effect of QE3. That should take us over 30% and this is hyperinflation.
    In August, I expect a debt downgrade for the credit of the US. $100.00 oil along with food price inflation will bring a loss in consumer buying power. The above mess means that future currency will have to be backed by gold or silver or both. Multilateral acceptance will not be an option because such backing is the only way that we can slavage the financial system.
    The world will bear witness to the these facts:
    1. unbacked currencies and
    2. fascist economic policies do not work.
    They lead to the subjugation of the people and destroy the quality of life for everyone except the rich. They lead to revolutions; they can even lead to war.
    A gold standard guarantees stability, enforcement of law and the unbridled excesses of Wall Street and banking. We need Glass-Steagall back and we need long, LONG prison sentences for the persons who caused this mess.
    So, knowing where we are headed, maybe the UK can see more clearly why I feel so strongly that the UK should not stand alone; the UK should unite itself strongly with the EU; otherwise, there is little hope of riding out the storm.

  • Comment number 55.

    54. At 5:07pm on 05 Mar 2011, BluesBerry wrote:
    With all your writing about interest rates and inflation, perhaps it would do you good to read Bernanke's latest logic.
    The Federal Reserve is telling us that INFLATION is needed to overcome the "overhang" created by debt. Of course inflation doesn't create employment; it just distorts prices up.
    Mr. Bernanke says that he can end inflation whenever he wants; he just has to increase the American-near zero interest rates. This isn't exactly the truth, but the truth ain't pretty: If inflation ends, deflation takes hold and guess what?
    The American economy will collapse into a third world entity, somewhat like Zimbabwe. What's more, you can't turn inflation/deflation on and off like hot and cold water.
    Also, Bernanke's plan (such as it is) fails to promote stability, or to accomplish (or even try) bank reform. For three years the Fed has been assisting banks to get rid of bad debts (which the banks caused themselves via subprime). These banks STILL HOLD BAD DEBTS. Are you ready for this?
    The Bank of International Settlements, the FASB and the government say it’s fine to keep two sets of books. In most other countries, persons who keep two sets of books end up in prison.


    Ben Bernanke? Be very afraid...he still has his finger on the button of that photocopier, ready to run off a few more $1 billion bills. Max Keiser refers to him as the very worst financial dictator...wants to value down the $ then demand everyone else stops playing protectionist games!

    Anyone other than the head of a central bank who printed fake fiat money like that would be thrown in prison.

  • Comment number 56.

    This is a tired old British anti-European argument that the euro won't work because of the idea that one size fits all isn't appropriate. I think this totaly misses the key point of the Euro which is to force economic convergence. To put it another way, how is economic convergence going to be achived other than by forcing some rather unpleasant adjustments processes which may in some cases take a considerable period of time. The long term game plan is to end up with an integrated economy of 400m+ people which can rival the US.

    But putting this argument on its head, how can the UK operate one currency when there are such huge regional divergences. Why should Scotland with its own unique set of economic circumstances have to follow a monetary policy which is driven by the whole of the UK. Why should London where the economy remain strong and house prices are rising be following the same policy as the more depressed parts of the Midlands or the North?

    The USA is no different - there are huge regional variations. House prices are in the doldrums in Arizona while New York real estate is still strong.

    The sad fact is that for all the "terrible intractable problems of the Euro" about which we have been hearing for the past 10 or so years, Europe is still faring no worse and probably better as a whole than the UK in terms of economic growth and inflation. As for the future, their banks are stronger, their workforces are more flexible, their infrastructure is far superior and their levels of social support are probably also better.

    Isn't it time we woke up and started to smell the coffee?

  • Comment number 57.

    43 `Unless member nations of the Eurozone are allowed to fail there can be no market economy to force efficiency across their national economies.'

    We used to call that war and revolution and if the EU means anything it means the end to such dreadful ruin across Europe. It would be better if we all lived on rations like those poor starving MPs than have that dreadful business all over again.

    There has to be a peaceful and constructive way out of this dilemma. What is missing is the imagination and the leadership to seek out such a solution.

    The failure in both Europe and the UK is that the ruling elite forgot that in order to achieve the social-democratic ideal you had to have an economy capable of generating the value and the surplus that allows the state to redistribute the wealth in a manner that is equable.

    Apart from the Germans and the Dutch all other participants in the Euro saw it as an opportunity for a free lunch. Their problem now is that they find whilst that lunch was very long and enjoyable the bill has to be paid but their economies are too bloated to allow them to get up from the table.

    This is a catastrophic failure of leadership which sadly, still continues.

    In my view to argue for market economies in the current climate is a bit previous. The economic and social need is to get people back to work, including those still generously rewarded employees of the state. This cannot be done under free market, free trade conditions as our costs are far too high. So we will have to rig the market. But then, if we can do that for banks then we can do it for anyone else.

    I wholly accept that this can only be a temporary phase but once we have the economic basis of value and a generated surplus across all economies in Europe, it is then that the political argument as to the distribution of that wealth can proceed.

    All that is happening at the moment is that everyone is quarreling over the size of their slice of the cake. I seem to recall from the Seventies that this argument can only be resolved by baking a bigger cake. So lets get on with the recipe: should it be a fruit cake, a sponge or a madiera? I fear we are back to all those Tea Party jokes again.

  • Comment number 58.

    #56

    " I think this totaly misses the key point of the Euro which is to force economic convergence "

    Correct.

    But it has so obviously failed to do this! National governments have either essentially cooked the books or been unwilling to impliment the necessary policies because of local political expediency.

    With unit labour costs (essentially a national measure of productivity) continuing their wide divergence trend between individual nations ( circa 40% between some of the PIIGS and Germany since the introduction of the Euro) plus the sovreign debt issues have created a situation where eg Spain has almost revolutionary levels of unemployment and eg Greece and Portugal unable to sell sufficient goods to keep their economies going because of their poor productivity.

    It may not be right to blame this entirely on the Euro but what is needed now is a solution and getting people back into productive competitive work before and just fixing the banking issues is only one part of this. I assure you I don't have an anti Euro mentality but the only way I can see of getting Greece, Spain, Portugal and Southern Italy back to work is either rapid massive wage and cost cuts in those places ( almost inconceivable in reality) or some sort of local devaluation. Anything else will certainly take decades, even if it works which is uncertain.

    Are we willing to see a couple of generations having massive unemployment and collapsing living standards in those countries just to keep the Euro? Or do you think the Germans and a few other Northern Europeans are willing to keep working like crazy and paying to keep tens of millions of other Europeans unemployed? Have a look at the recent election results in Germany. I think the answer is no they won't. A change in German and other European leadership is on the way and those who have a political and emotional link to the Euro will be replaced by a much more pragmatic mindset.

  • Comment number 59.

    #56 #57

    Some facts re last 10 quarters GDP growth Eurozone (incl. Germany), UK and Germany (Source: Trading Economics)

    Eurozone UK Germany
    2010 Q4 0.3 -0.6 0.4
    Q3 0.3 0.7 0.8
    Q2 1.0 1.2 2.2
    Q1 0.2 0.3 0.6
    2009 Q4 0.1 0.4 0.3
    Q3 0.4 -0.2 0.7
    Q2 -0.1 -0.7 0.5
    Q1 -2.5 -2.4 -3.4
    2008 Q4 -1.9 -2.0 -2.4
    Q3 -0.5 -0.9 -0.3

    UK 2011 Q1 ? (Dire, I reckon)

    So over the last 10 quarters Eurozone (with all the problems of the PIIGS) slightly better than UK, Germany much better.

    Throw in better Central Bank control, lower inflation and sensible interest rates, and a better / fairer social model.

    No contest - time to join the Euro.

  • Comment number 60.

    #59

    Forgot to add that Eurozone has better levels of investment, R&D spend and is more competitive than the UK, despite the social framework.

    58. At 09:22am on 06 Mar 2011, yewlodge wrote:
    A change in German and other European leadership is on the way and those who have a political and emotional link to the Euro will be replaced by a much more pragmatic mindset.


    It will not be a pragmatic move by the Germans to ditch the largest single market.

    There is 'grumbling on the ground' re paying for the indiscpline of others but is tempered by realism that the Euro has been a real winner for Germany.

    Incidentally the Germans have a capacity for moaning - it goes hand in hand with a perfectionist mentality.

    So Germany won't leave the Euro and the PIIGS can't.

  • Comment number 61.

    Richard Dingle

    Interesting stats but they don't address the fundamental issue that many of the PIIGS, or at least substantial areas of them in the case of Italy are uncompetitive and getting even more so by the month. They are not currently or in the forseeable future going to be able to sell enough of their services or products and earn a living. Hence Spanish and Greek unemployment are at record levels. 40% of under 25 year olds in Spain are unemployed even allowing for the black economy there.

    In fact your stats support my view. Germany's spending on R&D only improves their competitiveness and makes things even worse for the rest, including the UK. Membership of the Euro zone is neither here or there in motivating R&D spend. Pfizer for example pulling out of the UK is nothing to do with the Euro What is needed for R&D is some technologically literate government and we haven't had that for decades.

    I really don't agree with you that this trend in employment and social investment between north and south Europe is acceptable or sustainable. I don't agree that Germans (and a few others) will be willing (nor actually is it desirable for the unemployed in the PIIGS or elsewhere) to continue paying for decades to keep it that way. The recent election results in Germany support my view - they aren't just "moaning" - they are voting for a major change of emphasis. We have the ludicrous situation in Spain at the moment where a significant amount the bailout money essentially provided by Germany is being used to boost Spanish consumption of German made goods! Its doing virtually nothing to improve Spanish competitiveness or GDP. This isn't likely to be acceptable to anyone for long. And when this tranche of money runs out as it has in Portugal?

    I also don't accept your final analysis. Germany can leave the Euro without ditching the EU as a market (A not entirely disimilar situation arose in the Hanseatic League a few centuries ago)and some future leaders of the PIIGS may feel they actually have little to lose. They are heading rapidly to having little already. Yes either will have unfortunate and difficult consequences but probably no worse than where things are headed right now with no change of direction in sight.

  • Comment number 62.

    The bureaucrats in Brussels are pretty thick really as they are missing a golden opportunity to strengthen the overall Eurozone economy by e.g. harmonizing a maximum rate of VAT for inter EU trading (say 5% on EU 'made' goods and services) and using higher VAT rates as a type of import tariff on selective protectionist priced imports coming into the Eurozone from places outside of the EU that are e.g. bending the rules with export tariffs, devalued currencies and one country has around 46 protectionsist measures specifically targeting the UK with special tariffs.

    This is definitely not the time for any country to join the Euro currency just as interest rates are taking off and some countries likely to be forced out of the Euro with higher and higher interest rates.

    The pressure on the EU import prices with fuel and food and commodity price inflation heap pressure on the stability of the Euro currency and rekindle sovereign debt crises across Europe ... because a weakening of the Euro excahange rate will exacerbate the effect of these import prices.

    The ECB at least has more vision and recognition of the inflation problem than e.g. the BOE MPC ... but it is failing to deal with the problems and pull the main lever for growth and to control inflation ... that is VAT is far too high/low in Britian and across parts of the EU regarding various goods and services.

    If the ECB was clever it would realise that it could persuade individual members to manipulate their sovereign VAT levels and provide a necessary degree of stimulation and protection on the vital sustainable growth output sectors and individual products and services.

    Their likely and imminent failure to do this (as with Britian also) is also likley to become the next catastrophic economic mismanagement that will in time crash the GBP/Euro and economic fabric of Britian/EU in terms of stagnation, inflation, slump, debt crises etc.

    VAT is far too high and needs slashing/raising by up to 80% across Britain/Europe and is our collective 'get out jail almost free card' ... if those in power can't see this ... we're all in for much more bad news.

    Same with Ireland, who need to look closely at their ridiculous overall 21% VAT rate (Ouch!) ... use it to penalise foreign unnecessary imports and lower prices where possible to put more money in people's pockers to spend thier money wisely ... and survive.

    I think the Irish may lead the way on this when they figure out how best to do it i.e. use VAT as both an import tariff and to lower prices to improve real net disposable incomes.

    For all those cowardly and useless politicians and naysayers ... you have no idea yourselves ... there are no risk free options available to Britain, Ireland and fellow debt and deficit PIIGS. The BRIC's and USA would not like it ... but they have their own bad practices and protectionsit and illegal trade scams ... like deliberate theft of intellectual property etc.

    This is make or break time for all EU members ... or govts and bureacrats have to get it right ... or things economically will get much, much more difficult.

    If the EU has no way forward on fuel/energy policy, food etc ... what is it there for?

    Simples! First and foremost - It's the VAT, stupid!

  • Comment number 63.

    61. At 10:58am on 06 Mar 2011, yewlodge wrote:
    I really don't agree with you that this trend in employment and social investment between north and south Europe is acceptable or sustainable.


    The question surely is this.

    Would the PIIGS do any better outside the Eurozone ?

    It would mean defaulting on sovereign debt (denominated in Euros it would be impossible to service in their own new devalued currencies), it would lead to a decrease in North South investment.

    Independence in the sense of setting interest rates and devalueing currency is illusionary and just moves the problem somewhere else (inflation). It has not worked for the UK in the past 50 odd years.

    Best to tough it out.

  • Comment number 64.

    #63

    "Best to tough it out."

    You can tough it out if there is a realistically achievable end point based on a credible plan of action to rebalance the fundamental competitivenss problems which plagues most of the PIIGS re northern europe.

    At the moment there isn't and I just don't think the populace are going to vote for continuation of the same trends ad infinitum. I can't find one credible commentator who sees a significant drop in Spanish, Greek and southern Italian unemployment in the next decade given the policies in place at the moment. I truly wish it was otherwise.

    As for sovreign debt at least three of them are in the position already that they can't afford the interest let alone to repay the debts. A situation that is about to be made worse by the ECB raising base rates and the consequences of that on Portugal and Spain in the coming six months when they try to "roll over" the huge existing bonds that are maturing then. Portugal effectively hasn't sold a single bond to the global market in nearly a year. The ECB has had to buy the lot.

    And will Germany et al just keep pouring more money in to enable this to continue as the debt and interest charges rise? That is just kicking the can down the road too, moving the problem to next year and making it even bigger. As soon as Merkel effectively loses power, almost certaibnly within a year, I am sure there will be a major shift of attitude.

    Until there is a plan to end the massive and growing chasm of competitiveness between north and south and we get essentially all of Europe able to earn a living then unfortunately I can only see this ending in tears. I wish it was otherwise but thats where all the numbers point.

  • Comment number 65.

    Inflation is apparently an instrument of enervation. The Uk is not experiencing inflation at the moment, this will occur when interest rates rise.
    What is taking place with commodities today, is simple profiteering, the factoring of risk, ie profit, into price. Where those profits go is what is important. They mostly, do not benefit UK investment. Basically, in simplest terms, price hikes in the oil and sooner or later gas, are a rip off. That's right, pirates off the starboard bow, astern, aport and oh my god, what's that surfacing beneath us. Oil she blows.
    This pricing inefficiency with oil, occured previously, within recent business memory and was neatly wrapped up inside the credit crunchie. Was the problem really credit crunchiness or was it all a clever scam to boost oil profits. It's an evil world out there, be careful.
    The UK is now, according to DC, the world's hospital and doing it for free. There is no reason on earth why those from abroad, given health care in UK, shouldn't pay for it. That this matter is not taken seriously, gives a truth to current NHS reform. Health care, state benefits also, that are given to foreign nationals in the UK, should be recouped from the sovereign governments responsible for their citizens abroad.
    How many Brits are abroad, living of foreign benefits - not very many. It would be worth privatising this task and reaping a significant return on this countries investment in caring for our population. The free ride must end, we can't afford it and Mr. Cameron, shame on you for defending these rip offs of our resources - l could hardly believe what l was reading in your recent letter on the topic, to the daughter whose mother was in poor health. l think that Chancellor GO, should have a few sharp words with a very silly knee jerk by the PM.
    People from around the world, are literally and actually arriving at Heathrow and walking straight into NHS hospitals for health care and they are not private patients. I do not know if that act is actually legal, but allowing it to occur, most certainly is not.









  • Comment number 66.

    @11. At 2:18pm on 04 Mar 2011, Averagejoe wrote:
    "Germany is strong because it is a net exporter, which keeps its Government debt low."

    http://www.suite101.com/content/g7-nations-desperate-for-big-loans-a91949

    This is an old link. I guess the debt levels are cumulative government and private debt totals. But to say that Germany's debt is low, is contradicted by this article.

    http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

    Again, the data seems somewhat outdated, but debt as the proportion of GDP is higher in Germany. Depends on how much you can rely on any GDP figures or how much credibility you can place in using GDP as an indicator.

    Agree wholeheartedly with the idea of debt-free currency. How would you implement that though? Surely it would need to be backed otherwise it will be entirely on the good faith of the government, whom I wouldn't trust at all. Also, how would you intend to have the debt-free currency at a constant level? Money leaving the shores to pay for imports: this would reduce the supply resulting in a recession, even a depression. Merely printing more to facilitate the trade in the UK would devalue the currency leading to inflation. It's not an issue that you could reliably solve via taxation (reduce tax levels when the money is used to pay for imports?). Ultimately it would simply be using a different method to get to the same position we are in at the moment which I assume most people would rather try to avoid.

  • Comment number 67.

    @60. At 09:55am on 06 Mar 2011, Richard Dingle wrote:
    "Forgot to add that Eurozone has better levels of investment, R&D spend and is more competitive than the UK, despite the social framework."

    I find your use of "despite" interest in this regard. Perhaps you could expand on your reasoning for it? Was it referring to the UK's or European's?

  • Comment number 68.

    Portugal yield rates have hit the same level Ireland did before its bailout. Expect to see another default/bailout in the next two weeks. The third domino is about to fall. This crisis is no where near over yet.

  • Comment number 69.

    66. At 7:31pm on 06 Mar 2011, Stuart Wilson wrote:


    Agree wholeheartedly with the idea of debt-free currency. How would you implement that though? Surely it would need to be backed otherwise it will be entirely on the good faith of the government, whom I wouldn't trust at all. Also, how would you intend to have the debt-free currency at a constant level? Money leaving the shores to pay for imports: this would reduce the supply resulting in a recession, even a depression. Merely printing more to facilitate the trade in the UK would devalue the currency leading to inflation. It's not an issue that you could reliably solve via taxation (reduce tax levels when the money is used to pay for imports?). Ultimately it would simply be using a different method to get to the same position we are in at the moment which I assume most people would rather try to avoid.

    ...
    Postive Money/NEF proposals seem very well thought out. The BoE, independently, would be responsible for monitoring the amount of money is circulation and would increase the supply as required and pass the money to the government to be spent through public spending. If there is too much money, they could stop increasing the money supply and price rises will soak up the spare money and infaltion would come to an end, or the Government could tax it away and return it to the bOe. If money is flowing out of the country, more would be required to meet the UK needs of course, to meet the economies needs. The big advantage is that the BoE would be making judgements only based on what the economy needs. The current arrangement is that the private banks issue all money as debt. They base their decisions on profit rather than what the economy needs which is far worse. Nearly every time debt free money has been used in the past it has been a success; Tally sticks in the UK (for 700 years!!), and the greenback in the US, and the banks have deliberation put an end to it, because they cant make as much profit. Debt free money is less inflationary because it would ban fractional reserve banking in the process (this is the main source of inflation). The only time the Government has not had a spending deficit in the UK was when we used government issued Tally sticks. This came to an end when the BoE was set up and we have had a deficit ever since. Not a surprise when you realise that the government has to borrow every penny, in order for the money supply to exist. We should not fear debt free money, that fear is spread by the banks who wish to keep us in debt servitude. The only risk is of printing too much, but the government would always be debt free which is a better position to be in than at present. One last point that is rarely understood. Because nearly every pound is issued as a debt, where does the money come from to service the interest on this debt? SUBSEQUENT DEBT. Work by economist Steve Keen has shown that debt based money supplies must constantly grow simply to service the interest on the debt, which is not sustainable, and because it involves interest on interest it is compounding or growing exponentially. As a result, it is always doomed to fail. For this reason alone we must move to a debt free money supply. History has proven it works well. When the US used the greenback they had one of the most prosperous periods in their history. It was a similar case in the UK with tally sticks. Watch the "Secret of Oz" for more info.
    James Garfield President in 1881 "Whosoever controls the volume of money in any country is absolute master of all industry and commerce... And when you realise that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate."

    "That is simple. In the colonies we issue our own money. It is called Colonial Script. We issue it in proper proportion to the demands of trade and industry to make the products pass easily from the producers to the consumers.

    In this manner, creating for ourselves our own paper money, we control its purchasing power, and we have no interest to pay to no one."
    Benjamin Franklin

  • Comment number 70.

    55. At 10:49pm on 05 Mar 2011, doctor bob wrote:
    ...
    I agree Bernacke is one of the most dangerous people in the world. He makes his decisions based on a theoretical understanding of neo classical economics, which is flawed as pointed out by Steve Keen and others. What he is doing, QE2, is making everything worse, and probably will destroy the dollar in the process. 1920s germany all over again. They never learn. We need to get rid of our debt based money supply for good, its the only way forward. The US public will figure it out eventually, but it may be too late for the dollar.

  • Comment number 71.

    66. At 7:31pm on 06 Mar 2011, Stuart Wilson wrote:

    This is an old link. I guess the debt levels are cumulative government and private debt totals. But to say that Germany's debt is low, is contradicted by this article.


    Germany's debt as a percentage of GDP is higher than the UK. However there is a good reason for that, namely the 1.6 BN Euros, over 20 years, spent (mostly borrowed) on bringing the old East Germany up to scratch.

    You could say they actually did something with the money. It is a one-off, it is not structural.

  • Comment number 72.

    67. At 7:34pm on 06 Mar 2011, Stuart Wilson wrote:
    @60. At 09:55am on 06 Mar 2011, Richard Dingle wrote:
    "Forgot to add that Eurozone has better levels of investment, R&D spend and is more competitive than the UK, despite the social framework."

    I find your use of "despite" interest in this regard. Perhaps you could expand on your reasoning for it? Was it referring to the UK's or European's?


    It was a side swipe at the theory that enterprise only flourishes in low state spend / low tax environments currently finding a 'second wind' under the Coalition.

  • Comment number 73.

    69. At 8:30pm on 06 Mar 2011, Averagejoe wrote:
    "Tally sticks in the UK (for 700 years!!), and the greenback in the US, and the banks have deliberation put an end to it, because they cant make as much profit."

    I've seen The Money Masters, the prequel to The Secret of Oz (and also the Secret of Oz as well), which is where the majority of my education into how the system works (sic) comes from. I'm aware of the role the BoE played but was astonished that the Tally Sticks were used to purchase the initial shares of the BoE. Bill Still did not go into any lengths to explain the questions I had put to you, hence my reasons for asking them.
    Anyway, so far so good - all that needs to happen is some form of legislature or at least guarantee that the debt-free money won't be used to enact a private central bank. There also needs to be some form of education in place to ensure we don't end up with well-meaning people like Woodrow Wilson who was pressurised into setting up the Fed Reserve - an act he later very much regretted, but by then it was obviously too late.

  • Comment number 74.

    People are interesting. It is always important to separate the rhetoric from the action. Listen to what people say, watch what they do. Rarely do the two agree.

    Recently however, biases of all kinds aside, I am impressed that Mervyn King's actions and rhetoric are in harmony. I think in the interests of the UK and in the interests of humanity, as a humanist, he should be supported.

    We must not forget what led to this situation. Banks, and poor regulation, led to this situation.

  • Comment number 75.

    #16 >>I have only posted on EU Member Nations forced to give up their currency and use the Euro as a condition of membership of the EU

    Both Britain and Norway are members of the EU and yet they have NOT been forced to give up their own currency !! There appears to be some confusion between the EU, on the one hand, and the Eurozone, on the other !!

    As an aside, some of my Norweigian friends pointed out with malicious glee that, because Norway was not part of the Eurozone, it was left out of the map of the Eurozone on the early Euro coins. With Sweden "hanging down", this left the map with a distinctly....ahem...impression !!

  • Comment number 76.

    #19 >>This will come about because of the failure of markets to fairly distribute oil without wars.

    To fairly distribute oil, America will have to collapse since the average American uses up 100 times as much oil as the average African !! The average European also uses up about 30 times as much as the average African. So, on yer bike, chaps, and use less oil !! Besides, cycling keeps you fit and healthy (if you don't get knocked down by a giant lorry !!).

  • Comment number 77.

    #24 >>The other issue is what is actually left of the EU at the end of this process and as weaker members tend to do better being out of the Euro/EU ... this is the beginning of the end for the EU/Euro ... Hooray!

    I doubt that it will be the end of either the EU or the Eurozone since the EU is merely a political/economic entity whereas the Eurozone is a monetary entity and the two are not the same thing. The Eurozone can exist in a reduced membership state while the EU can carry on being a political/economic entity [and a source of cheap ciggies and booze :-)].

  • Comment number 78.

    #26 >>If the EU raise interest rate and the Bank of England don't follow the pound will devalue against. Now is the time to move some money out of the GBP and into the Euro.

    Smacks of frying pan and fire !! Now, if you move into gold.....

  • Comment number 79.

    #28 >>Probably within a year Merkel will be out of effective power and probably out of office too. Replaced by those with a much "harder" view on the debts of other Euro nations. What then?

    And that may not be the only place it could happen -

    http://www.bbc.co.uk/news/world-europe-12660329

  • Comment number 80.

    #30 You forgot to mention two important points.

    (1) Britain was not the only country to refuse membership of the Eurozone. Norway did that, too. And it's not suffering the same fate as Britain !!

    (2) The "weaker" economies got into the state they are in by maxing out their national credit cards, spending on handouts instead of productive investments and infrastructure. Should the Germans now pay for the other countries' "binge drinking" ??

  • Comment number 81.

    #43 >>We have the EU angling to create a state supported banking system while the UK's Mervyn King has just stated that there is no place in a market economy for organisations that are immune to failure.

    And ole Merv the Nerve said that with a straight face after bailing out many banks with a massive amount of public dosh !!

  • Comment number 82.

    #49 >>On the other side of the possible range of developments you have Greece (Pergamon, Ephesus, Cyrene, Black Sea colonies – funny more than 2000 years on people are still keeping family ties!

    Sorry to be pedantic but Greece as a nation did NOT exist until late in the 19th century. Until then, is was lots of little bits like Atherns, Sparta, Thebes, etc. They are still arguing over whether Macedonia is Greek !! They want to glory of having Alexander the Great as a "Greek" but not the baggage that comes with it, i.e. accept Macedonia and the Macedonians as part of Greece !!

    Similarly, Germany also did NOT exist until late 19th century when the Prussian kings, forceably or otherwise, "united" the lot of them and became the Kaisers of Imperial Germany !!

    So, all this "nationalism" has little to do with economy and lots to do with political maneuvering !!

  • Comment number 83.

    #57 >>The failure in both Europe and the UK is that the ruling elite forgot that in order to achieve the social-democratic ideal you had to have an economy capable of generating the value and the surplus that allows the state to redistribute the wealth in a manner that is equable.

    Ah but in Europe (including the UK, the politicians decided to distribute the potential surplus first and then worry about getting it later; meanwhile they will simply borrow it !! It's called spending tomorrow's income today and worry about earning it later; or, better yet, let someone else worry about earning it !!

  • Comment number 84.

    #69 >>"That is simple. In the colonies we issue our own money. It is called Colonial Script. We issue it in proper proportion to the demands of trade and industry to make the products pass easily from the producers to the consumers.

    >>In this manner, creating for ourselves our own paper money, we control its purchasing power, and we have no interest to pay to no one."
    Benjamin Franklin

    Unfortunately, now there are (a) no more colonies and (b) whatever currency available is based on fiction and not gold !! Helicopter Ben is fighting a rear-guard action to slow (not prevent) the collapse of the US $ !!

    As some other blogger likes to put it - Be afraid. Be very, very afraid !!

  • Comment number 85.

    Ishkandar, loads of late night blogs here and I agree with all of them. I hope you are getting some sleep throughout all the worry of the economic mess the world has weaved for itself.

    No doubt Stephanie will have a new blog this morning when I'm at work on the growth focus (rhetoric) of the government in the run up to next week's budget. Again government and it's advisers are blindly pursuing the impossible dream of economic growth as our saviour instead of accepting the reality that there is not going to be enough cheap concentrated useable energy sources and associated essential food and commodities to power growth for all if any of the world's developing and developed countries. When will the first major political figures start to acknowledge the reality that we need to focus on a new economic model? This model must accept sustainability at it's core and take control of the money supply and focus on projects and scientific and industrial development to address the impending crisis of energy and food shortages and cost. This will inevitably involve more local trade and employment and collaboration internationally to develop new energy sources and sustainable local agriculture and employment therein.

  • Comment number 86.

    Any chance of you (and a colleague perhaps )write a piece on how other 'federations' deal with the issue. (USA, India even China) California is a big country!

  • Comment number 87.

    77. At 01:42am on 07 Mar 2011, ishkandar wrote:

    #24 >>The other issue is what is actually left of the EU at the end of this process and as weaker members tend to do better being out of the Euro/EU ... this is the beginning of the end for the EU/Euro ... Hooray!

    I doubt that it will be the end of either the EU or the Eurozone since the EU is merely a political/economic entity whereas the Eurozone is a monetary entity and the two are not the same thing. The Eurozone can exist in a reduced membership state while the EU can carry on being a political/economic entity [and a source of cheap ciggies and booze :-)].

    ..................

    Once the balance of members have left the Euro ... then the question is what will the Euro/EU represent ? Will not be the Euro/EU and will have to be called and represent something different albeit still 'European'?

    Another issue is countries being 'forced out' as opposed to 'opting out' of the Euro?

    The Irish can show us all how to operate VAT as a main macro economic policy tool ... if they're bold and get it right with strong VAT reductions and increases as appropriate ... the Tiger can and will roar again pretty soon.

    If the ECB and closed door eurocrat expense millionaires get it wrong ... I will be proved right ... Hooray... if 'they' start using VAT in a bold way (leveraging their global market power as the EU has more collective clout than even the USA) ... then they will follow my advice and I will agree with them

    Leaving VAT as it is as a nonsense economy damaging tax in many EU member states and doing nothing about the protectionsism direceted at some EU member states like the UK; will break up the Euro for sure at some stage unless the ECB plays the game and starts 'protecting' what needs 'protecting'.

    Currently the only things protected in our bent UK market economy are 'over-privilege' and 'over exposure'.

    The ECB are now going to be 'tested' ... about time ... it will be very interesting indeed!

  • Comment number 88.

    85. At 07:13am on 07 Mar 2011, Sage_of_Cromerarrh wrote:
    Ishkandar, loads of late night blogs here and I agree with all of them. I hope you are getting some sleep throughout all the worry of the economic mess the world has weaved for itself.

    No doubt Stephanie will have a new blog this morning when I'm at work on the growth focus (rhetoric) of the government in the run up to next week's budget. Again government and it's advisers are blindly pursuing the impossible dream of economic growth as our saviour instead of accepting the reality that there is not going to be enough cheap concentrated useable energy sources and associated essential food and commodities to power growth for all if any of the world's developing and developed countries. When will the first major political figures start to acknowledge the reality that we need to focus on a new economic model? This model must accept sustainability at it's core and take control of the money supply and focus on projects and scientific and industrial development to address the impending crisis of energy and food shortages and cost. This will inevitably involve more local trade and employment and collaboration internationally to develop new energy sources and sustainable local agriculture and employment therein.

    ...........
    This is spot on. The end of cheap oil will force us to become more sustainable. Globalisation will have to give way to self sufficiency, and we will have to start manufacturing closer to markets once again, as the cost of shipping products around the world will no longer make it worth while. Unfortunately the destruction of our manufacturing base will make it difficult and slow to adjust, and the cost of building everything again will be much higher. This is another reason why we need to get rid of our debt based money system, so that governments can invest in new infrastructure without creating any debt. Debt combined with expensive energy, means no profit, and I cant see how you could squeeze workers wages any lower, in a world of rising commodity prices. Capitalism ability to suvive crises is going to be put to the test.

  • Comment number 89.

    84. At 03:25am on 07 Mar 2011, ishkandar wrote:
    ....
    Helicopter Ben's 'solution' is to dillute the value of the dollar to death to keep asset prices high. This can only lead to hyper inflation circa 1920s Germany. I didnt't work then and it wont this time either.

  • Comment number 90.

    @80. ishkandar wrote:

    "#30 You forgot to mention two important points.

    (1) Britain was not the only country to refuse membership of the Eurozone. Norway did that, too..."

    And you forgot to mention that my post #30 dealt only with EU countries. Norway was not and is not an EU member; UK was and is.

    "(2) ... Should the Germans now pay for the other countries' "binge drinking" ??"

    Could you perhaps be loading the dice just a teensie-weensie bit? It depends doesn't it which end of the telescope one is looking through. I think you'll find there are plenty of people in Grece for instance living pretty hard lives on pretty low incomes.

    And BTW have we in UK *not* been "maxing out (our) national credit cards, spending on handouts instead of productive investments and infrastructure"? Pots and kettles?

  • Comment number 91.

    @75. ishkandar wrote:

    "Both Britain and Norway are members of the EU"

    You should check your facts!

  • Comment number 92.

    There we go again: Read the top of this blog, right: "I'm Stephanie Flanders, the BBC's economics editor. This is my blog for discussion of the UK economy, how it relates to the rest of the world, and how it affects us all."

    This again is not a blog about the UK... You could have written about the coming econd banking crisi of the UK, about the UK's bad growth figures as compared to northern European countries... Anything about the UK... But since that won't be a pretty picture, well, why not focus on the same Euro mantra again...

    Sorry Stephanie, worthless blogging... Focus on the UK, will ya?

  • Comment number 93.

    59 Richard Dingle.

    Whilst I am sympathetic to the idea of the Euro there remain substantial issues for both the British and Euro countries if we joined now. It would help some issues but make others worse. I think in the immediate term we would come out in a rash rather like our friends in Ireland. So my suggestion to the Europhile lobby is all in good time.

    75 Ishkandar

    Norway is not in the EU. I expect you really meant Sweden and Denmark.

    83 Ishkandar

    Just the point I was making.

    92 burtine

    We might be an island but we are not isolated. There is no fog in the Channel at the moment so Europe is reachable. We even have a tunnel connecting us by train to France and a land frontier in Ireland. Although how long the latter will persist is open to question.

  • Comment number 94.

    Central Banks don't set our major interest rates.
    That role belongs to the international Bond markets where inflation and risk adjusted rates are selected by flows of investment funds.
    I somehow doubt whether a quarter or even half point rise in the ECB's base rate would make much difference - if any at all - to the 10 and 20 year Bond rates of either Germany or any of those threatened peripheral economies.
    After all, the intense rhetoric about the so-called British Debt Mess last year hardly scratched Bond yields. Which only shows that credit rating agencies had lost all credibility. So why worry?
    Most household borrowing in the Eurozone is for home purchases and HP deals that are fixed at rates further up the yield curve than the ECB's rate anyway.

    If Trichet really believes changing the ECB rate will quell inflationary pressures from oil and other commodities, just let him get on with it!!

  • Comment number 95.

    @64. yewlodge:

    A very bleak analysis - which doesn't, alas, mean it may not prove correct.

    But is it inevitable? What will have been the point of setting-up the EU (even it stayed limited to only being a "single market", with national currencies) if it wasn't to bring about a general levelling-up of living-standards across the whole of its territory? Of course that was the main motivation for the poorer countries to join it, while the richer ones (principally France, Germany and the Benelux countries) created it in the first place for political reasons rather than economic ones.

    Unless the richer countries, especially Germany (which has been further enriched by its membership) are willing to tolerate some transfer of their wealth to the poorer countries, the raison d'ètre for the EU disappears.

    "Until there is a plan to end the massive and growing chasm of competitiveness between north and south and we get essentially all of Europe able to earn a living then unfortunately I can only see this ending in tears".

    And how do we get that without investment? Yet the German government stepped-in to prevent the investment by VW in additional production facilities in Slovakia by giving VW a €100 million bribe (totally contrary to EU competition regulations) *not* to do it, so as to keep those jobs in Germany. This is not only not helping a poorer country to improve itself, it is actively pursuing "beggar-my-neighbour" policies.

    With this kind of behaviour, I don't think the Germans have any cause now to start getting self-righteous. Otherwise they should be prepared to kiss the EU goodbye.

  • Comment number 96.

    From Stephanie's column: "Strong hints yesterday from Jean-Claude Trichet that the ECB would raise rates next month will not have gone down well in Portugal and Athens. They need higher interest rates like a hole in the head. But as these governments will have learned by now, that is how the eurozone works. One interest rate very rarely fits all."
    ----------
    Ludicrous. Think how marvelously would the drachma and punt interest rates fit Greece and Ireland if they were out of the euro! 26%, 35% -- just have your guess.

  • Comment number 97.

    #95 The data for Spain and Portugal ( don't have the numbers for elsewhere) shows that there was far more investement from Northern Europe during the 1980's and 1990's ie before the Euro than in the decade since. Apart from agriculture and EU road and rail projects I know a lot of this was private property, golf courses, tennis clubs etc but nonetheless it created a massive tourist infrastructure. Oversupply eg just how many golf courses do we need? plus a shortage of money in the pockets of northern consumers ( banks and governments have grabbed it all) means no new infrastructure building work in Spain and Portugal as there is far too much already for the European disposable income to use it all. A substantial devaluation would have been the previous answer, make it cheap enough and people will use it. Then we wouldn't be looking at 40% youth unemployment in Spain. Now? No-one has a clue what to do to get all these people back to work and get the economy moving again.

    #96 Actually history suggests you are wrong. The day before the UK left the ERM interest rates went up to 16% and were 6% or even less a few days later. Of course the currency then was substantially devalued. Indeed if Portugal, Spain et al were to leave the Euro now the same would happen. However interest rates become a substantially internal matter. Within a couple of years from about 1991 onwards the UK experienced the start of a boom in GDP which lasted until the politicians and banks lost the plot.

  • Comment number 98.

    @corum-populo-2010

    "Once a country loses it's own currency - it loses control of it's basic sovereignty and ability to adapt to it's population's wide spectrum of needs."

    "The Euro, as a currency, has failed to meet the majority of
    new EU Nation Member States' actual economies. To join the EU a nation is forced to use the Euro - what kind of democracy of the European Union is that?"
    It is also "forced" to do a lot of other things you don't seem to object to, such as stop levying customs duties on imports from the EU. Don't want that? Don't ask to join the EU.

    "Who decided that the Euro was a worthy condition of Membership of the EU?"
    A majority of UE countries. That's democracy for you.

    What would befall Ireland and Greece, were they not Eurozone and UE members? It's a horror story to think about it. Interest rates would be 30%, not the few percentage points that so shock Eurobashers.

  • Comment number 99.

    @62. nautonier wrote:

    "Simples! First and foremost - It's the VAT, stupid!"

    OK, so you have the answer. Protectionism, in a word.

    You could be right. Certainly free trade has ceased to be of much benefit to UK. But wouldn't we be severely damaged by countries which we need to export our goods to (USA for instance) erecting retaliatory tariff barriers against us? Not to mention the trade sanctions which the World Trade Organisation would almost certainly introduce against any bloc (such as the EU) which introduced discriminatory trade practices along the lines you're proposing? Could we live with that?

    Then there's the question of how do you stop individual EU countries using discriminatory VAT rates in order to discriminate *against other EU countries*? Ireland already uses corporation tax to do this, much to the annoyance of the Germans in particular.

    One cardinal principal of the EU (whether one happens to subscribe to it or not) was to create a level playing-field through "harmonisation", of taxes as well as of trade policy. Ideally there would be only one, uniform, rate of VAT across the EU, and there is already considerable pressure - led by Germany - for harmonisation of budgets and fiscal policy across the Eurozone. Your proposal seems to go in the opposite direction. How do you deal with that objection?

  • Comment number 100.

    4. At 1:14pm on 04 Mar 2011, John_from_Hendon wrote:
    The Euro is working very well indeed.
    +++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
    Yes the Euro is doing very well, out of the seventeen countries who have adopted it five are on the edge of financial and moral bankruptcy.
    Then we have the others :-
    Austria - now struggling due to over commitment to banks in emerging Euro countries, Hungary in particular.
    Belgium - In turmoil politically but insignificant finacally
    Cyprus - On the downward slope....
    Estonia - Doing surprisingly well but still seen as a taker rather than a giver within the EU and seen as insignificant due to the size of its GDP
    Finland - Not Politically and finacally strong and not a supporter of further bail outs. There are big questions being asked about its economy.
    France - Is quietly struggling along with its finances and unemployment causing concern along with the national debt and deficit. A strong supporter of the EU and Euro but at present lack the were with all to give the support that is needed.
    Germany - The shining light and the driving force of the Euro. However there are murmurings now about how far and how much they will have to go and give and there are calls to stop the bail outs of what are seen as failing states.
    Greece - Are they now past the point of no return.
    Ireland - Down and probably out and are now looking for further assistance with their ballooning debt in the form of reduced bond rates.
    Italy - If Belescoini goes they could well collapse. Sad to to say I know but that is the probable truth.
    Luxembourg - Who cares?
    Malta - At the edge and looking for assistance.
    The Netherlands - Solid and going with the flow.
    Portugal - Still in denial and deeper in than any one thinks.
    Slovakia - ??????
    Slovenia - ??????
    Spain - Still no light at the end of the tunnel with distinct possibility of a collapse at any time.

    Yes the Euro is doing very nicely thank you ...........

 

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