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Third time lucky for Portugal - and the eurozone?

Stephanie Flanders | 13:20 UK time, Wednesday, 4 May 2011

What's the difference between a developing country financial crisis and a European one? The answer is that emerging market crises are usually done and dusted in a matter of weeks - whereas in Europe they really like to drag things out.

Watching the eurozone these past two years has been like watching a car crash in really, really slow motion.

It was more than two years ago that senior policy makers - on both sides of the Atlantic - started worrying about a European "leg" of the financial crisis that peaked in the autumn of 2008. European policymakers were urged to think long and hard about the state of their banks, and the deep financial and economic imbalances that had built up in the first 10 years of the single currency - and how they would respond, if and when, these vulnerabilities came to a head.

By and large, these pleas were ignored. European officials preferred to offer short-term support for their banks and their economies - and hope that their long-term weaknesses would quietly go away. Surprise, surprise, that didn't happen. Now Portugal is the third eurozone country to be asked to resolve the single currency's contradictions the hard way.

Unlike the other countries in the mix, Portugal does at least have recent experience of negotiating with the IMF. This will be its third emergency loan from the Fund in the past 34 years. It also had help in 1977 and 1983.

In announcing this deal, the caretaker Prime Minister, Jose Socrates, suggested that the terms of the bail-out were less severe than they had been for the Republic of Ireland and Greece. He is in the middle of an election campaign - we can't know whether that's true until we see more details, notably the interest rate being charged and the structural conditions.

But there's a reason why Portugal was the third in line for a bail-out, not the first: its fiscal situation is not nearly as bad as the Greeks', and its financial system is not nearly as weak as the Republic's - and has not infected the sovereign balance sheet to anything like the same extent. (Though we expect that up to 20bn euros of the 78bn euros will earmarked for the banks.)

It would be surprising, in these circumstances, if Portugal's programme was as tough as the others. But the word is that there will be plenty of structural reforms included in the agreement, including pensions and the labour market, even if the specific areas listed by Mr Socrates have been saved (for example, he suggested there would be no change to the minimum retirement age - which would be surprising, if true).

The few details we do have, showing the budget deficit falling from 9.1% of GDP in 2010 to 3% in 2013, suggest it is tough enough to be getting along with, at least by the purely macroeconomic yardstick of how far the government is being squeezed.

If that timetable appears more generous than it might have been, that is largely because the starting deficit is larger than previously thought. Remember, until recently, we thought the budget deficit in 2010 would 'only' be 7% of GDP.

When you take the higher starting point into account, the pace of deficit reduction is not much slower than the government originally planned. And pretty ambitious, too, when you consider that the EU and the IMF expect the Portuguese economy to shrink by 2% in 2011 and in 2012.

As I noted a while ago, the countries in trouble in the eurozone have a debt problem and a competitiveness problem, and you can't solve one without trying to address the other. As I said then, if one were starting afresh with the single currency, you would want an effective way to manage sovereign debt restructuring. You might also want to think about economic policies which would make it easier for the less developed members of the eurozone to improve their competitiveness without having to suffer years of economic stagnation.

Of course, the eurozone was not starting from scratch in the spring of 2009. But in the past year the debt problem has at least been extensively discussed, even if it is far from being resolved. By contrast, the serious consideration of how countries like Portugal are going to achieve economic growth in the current environment has barely begun. As Greece, Portugal and others have been finding out, a lack of growth can undermine the credibility of a bail-out programme just as quickly as a lack of political resolve.

Comments

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  • Comment number 1.

    It would appear that the Euro zone is determined to repeat its previous mistakes and is not an organisation which seems to learn from them. There are three glaring errors with this rescue plan as it stands.

    1. An interest-rate which makes Portugal look solvent in the long-term should have been applied to these loans and announced at the beginning. Say 4% for example. Instead we have no announced interest-rate ( If a year into these bailouts the Euro ozne does not know what it should charge….)

    2. After having to extend the three-year term for loans to Greece and talk about this for Ireland the Euro zone has yet again offered a three-year term for a programme. Yes the same three-year term that has not and will not work the two times it has been tried. Rather ironically at a similar time to Jose Socrates public address and adviser to the Greek Prime Minister was giving a talk at the london School of Economics suggesting that Greece needs “rescheduling — or re-profiling as it is called sometimes”.

    3. The programme does not directly address the fundamental problem which Portugal faces which is a lack of economic competitiveness. This has dogged her for the past twenty years and accordingly was a feature of her economy way before the credit crunch hit. Looked at like this where it is plain that a long-term solution needs to be applied it is even plainer that the three-year term of the package is a combination of a mistake and a fantasy.

    http://bit.ly/jUZupM

  • Comment number 2.

    This is not really that complex. The governments have taken the Three Monkeys approach to the crisis and therefore have no answers. In developing countries the criminals would be in jail or already dispatched...in the West they are rewarded with funds from the middle class. Sophisticated corruption is still corruption. Maybe one day the banks will list the governments on the stock market as an IPO and the people will have a chance to buy them back.

  • Comment number 3.

    Stephanie as I have just written on Mr. Hewitts blog:"One key element is the interest rate to be charged. Anything over 4% will mean increasing hardship for Portugal and looking at the current rates for Greece and Ireland, I cannot see any salvation for the country! Secondly, as Mr. Socrates is a care-taker, does he have the authority for this level of commitment? Finally his "will not do" list is far more comprehensive than his "will do" list. Bond-holders, prepare for a severe haircut!" I think a more apposite headline would have been "hope springs eternal from the (European) breast".

  • Comment number 4.

    "the countries in trouble in the eurozone have a debt problem and a competitiveness problem, and you can't solve one without trying to address the other." Also it is a growth problem and sending these economies into a spiral of low and no growth is more likely to make the deficit worse short and medium term. I challenge the apparent assumption in Stephanie's piece that austerity equals smaller deficits.

  • Comment number 5.

    Q. What is the difference between a financial crisis in a US State ( for example California - a bigger 'country' that any European country apart from Germany(?)) and anywhere else.....

    A. is the same one as for a European Euro Zone State - the currency's managers take responsibility and rescue the state.

    What you anti-Europeans fail to grasp is that just as there is no possibility of California leaving the US dollar behind there is similarly no possibility of any Euro members leaving the Euro behind.

    The reason that neither California now Portugal will abandon their parent currency is that there is an enormous benefit gained by using the currency which they find outweigh all possible other scenarios. It is only the daft British who do not understand currency that allow themselves to be hoodwinked by the gamblers in the City of London to think that it is at all rational to be outside the single European currency - when in fact the only group that gains are the bankers - at a terrible cost to the UK.

    We (the UK) really MUST join the Euro if we are to have any hope of re-balancing our economy so as to provide the jobs that our fellow citizens so badly need.

  • Comment number 6.

    There is something new about this financial crisis. It should not be compared to the 1930s before WWII. Germany defaulted on it's loans and by oppression from France, for German coal in particular. That's what really caused the Wall Street crash.

    This time around was really something very new and uniquely caused by banks.

  • Comment number 7.

    The Euro, as a so-called and TOTALLY unelected currency, has failed most countries in Europe.

    The EU Commission is ALSO an unelected and totalitarian State in itself. More money than sense - that we all pay for - yet no accountability, nor open or clear financial accounts to any EU citizen of the unelected. I want the European Commission to publish ALL their accounts, expenses and salaries to you and me who pay for them all.

  • Comment number 8.

    Capitalism ex nilo
    Current Fallacies:
    1. There is no such thing as growth.
    2. Any type of investment banking.
    3. Equity markets or any financial instrument which makes any kind of supposed profit in a very short time.
    What you have is a super massive ponzi scheme. So the short answer to this question is, Europe the united states of America are all a complete basket case.

  • Comment number 9.

    The Euro, as a currency, was imposed undemocratically - get rid of the Euro and allow all countries to return to their sovereign currency and freedom of what their country does best.

  • Comment number 10.

    More kicking the can down the road - Expect when new government elected then attempts to reduce interest rate and/or increase term of loans as Ireland. Pound still devaluing against the Euro so we are apparently even weaker but expected to contribute via IMF & EU funds?
    Perhaps the prime economic measure by which to judge HMG should be employment especially of our younger citizens. - another lost generation on a par with Thatcher's era?

  • Comment number 11.

    9. At 14:39pm 4th May 2011, Read Animal Farm wrote:
    The Euro, as a currency, was imposed undemocratically - get rid of the Euro and allow all countries to return to their sovereign currency and freedom of what their country does best.

    No one asked whether I wanted Sterling.

    As for the title of Stefanies latest piece -

    1.0890 Euros to £1.


    7. At 14:36pm 4th May 2011, Read Animal Farm wrote:
    The Euro, as a so-called and TOTALLY unelected currency, has failed most countries in Europe.

    No it has not. Most Europeans benefit.

    Demonstrate that life was better in Spain, Portugal, Greece, etc before the Eurozone was created.

    We will join within 5 years.





  • Comment number 12.

    #5 - John from Hendon - I simply couldn't agree more.

    I've argued and questioned on these and other blogs that the UK simply wouldn't be in half the mess its now in of we'd been in the Euro.

  • Comment number 13.

    AND what about the USA.....

    The US are not monetising the debt. They will pay back their obligations at full value. The USD is a good long term store of value. Unemployment is falling, jobs growth is rising.......

    Go back to sleep.

  • Comment number 14.

    What happens when the PIIGS fail to keep their hair shirts on?

    In Eire the rapid recessionary effect of spending cuts combined with the scale and cost of the bailout is headed towards default - I'd seriously doubt any other outcome elsewhere - what will EuroLand do when this happens?

  • Comment number 15.

    12. At 15:57pm 4th May 2011, Gilthead wrote:
    #5 - John from Hendon - I simply couldn't agree more.

    I've argued and questioned on these and other blogs that the UK simply wouldn't be in half the mess its now in of we'd been in the Euro.

    In Little Englander eyes the Euro is perceived as a 'German Project'

    It's failure will make up for being second best at most things (not just on the footie field).

    Pure hubris.

  • Comment number 16.

    As we enjoy the 'wisdom' of a currency that has devalued by 25% against the Euro, with savings rates some 3%+ below inflation, with massive cutbacks in public services and a brand new plan for aircraft carriers, we can indeed survey the wreckage and say 'It was tough , but we sure beat those continentals'. Some victory. Can we taste defeat please?

  • Comment number 17.

    I agree with Richard Bunning #14 (in this and most other posts). Default is nigh on inevitable - only the timing is uncertain - and the longer it is left the more public money will have been burned in the effort to keep things going as they are.

    The only thing that could prevent a default would be a rapid return to substantial economic growth and that is a pipe dream.

    I can't believe that the powers that be do not know this. so what are they doing? Hopefully, in dark rooms somewhere people are plotting a critical path to a soft landing (one that does not involve a wing and a prayer).

  • Comment number 18.

    16. At 16:48pm 4th May 2011, morrispjb wrote:
    As we enjoy the 'wisdom' of a currency that has devalued by 25% against the Euro, with savings rates some 3%+ below inflation, with massive cutbacks in public services and a brand new plan for aircraft carriers, we can indeed survey the wreckage and say 'It was tough , but we sure beat those continentals'. Some victory. Can we taste defeat please?

    Well summed up.

    I did come across a map in an old bookshop in Bavaria. It was a map of the British Isles with the legend (translated) 'here be stupid people'

    :)

  • Comment number 19.

    17. At 16:53pm 4th May 2011, tFoth wrote:
    I agree with Richard Bunning #14 (in this and most other posts). Default is nigh on inevitable - only the timing is uncertain - and the longer it is left the more public money will have been burned in the effort to keep things going as they are.

    Can you finish your point by pointing out why defaults are a bad thing. It will cause a problem for banks including German banks but Germany has other irons in the fire.




  • Comment number 20.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 21.

    I can understand the worries of the EU, but I can't understand why the EU is not far more concerned about the US' deficit & what's coming.
    The collapse of the USD is going to hit like a tsunami. What is the EU plan?
    The US is in the midst of a multiple-dip recession, headed for hyperinflation, in addition to dollar collapse.
    Standard & Poor's (S&P) has given its warning its warning. (Actually I'm surprised that S&P is waiting for 2013.)
    American accounting for Social Security, Medicare and other programs indicates a total federal debt of about $70 TRILLION. That's 15 times the GDP. The deficits are increasing at about $5 TRILLION/year. If the US was a business, it would be bankrupt.
    The AAA rating on US Treasuries is "benchmark". What happens when S&P downgrades the American "benchmark"?
    I don't think anyone knows. Do you?
    As long as the USD retains its reserve currency status, you'll continue to see a triple-A rating for US Treasuries, as laughable as that may seem. Having the US Treasuries in US dollars means the government can run a printing press.
    But when the reserve currency changes, the printing press stops. There's the rub & the complexity.
    Let's say that the US wants to sell debt to China, but China will only lend in its own currency. Now the US has a big problem because because it can't print the Chinese currency to pay the debt. Lenders will soon not buy Treasuries unless in a stable currency. As the USD loses its value, people will USD-denominated assets and move to safer currencies, like THE EURO.
    There's been some talk already about moving to some kind of basket of currencies—but not including the USD, possibly including gold. This would be devastating to the US consumer - double whammy from an inflation standpoint. The dollar's weakness would be doubly inflationary. This will certainly happen by 2013.
    When the US currency collapse, it will have major negative economic impact on the global economy. Part of the weakness in the dollar now is due to the way the world views what's happening in Washington and the apparent inability to control the American deficits.
    I don't know why Europe is not planning for USD collapse, why it is all tied up in the sovereign debts. When I examine the performance of the Euro and the pound, they're generally stronger than in the US. The US is IN THE WORST CONDITION of any major economy.
    Why?
    USD going down. Hyperinflation by 2013.

  • Comment number 22.

    Evening Stephanie,
    I can't tell from your blog whether you believe that bailing out Portugal will be an end to Eurozone crises.
    On the plus side, the ECB trying to remove some of the extraordinary financial stimulii and increasing the base rate will have a positive effect on the strength of the Euro (and maybe wage inflation in the long term).
    On the negative side, the bond vigilanties have many more targets to short with Spain next, followed by Italy and maybe Belgium. Then comes the turn of France!
    Germany too is not completley safe if other countries default and don't pay back all of the German loans.
    I wonder how long it will take for these same wreckers to turn their attention to the UK (my guess would be the end of this year). I say this because Mr Cameron's grand plan for the UK will be bearing fruit by then (or not as the case may be).
    Fortunately for us, politicians are never wrong when it comes to dealing out mysery to others, so long as it doesn't affect their gravy train.
    I note with interest that the 10 year yield for Government bonds is almost the same for US, UK and Germany. So I guess the market thinks that we are all equally strong.
    I can sense another financial storm coming and this time the cupboard will be bare (or bear market maybe).

  • Comment number 23.

    So why did the UK get trashed as a member of the ERM if the Euro is the answer to the meaning of life?

  • Comment number 24.

    #20 it doesnt matter if its cool or not...hes dead thats all you need to worry about.

  • Comment number 25.

    # 5 john_from_Hendon and #12

    I simply could not disagree more.

    There is an enormous difference between USA and Eurozone.

    1. In USA states can go bust, New York has come close several times. When US states issue bonds they are priced not on the basis of federal risk but state risk. Until the current crisis Eurozone countries were all enjoying close to German levels of pricing. Arguably even now Eurozone bonds may not reflect real risk pricing levels as market is betting that bail outs will continue with no defaults

    2. USA deals with the inevitable problems of a single currency zone leading to loss of competiveness by not merely allowing mass movement of labour but such movements actually happening. Eurozone allows for mass movement but it simply dos not happen (different languages and cultures are but one reason). This is really important because mass movement of labour is an economic stabilizer similar to the way UK has used currency depreciation.

    The Eurozone is simply a very badly designed single currency area. Lets look at what a well designed currency area should look like:

    1. All parts of the currency area should have similar economies so that they already tend to march in step. This helps ensure that an external economic shocks to the single area do not have massively assymetrical effects.

    2. All parts of the currency area should have a similar working culture, I would argue that a similar legal tradition is also a good idea but that may be taking things too far.

    3. There should be a tradition of large scale movements of people right across the currency area in response to economic circumstances.

    4. There should be democratic support. In the past this was not necessary as you could impose a single currency zone by war (USA) or in a more fuedal society as long as monarch was in favour (England/Scotland is close to this, I suppose that was with democratic support but the political class was so narrowly drawn it might as well have been monarchial)

    Now I am not saying all factors have to be perfect merely that the close to the ideal the more stable the currency area and the further away the less stable the currency area becomes.

    There is a theoretical reason and it is all to do with economic stabilizers which need to kick in when economic shocks have different effects in different parts of the currency area.

    By combining into a single currency area there are several clear benefits - each country is part of a larger currency so there is reduction in transaction costs which encourages intra currency area trade, larger currencies areas tend to enjoy more acceptance in international trade. Those benefits should not be under-estimated.

    But there are costs to a single currency area and one of those costs is that component countries can no longer use currency depreciation as a means of dampening assymetric shocks. This means that in practice in an economic area there are only 2 major economic stabilizers that can be used (1) mass movement of labour and (2) mass transfers of wealth from rich areas to poor. What we can glean from history is that mass movement of labour can be as powerful a stabilizer as currency depreciation but it does have the downside that it can virtually depopulate parts of the currency area and leave those areas in the economic backwater for a very long time. We know that mass wealth transfers can have a very rapid effect but are extremely inefficient and ultimately rarely achieve a long term solution - they are a good stop gap measure to deal with an immediate problem but not the ultimate answer.

    What we find in the Euro is that the single currency area idoes not really fit closely with the economic ideal for a currency area (but to be fair USA in 1865 whilst closer than the Euro was still not a close match to the ideal) but worse there is no possibility of truly mass movement of labour and the wealth transfers of the scale necessary to make a difference are politically extremely difficult. The last point may surprise some. There are already large wealth transfers, problem is that these are simply not big enough. To put into context Greece probably needs to write off 50%+ of its debt, Ireland (thanks to the banks) even more, Portugal probably a bit less. Debt write offs are true wealth transfers (because it destroys wealth in the rich bit and reduces the poor bits long term interest bill) - bail out loans are not

  • Comment number 26.

    Bluesberry,
    "The US is in the midst of a multiple-dip recession, headed for hyperinflation, in addition to dollar collapse."

    The hyperinflation idea comes from the assumption of the money-multiplier, which most economists are starting to admit is a fanatasy - banks don't lend reserves.

    "American accounting for Social Security, Medicare and other programs indicates a total federal debt of about $70 TRILLION. That's 15 times the GDP. The deficits are increasing at about $5 TRILLION/year. If the US was a business, it would be bankrupt."

    The total level of federal debt is not important, as each debt only has to be paid when it becomes due - not before. The US is the monopoly issuer of its currency and so (one way or another) can never become insolvent unless it wanted to. Also, everyone forgets to count the US's assets alongside its liabilities.

    "The AAA rating on US Treasuries is "benchmark". What happens when S&P downgrades the American "benchmark"? "

    Who listens to the criminal ratings agencies anymore. When the warning from S&P came the markets didn't even blink. The "economists" at the CRAs are not obliged to declare any conflicting interests, so bear that in mind.

    "But when the reserve currency changes, the printing press stops. There's the rub & the complexity."

    The reserve status of the US is a vestigial legacy from Bretton Woods that is no longer relevant with floating exchange rates. All fiat currency issuing nations with floating exchange rates, are able to expand their reserves (or indeed their real money supply) if they have the political will to do so. The UK also used QE remember. With EMU nations it's more complicated however.

  • Comment number 27.

    Bluesberry,
    "Let's say that the US wants to sell debt to China, but China will only lend in its own currency. Now the US has a big problem because because it can't print the Chinese currency to pay the debt."

    I doubt there would be a problem here, because when a currency devalues, many investors will swap this non-interest bearing currency, for interest-bearing government debt. There will always be a healthy demand for US currency, because the US population need it to pay their taxes.

    "Part of the weakness in the dollar now is due to the way the world views what's happening in Washington and the apparent inability to control the American deficits."

    The US can and must always maintain gov't spending sufficient to maintain aggregate demand and pursue full employment - it can maintain a deficit indefinitely if necessary. The "concern" about the deficit is an invention of the bond markets who believe that by bullying governments into austerity, those governments will actually have to hand out more government debt, and for longer - this is what austerity does to an economy, it keeps it in debt.

    This is precisely what the IMF did to the developing nations - the austerity prevented them from growing, and kept them borrowing.

  • Comment number 28.

    19# The Coming Storm

    I think I finished my point, but to address yours I am not at all convince that defaults are a bad thing. I would be interested to know how Iceland are getting on - if anyone out there knows - relative to Ireland or Greece.

    As I have said before, when there is a default it is not the debtor who loses money it is the creditor. The risk of default lies mostly with the banks the will have to write off the sovereign debts. They will probably fold (and need bailing out once again).

    Meanwhile the defaulters will lose their ability to borrow for some years and will have to restructure to live within their means. This will be tough - but not necessarily tougher than the austerity necessary to maintain the current borrowing capability.

  • Comment number 29.

    Commodities and specifically energy is what counts. The PIIGS can be bailed out as many times as they need but energy has to be bought. If the energy owners don't want paying in a declining currency then there is not a lot of options.
    In the short term the industrial might of Germany will keep the Euro buoyant. But there is a limit to what the German workers will take.
    Once they realize that their expensive oil and gas prices are paying for the PIIGS to lord it up then expect trouble. In a cold winter perhaps.

  • Comment number 30.

    The interest rate being charged is the key. Broadly though I agree Portugal has a debt and isn't competitive... The EU solution appears to be attempting to address those issues by providing liquidity. This boils down to punting the problem down the road.

    This is either incompetence or cynicism, take your pick.

  • Comment number 31.

    25. At 19:37pm 4th May 2011, Justin150 wrote:

    The Eurozone is simply a very badly designed single currency area.

    Yes I agree.

    But (always a but isn't there) your piece misses the point utterly.

    The Eurozone is a very clever political idea and will predicate eventual fiscal alignment. The price will be some loss of sovereignty, a small price to pay for the economic advantages.

    Lets pretend you are the boss of a Japanese multinational looking to site a new plant in the EU - you will want to put it a country that is part of the biggest currency block on the planet, the Eurozone.

    The great bulk of Japanese investment in the UK in the eighties had a lot to do with Thatchers taming of the unions but it had far more to do with the fact that Euro membership was on the table.

    Lets put it back on the table.

    Think BIG not small.

  • Comment number 32.

    Forget Portugal. Why is the pound sterling currently in free fall against the Euro?

  • Comment number 33.

    29. At 20:09pm 4th May 2011, prudeboy wrote:

    Commodities and specifically energy is what counts. The PIIGS can be bailed out as many times as they need but energy has to be bought. If the energy owners don't want paying in a declining currency then there is not a lot of options.

    Do you not understand currency rates ?

    Currently 1.089 Euros to the £1, 1.48 to the S (oil is priced in dollars).

    Causing me grief - I earn in the UK and spend 90% in the EU.

  • Comment number 34.

    ''Watching the eurozone these past two years has been like watching a car crash in really, really slow motion.''

    Yes - thing is the next turtle-mode floaty floaty motion event may have started. So which one is it : )

    US debt. China crisis. Collapse of capability to reform in UK, the Prince cannot move, like Gulliver he is pinned by too many small men. Or Oil.

    Empires have trouble when they run out of resource whether it is money or energy or slaves. Of course Britons never never will be slaves, I heard that in a song.

  • Comment number 35.

    31 TCS

    The idea of the EU is a United States of Europe, to try and take on the USA. It doesnt work because of national identities which result in conflict in policy. With respect to manufacturing - The only advantage to a foreign manufacturer based in the UK is access to the European market which they have automatically if based here, and a lack of volatility in currency, ie an over valued sterling. The trade off downside to the UK if the euro is adopted is a lack of scope to move, which is exactly the thing which has scuppered Greece, Portugal, etc etc. If economies with different make-ups have common currency they can expect problems. I have little interest in pandering to foreign manufacturers because there is a long list of them who have upped and gone rather quickly, some of whom have been rather reluctant to repay grants given to move here in the first case. One of the big problems with foreign satellites here is they are just that, satellites and homeland based facilities are the last to be cut, it is always the satellites first.

    Thinking small is the start and long overdue. The bigger the idea the more likely the chance of getting it wrong and the less opportunity for evolution.

    Just watch China get in trouble as their centralised management policy breaks down in the face of domestic pressures.

  • Comment number 36.

    35. At 21:48pm 4th May 2011, Arthur Daley wrote:
    The idea of the EU is a United States of Europe, to try and take on the USA

    An assumption.

    To use the analogy of the USA it is interesting that labour mobility (leaving Tenesse to work in New England, for example) is, despite the common language, not much greater than in the EU.

    Increasing numbers of Spaniards are trying their luck working in Germany. Eventually growing industries in Spain will have the benefit of a large currency block.

    Just watch China get in trouble as their centralised management policy breaks down in the face of domestic pressures.

    Not sure what your point is here. I hope you are not suggesting that the EU is a monolithic centralised beast because it is not true. It is a federal structure with considerable decentralisation (far more than in the UK).

    China is an interesting case. As I have posted before something will have to give, economic progress or the centralised state. My money is on the state changing; China has tasted economic power and will not want to retreat. A marvelous example of economics and trade shaping politics.

  • Comment number 37.

    #33 The Coming Storm,


    "Currently 1.089 Euros to the £1, 1.48 to the S (oil is priced in dollars)."

    Please be accurate,


    As at 22.30 this evening

    Sterling: US Dollar 1.6491

    Sterling:Euro 1.1121




  • Comment number 38.

    #25. Justin150 wrote: disagreeing with my original post #5 and as would be expect I am coming back on the matter....

    You wrote:
    "Lets look at what a well designed currency area should look like:

    1. All parts of the currency area should have similar economies so that they already tend to march in step.... and 2. All parts of the currency area should have a similar working culture"

    On that basis the City of London should have a different currency to that in the North, Wales, Scotland, outside the M25 etc ... your 'condition' is simply preposterous! If you are going to criticise the Euro on this basis please try to not be so ridiculous as it does not help your (lost) cause!

    The Euro has faults as nothing is perfect, but its commercial and business transparency overcomes the vast majority. To have certainty of cost and price in buying and selling is THE cause of a currency's success and with the Euro we have that. The efficiency gain of not being ripped off by bankers is enormously valuable in promoting business. Just look at the birth of the US Dollar and how that gave rise to an enormous economic blossoming of the USA. We have that within our grasp (if they will still let us join!) and we really must argue against all of the bankers who want to steal our money with the support of people like you! Do you really love giving money to the money changers? Is so why? And what benefit is doing so to the people (other than bankers!)

  • Comment number 39.

    37. At 22:38pm 4th May 2011, foredeckdave wrote:

    #33 The Coming Storm,


    "Currently 1.089 Euros to the £1, 1.48 to the S (oil is priced in dollars)."

    Please be accurate,


    As at 22.30 this evening

    Sterling: US Dollar 1.6491

    Sterling:Euro 1.1121

    I was quoting USD / EUR (1.48) not USD / GBP. Sorry if this was not clear.

    As for EUR/GDP I last looked lunch time.

    But the point really is that the EUR looks pretty healthy right now.

    According to some on this blog (not you) it was game over 6 months ago.

    :)

  • Comment number 40.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 41.

    I would not wish to see a Eurozone country have to leave the currency, but, if one did and officially re-adopted a national currrency I would be very intersted to see whether citizens used that currency (drachma, escudo, punt) or whether they used the euro anyway. This would be a good test of the Euro (although many unoffical users of USDs are gradually giving them up, there are still plenty who use them instead of their national currencies.)

  • Comment number 42.

    #38 John, you are in danger of emulating one of the methods of WOTW by picking bits of posts to refute without reading the whole post.

    I specifically stated in my original post "Now I am not saying all factors have to be perfect merely that the close to the ideal the more stable the currency area and the further away the less stable the currency area becomes."

    So I have no problem with the fact that London has a different economic structure and pace to the rest of the UK, yes it makes the UK a less than ideal single currency but it is still much closer to ideal than the EU. There are costs to this less than ideal single currency area for the UK, for example parts of the UK have become permanent economic backwaters (Highlands of Scotland for example). The UK is not unusual in this respect, both France and Italy would also be less than ideal single currency areas. In the case of UK, France and Italy however they did have the benefit of the other factors I have listed

    Ultimately it comes down to a judgment call as to the costs and benefits of a single currency area. The more strident pro-Euro fans point out the benefits but deny the possibility of costs, the more strident anti-Euro fans talk about costs and usually (in my experience) ignore any possibility of benefits. I try to walk in the middle. I happen to agree that there are significant benefits to joining the Euro but it is my judgment that the costs of the UK joining the Euro are even greater.
    ======================

    #36 The Coming Storm: the latest figures I can find on labour mobility for US and EU are that in US annual interstate labour mobility is 2.3% of workforce but in EU-15 (ie excluding the newer eastern European member states) the comparable figure for cross border labour mobility was 0.2%. There are slightly older figures from Princeton university that puts annual interstate US labour mobility at 2.8% and EU-27 cross border labour mobility at 0.2% (in each case of working population).

    It is clear from those statistics that labour movement in the US has a vastly greater economic role even today than in EU

  • Comment number 43.

    Could the BBC economics department, who seemingly has not heard about Credit Default Swaps, investigate their role in this "eurocrisis", please. CDS are instruments betting on a worsening of the eurocrisis and country default, and the role of these destructive instruments in the eurocrisis should be investigated.

    Why does nobody talk about them? Is anybody afraid that if the truth came out, there would be a large uproar by the unwashed populace asking for an immediate ban on these instruments, which allow everyone in the know to get richer, and everyone in the Europeriphery to become poorer. Why is their no mention of CDS? What is the reason behind it?

    Perhaps we should be told how much profits could be made by somebody holding a CDS if yields double from 5% to 10%, for example?

    Could these enormous profits possibly be responsible for hedge funds and speculators investing in them to do everything possible to drive these countries into the situation they are in?

    More money is now being spent betting on Eurocountries defaulting than on new bonds to them?

    The EU competition authorities seem to know, and investigate CDS, the German Bundesbank says CDS prices lead bond prices upwards, and the EU parliament is just about to ban CDS contracts, where you just buy the insurance, and not the bond. Obviously CDS have something to do with the crisis.

    There should be an immediate ban on CDS or a massive 30% insurance tax, to stop speculation in these instruments, bringing misery to countries. Alternatively, a annual windfall tax of 90% on any "winnings" or "increase in value should do the trick.

    It is time that ruthless speculators and greedy hedge funds start to pay for the damage they cause.

  • Comment number 44.

    So Portugal gets a bailout.

    The big question is,

    'what's next, an EZ country default or Spain seeking a bailout ?'

  • Comment number 45.

    @BobRocket
    'what's next, an EZ country default or Spain seeking a bailout ?'

    No question about it, abolish credit default swaps tomorrow, and it will be hedge funds defaulting and speculators seeking bail outs.

    The eurozone countries would be fine after that!



  • Comment number 46.

    44. At 07:59am 5th May 2011, BobRocket wrote:
    So Portugal gets a bailout.

    The big question is,

    'what's next, an EZ country default or Spain seeking a bailout ?'


    --------------------------------------

    How about both.

  • Comment number 47.

    Stephanie,
    Slo-mo car crash sure, but those who invest in currency - because of the underlying strength of the economy - seem to prefer, at present, the Euro to Sterling.

    Hhmmmnnnn!

  • Comment number 48.

    #42. Justin150 wrote:

    "You (to me) are in danger of emulating one of the methods of WOTW by picking bits of posts to refute without reading the whole post."

    Justin has it occurred to you that the reason for this is that anyone with any common sense who reads your 'reasons' sees the foundations upon which you base your views is flawed, illogical and without substance?

    I further do not understand the basis upon which you found your unsupported assertion that that running the whole British economy for the sole benefit of a very few bankers is rational or sensible. This strategy has crippled and bankrupted the country to a far more serious and longer term extent that the average Euro state. We are already the Mexico to the United States (of Europe) your strategy fro the country will reduce us to the status of Columbia is that what you want - complete economic destruction and the degradation which that brings?

  • Comment number 49.

    36 TheComingStorm:

    ''35. At 21:48pm 4th May 2011, Arthur Daley wrote:
    The idea of the EU is a United States of Europe, to try and take on the USA

    An assumption.''

    Not at all. Cross national commercial development is routinely needed in Europe. (Automakers, Pharma, Aerospace) individual national markets are not large enough to support novel development in many cases - this is not the case in the US which is a larger self contained market with one common language. The EU in part is designed to strengthen the trade base. Otherwise Europe will get left behind by larger regions eg the USA and now probably China in a short time. It is no accident that the internet is administrated in the US having been invented in Europe or that so many internet companies are US based.

    ''I hope you are not suggesting that the EU is a monolithic centralised beast because it is not true. It is a federal structure with considerable decentralisation (far more than in the UK).''

    Hmm. The EU publication classifying Aubergines is 10x longer than the Sermon on the Mount, also considerably longer then the US Declaration of Independence. Sounds bureaucratic to me. As well as being somewhat pointless. Setting vegetable specifications to arbitrary criteria just introduces waste and increases the consumer price.

    47 snuffie

    The future of the dollar is more interesting methinks.

    Anyway - Do people invest in a currency or speculate in it.

  • Comment number 50.

    When a currency, the Euro, is used as an agent of political unification there is a high risk that the participating nations, of extreme diverse cultures, will set aside their own responsibility to manage their economies with prudence.

    Like the UK banks the EU attitude is 'why worry some one else will bail us out'.

    It is immoral and unsustainable politically that Germany's and the UKs taxpayers should pick up the tab for the past and future incompetences of the failed Banks and the EU failed nations.

    Would Ireland, Greece and Portugal be in this mess if they had always been responsible for managing their own stand alone currencies and economies?

  • Comment number 51.

    @Arthur Daley

    Where can I find the EU classfication for Aubergines, and where the sermon on the mount?

    No offence, but with your name, I am a bit suspect?

    And what do you think about the EU investigation of whether we are being ripped off with CDS in this Eurocrisis. That, surely, must be something which meets your approval!

  • Comment number 52.

    Let us just remember, the Portuguese are all better off than the Brits.

    If we go on holiday there in the summer, it will be 50% more expensive than a few years back. Because out lovely Pound Sterling has been devalued by 30%. Something I had to pay 70 pence for, will now cost me £1 (although the Euro price has not changed)

    I, for one, wish I would be in the Euro. Even in Protugal or Greece. Instead of living in a country where the government does not have any other ideas on how to make ourselves competitive, other than making everybody poorer by devaluing the currency.

    This is stealing from the people, to pay for incompetent policies. To pay incompentent and fraudulent bankers, and hedge fund managers, the main finaciers of the Tory party. Lovely to live in a country like this, run by snobbish millionaires who think it is a good idea to triple the cost of further education. Even though it is now about half of the average annual net salary.

    And don't blame the Labour government. Its the Tories who raised VAT to 20%, it is them who are stopping the Library bus for my mother in law, who are cutting police and school sports. Its the Tories who are going back to increasing NHS waiting lists, and cutting doctiors and nurses.

  • Comment number 53.

    #44 BobRocket,

    "So Portugal gets a bailout.

    The big question is,

    'what's next, an EZ country default or Spain seeking a bailout ?'"


    That's only one of the questions.

    We have already seen bail-outs for Ireland and Greece. They appear to have steadied the financial ship but they have done nothing to address the fundemental economic problems of either contry. Whilst we do not yet know the detail of the bail-out deal for Portugal it is likley that it too will focus upon the financial position and totally ignore the real question of Portugal's continuing uncompetitiveness.

    I find it interesting that the ECB (in line with the IMF) has commited itself to reducing government social spending as part of their regulation for the bail-outs. Now the ECB only exists as an element of the political will of governments with the highest levels of social spending in the world. Is this not hypocritical?

    Even allowing for a desire to attempt to stabilise the financial position of members of the Eurozone, we now still await the conditions that push Spain, Italy and Belgium over the top. From the commentries the feelings appear to be that their failue is a matter of when and not if. When the if materialises then the ability of the ECB to even attempt to lead a rescue operation will be swamped. However, we are hearing nothing about any EU/ECB plans to help stave-off such a calamity - surely prevention is better than cure!

    As many posters above have commented, the Euro crisis will apear as nothing when the impact of a US$ collapse hits us.

  • Comment number 54.

    The Euro was always some immature joyride that was always going to end in a car crash. Nobody can say they weren't warned that this would inevitably happen. But the BBC, like many others, even wanted us to be passengers.

  • Comment number 55.

    This probably isn't the correct blog to raise this, but here goes anyway:-
    I keep hearing (from UKIP mainly) about the absence of EU annual audited accounts over many years, so my points are
    1) Is the EU legally obliged to produce annual audited accounts or is it just UKIP mischief making?
    2) If it is obliged to produce accounts why can't or doesn't it do so? What would such accounts reveal and would it matter what they reveal anyway? Could it be EU funds are already available and in recent times been used to help EZ countries bailout needs?
    3) On AV referendum day it seems appropriate to me to recollect that when I voted yes in the UKs last whole of the country referendum to Common Market membership (no mention of European Union or any of it's previous name badges) as a trading club to join with bigger and/or better members than our existing membership of EFTA - European Free Trade Association.
    The innonence and naivety of youth eh?

  • Comment number 56.

    Here is a question:


    Why does Portugal need IMF support and Japan, with a far greater national debt, does not?

  • Comment number 57.

    'what's next, an EZ country default or Spain seeking a bailout ?'

    #Dempster

    If an EZ country defaults first then I think there will be a rush for the door an no bailout for Spain will be needed (Spain would default as well), if the floundering EZ countries can hang on long enough then Spain will have to be bailed out.

    A Spanish bailout would bring the whole EZ empire crashing down so before that happens an EZ wide haircut solution (imposed on all sovereign debt holders) will be imposed.

    Local banks will be nationalised with the national central banks imposing control, the ECB will then take control of all the EZ central banks and an IMF style regime administered by the EU will be imposed on all EZ countries.

    The EZ countries will be issued with a tax take target and a spending allowance determined by the EU and Fiscal Union will be complete.


  • Comment number 58.

    John from Hendon #5 is right, the UK should be in the Eurozone.

    Every time we have to change currency between Sterling and the Euro the moneychangers take a substantial "turn". Next time you are at an airport, look at the difference between the selling and the buying price for euros. Your bank which maybe claims not to charge commission is probably just as bad. The money changing "industry" skims off billions every year. This is a privately levied tax on trade between the UK and the Eurozone. Even if the UK were on occasions to find itself in the position of Portugal, the cost of the extra interest demanded by the IMF and ECB would probably be less.

    The EU is a federation, because certain sovereign powers have been conceded to it by member states. However instead of having a directly elected executive like the US, it has the indirectly elected Council of Ministers, which meets in secret, and has in turn elected a president. A directly elected executive would probably have dealt with the problems of Greece, Ireland and Portugal much more constructively.

  • Comment number 59.

    Why are we still looking at problems from the same old perspective.

    For example we're currently suffering from chronic food inflation.

    The price of grain has rocketed , at one time we had grain mountains, so much so we paid farmers not to produce it. Are we still doing this? If so why is that slack not being used to produce more grain to bring commodity prices back down? Why is no one asking these questions? Or have people simply forgotten how to work?

  • Comment number 60.

    There are so many Euro-enthusiasts on this thread it's like being stuck in a lift with Paddy Ashdown!

    I remain at a loss to understand how some can still see advantages in Euro membership for the UK? But for John Major and Norman Lamont (I never thought I'd hear myself say that!) we would currently be in a pickle every bit as bad as Ireland's if not much worse! The idea that somehow the British Government wouldn't have embarked on a debt-fuelled monetary expansion if the ECB had been at the reins seems daft given it's very laissez-faire approach to sovereign debt and bank regulation elsewhere.

    So we would be sitting on bust banks, up to our oxters in debt and with absolutely no levers to pull to try to turn things around. That's some price to pay for being thought of as "progressive" and "fraternal" and not a (shock-horror) a "little englander".

    The Euro can be seen as a well meaning and far-sighted attempt to bring the European economies together, making them competitive in an uncertain world. I might even approve of that, if the structural flaws could be somehow tidied up. Alternatively, the Euro can be seen as a means to an end in delivering the political union that seems so unpopular to ordinary Europeans...in other words the present crisis was foreseen in the knowledge that the little people might then embrace union to save their pensions, thus making us all finally much easier to administer by the elite! At the moment, I'm tending towards the latter because the mechanics of the present mess were well signposted.

    I'm also just popping out to do my little bit to frustrate the people who are so babyish they believe that, if they can't convince enough people to vote with them, they should have a second, or a third go until their vote somehow "counts". Hopefully the great British public will send a clear message to these "progressives" that they should just man-up, get a grip of themselves and think how they can convince others of their political model...even if that does water down the sense of smug self-righteousness they presently enjoy!

  • Comment number 61.

    re #49
    Arfur,
    Both, I think. Shorter term money - speculation with some hedging. Medium term money - commercial hedging mostly, with some longer term investment involved in hedging there also - building buildings/ships/aircraft, that sort of thing in foreign countries. And longer term - investment, mostly, with some aforementioned hedging. If you had surplus pounds in the four decades from 1970 and you regularly bought Swiss Francs you would have been sitting on a nice little earner by now. You did remember to do that, Boss, didn't you?

    If you are a major director/shareholder in Glencore post-float, what do you do with all that dosh? Some left in the business. Houses (and cars) (and 'planes?) in several locations around the world, a share portfolio, a currency portfolio, a commodity portfolio, plus paintings, jewellery and toys, and a well endowed charitable foundation to top it off!


    I agree on the dollar, too. Interesting, the effect the ObL thing had on the $. Some folk posting here are asking who is next after Portugal? Don't think anyone has thought of the UK .....

    It wouldn't be hard to find a few economists who reckon at $1.68 the £ is way overvalued!

  • Comment number 62.

    54 NTP3

    "Here is a question:


    Why does Portugal need IMF support and Japan, with a far greater national debt, does not?"

    Easy really. The Portuguese economy is chronically uncompetitive and doesn't earn enough to pay for the government's spending commitments. Portuguese business is hampered by an exchange rate that reflects Germany's export strength rather than its own. The Portuguese don't save much money!

    The Japanese by contrast have borrowed huge amounts to support their zombie banks, but this money has largely been lent by Japanese savers (the Japanese post office is one of the biggest reserves of unallocated capital in the world) who, for historical reasons are fanatical savers.

    QED Japan is still, amazingly, credit-worthy, whilst Portugal is broke.

  • Comment number 63.

    SF: "...Watching the eurozone these past two years has been like watching a car crash in really, really slow motion..."

    +++++++++++++++++++++++++++++++++++++++++

    So how, Stephanie, had you been around, would you have described WW1 or WW2?



  • Comment number 64.

    57. At 11:00am 5th May 2011, BobRocket wrote:
    'what's next, an EZ country default or Spain seeking a bailout ?'

    #Dempster

    If an EZ country defaults first then I think there will be a rush for the door an no bailout for Spain will be needed (Spain would default as well), if the floundering EZ countries can hang on long enough then Spain will have to be bailed out.

    A Spanish bailout would bring the whole EZ empire crashing down so before that happens an EZ wide haircut solution (imposed on all sovereign debt holders) will be imposed.

    Local banks will be nationalised with the national central banks imposing control, the ECB will then take control of all the EZ central banks and an IMF style regime administered by the EU will be imposed on all EZ countries.

    The EZ countries will be issued with a tax take target and a spending allowance determined by the EU and Fiscal Union will be complete.

    -----------------------------------------

    I've posted this before but still:

    Individuals should be allowed to fail, companies to, but not nations.

    The ECB should print some money and give it Ireland, and then print some more and dole it out to whoever needs it.

    As Uncle Mervyn dutifully proved, article 104 isn’t really a rule, it’s more of a guideline.

    No Q.E. = No bailout
    No Bailout = No Union
    No Union = No need for Euro Politicians

    Now come on; what would you push for if you were a Euro politician?

  • Comment number 65.

    58 Stanblogger

    "Every time we have to change currency between Sterling and the Euro the moneychangers take a substantial "turn". Next time you are at an airport, look at the difference between the selling and the buying price for euros. Your bank which maybe claims not to charge commission is probably just as bad."

    If you change money at airports then you will taken for a ride...not so much a tax on trade as a tax on the dumb. The spreads are simply ridiculous. You are far better off simply walking up to the nearest ATM machine when you get to your destination, assuming it's a civilised country, and getting your cash there. The rates are far better.

    PS: Exchange rates on trade transactions bear no relation to tourist rates. It's actually a competitive business and the profit margins quite small. It's the sheer volume of transactions that generates the money!

  • Comment number 66.

    51 matt_us:

    ''@Arthur Daley

    Where can I find the EU classfication for Aubergines, and where the sermon on the mount?

    No offence, but with your name, I am a bit suspect?

    And what do you think about the EU investigation of whether we are being ripped off with CDS in this Eurocrisis. That, surely, must be something which meets your approval!''

    Are you a bit suspect. No mate haven't seen you in the line up. But don't loiter if you think you look suspicious.

    Sorry no link to veg to hand, but if you dig around you will probably find it, cant off hand remember if it is 5000 words or 50000, but its a lot. Think a senior guy at one of the work study charities told me a long time ago, Joe Rowntree mob maybe.

    Sermon of the mount is in the Bible, again cant remember if 320 words or 500 ish, but not long. US Dec of Indepenence less than 100 words.

    Thinking about CDS. Nope, I try and avoid thinking. Bit 'o zen helps with dealing with things like that.

    Regards

    PS Arthur isnt my real name. Hope that helps.


  • Comment number 67.

    #49 You are right you can pretty much only speculate in a currency but on the other hand most ventures typically called 'investments' are actually speculative or a speculation - this is true of all direct investments in the stock market and certainly all direct transactions on money markets. The only case in which a currency purchase made with the intent of either profit or cash security is an investment is when some extremely credit worthy body promises return of the principle and some return on the capital provided - as for example when placing a sum or term deposit with a bank. Even this could be said to be semi-speculative during periods of financial crisis when the bank might fail.

    This is because a speculation does not guarantee safety of the initial investment along with the return on the principal sum whereas an investment is a financial operation that promises both safety of the principal and a satisfactory return.

    Right now there are therefore very few financial operations that meet this criterion and most 'investments' turn out to be - to a larger or lesser extent speculative. Its therefore irritating to have people denigrate speculation in principle - not that I would necessariliy endorse it either - it just means engaging in a financial transaction where there is uncertainty about the outcome - and therefore one has to speculate as to what that out come might be. Everybody does it for example when they buy a house and may then double their speculation when they take a variable rate mortgage. The speculation being that they will be able to meet the repayments and that their net equity in the house will increase over time. That makes for quite a lot of speculators in the UK taken as a whole.

  • Comment number 68.

    #48 wrote "I further do not understand the basis upon which you found your unsupported assertion that that running the whole British economy for the sole benefit of a very few bankers is rational or sensible"

    I may have missed something but I have never made such an assumption - supported or unsupported. The fact that bankers and currency traders benefit from multiple currencies does not mean that that is the basis for supporting multiple currencies

    "anyone with any common sense who reads your 'reasons' sees the foundations upon which you base your views is flawed, illogical and without substance?"

    OK so are you saying that there are no costs but only benefits to joining the Euro? I would suggest that such a view is rather more flawed than any view I may express.

  • Comment number 69.

    It's very important Stephanie that you draw attention to the need for Portugal, Greece and Ireland to become more competitive in what is the Germany dominated Euro-zone.

    All Euro-States have to keep up with German productivity, otherwise their debts will mount to unsustainable levels.

    It's worth reminding ourselves that Britain's productivity grew slightly faster than both Germany's and the Euro-zone's productivity over the whole period of 1990 to 2010, and mostly in the last ten years. And at a faster rate than had ever been achieved hitherto.

    So how is it then that our economy is said to be "in a mess"?

  • Comment number 70.

    The real worry for the UK is the imminent collapse of the property market outside London. Artificially low interest rates have delayed this for a couple of years, but not for much longer. The bank's policy of punishing the prudent and rewarding the feckless, in the hope that economic growth would ride to the rescue, has proved a dismal failure. Spain will follow Portugal and Ireland, and accelerate the collapse in UK property. The banks have no answer to this and will soon (once again) be at the doors of Parliament with their blackmail notes and begging bowls. But this time the cupboard is bare!

  • Comment number 71.

    I'd recommend Justin150's posts as required reading for anyone wanting to understand a balanced economic case for and against a single currency zone. Indeed a friend back in the 90s presented the same set of arguments and subsequent events have proved him entirely correct.

    The case for and against a single currency zone should be based entirely on economic arguments. Political reasons (either from the little englanders or the rabid europhiles) should be left out. John from Hendon appears to be one of these and he should take a chill pill

  • Comment number 72.

    Will a bail out save Portugal, Ireland, Greece,.... .... ?

    Will an air bag stop a car crash?

  • Comment number 73.

    #69 Leftie - its in a mess because the tax take cannot fund the government spending and as a consequence we are building up an increasing mountain of debt which will cost more and more etc etc etc. Productivity is at the margin of that basic fact although could help medium term with a recovery. So increase taxation, increase growth or reduce govt spending or perhaps all three. Portugal, greece, ireland etc tell us that the river in egypt option (ie problem denial) is unlikely to be a good long term plan.

    The other possible solutions in terms of growth, tax increase, and cuts are all highly speculative because no-one has any idea which combination of the above is the best one (there may in fact be more than one). Of these relying on growth to solve matters is probably the most speculative as this looks likely to be anemic for some time to come - no matter how much cash we keep pumping into the system.

    As no-one has any real idea what to do, opinions on the best way forward are based upon political considerations.

  • Comment number 74.

    To Leftie at 69

    All Euro contries have to follow the German example in producing and selling otherwise they run out of Euros and into bigger and bigger debt. The UK has, for better or worse, these days more for the better, the freedom to print and devalue its own money.

    To compete with Germany, we have to grow our production to the level where we sell more than we buy - not something that could happen very quickly even if we had a Gov with intelligence to try.

  • Comment number 75.

    I have some difficulty reconciling the "crisis in the eurozone" with a currency which is riding high in the markets against sterling (€ 1.12 = £ 1.00) and the US dollar (nearly $ 1.50 = € 1.00).

    If the euro is such a disaster as British journalists like to portray, why are the UK and American currencies so weak against it?

    Discuss.

  • Comment number 76.

    31. At 20:50pm 4th May 2011, TheComingStorm wrote:
    Lets pretend you are the boss of a Japanese multinational looking to site a
    new plant in the EU - you will want to put it a country that is part of the
    biggest currency block on the planet, the Eurozone.
    ----------------------
    Japan has its own national currency, low cross-national labour mobility, practically
    zero immigration, trade barriers, a common culture and a very strong sense of national identity and self-interest. All things the supporters of the Eurozone want to "solve".
    Which begs the question why did you use it as an example of the country doing the
    investing ? I would imagine the number of unemployed people in Tokyo begging for a
    Volkwagen factory must be fairly low

  • Comment number 77.

    @70 I just can't see the collapse you are seeing.

    What seems to be happening is long term stagnation below inflation. So in real terms houses are falling, but without the collapse you are talking about. I suspect the government/BOE know this, and has been the plan all along.

    A slow float downwards, which doesn't lead to a negative equity shock, but prices do come back down to more realistic wage/borrowing levels over say 5 years.

  • Comment number 78.

    Leftie@69

    The UK government is borrowing £400Million every day to pay for our OTT public services, for our subscription to the EU and as freebies to third world countries with nuclear weapons.

    It has been pointed out before that many western governments are into deficit financing their expenditure, but the UK in the past 10 years have increased government borrowings at an irresponsible rate to a level that now exceeds government revenues forecasts by a long way. Even with the present cuts this new government have been left a 'poisoned chalice legacy' by Brown that requires a continuation in government borrowing for another five years at least, based on economic estimates that are at best very optimistic.

    As one of your fellow newly enlightened lefties, Ed the BallsUp, has indicated, this current policy of cuts in government expenditure is essential, only the rate of cutting and over which period actually divides the two main political parties.

    Yes, we are in a big mess and it has been coming a long time and as an elderly person I really feel deep for our younger people who have been left to pay for this mess for many years to come.

    For twenty years the UK people have been consistently let down by our totally incompetent politicians of both main parties, that systemic weakness will not change but continue to contribute to yet another mess when we/you eventually pay for this one.

    Economics is just another tool for politicians to exploit in their persuit of perpetual political power and when it all goes wrong we the taxpayers pay the bills.

    Yes we are in a big mess, bigger than many people wish to admit or ignorantly realise, by the way I am non political, I detest all UK politicians.

  • Comment number 79.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 80.

    #33 TheComingStorm

    "Do you not understand currency rates ?"

    Check out the actual price of oil.

    http://inflationdata.com/inflation/images/charts/Oil/Inflation_Adj_Oil_Prices_Chart.htm

    The point I am making is that Oil is king.
    Everything, including precious metals depends on energy.
    The rest is just paper shuffling and gambling.

  • Comment number 81.

    The case for and against a single currency zone should be based entirely on economic arguments. Political reasons (either from the little englanders or the rabid europhiles) should be left out. John from Hendon appears to be one of these and he should take a chill pill
    ------------------------------------------------------------------------------
    The rabid Europhiles and 'little Englanders' are one and the same. They claim that England/UK is too small to survive on its own out there in the big wild world. They call their opponents that name to shift their lack of confidence onto somebody else and to scare the undecided into a huddle with Europe.

  • Comment number 82.

    #10>>Pound still devaluing against the Euro so we are apparently even weaker but expected to contribute via IMF & EU funds?

    Contribution to the IMF has nothing to do with the strength or weakness of the country's currency. It has *ALL* to do with the country's share of the voting rights in the IMF !!

    If you want to pretend to be a big boy, you have to pay the big boy's price !! The alternative is to surrender all voting rights in the IMF and pay nothing !! This is the same problem facing the Yanks right this moment !! They are bust but they still have to pay the big boy's price to the IMF !!

    Meanwhile, the BRICS countries are rubbing their hands gleefully and paying the small boy's price, despite having the largest stashes of reserves in the world !!

    Pax Britannia is no more and Pax Americana is on the way out !!

  • Comment number 83.

    #18 >>I did come across a map in an old bookshop in Bavaria. It was a map of the British Isles with the legend (translated) 'here be stupid people'

    If it's a real Waldseemuller map, I'll pay you £10,000 for it !!

  • Comment number 84.

    #25 >>Eurozone allows for mass movement but it simply dos not happen (different languages and cultures are but one reason)

    Ahh !! So my Rumanian barber and Hungarian baker are mere figments of my imagination !! Real nice bread even if it's imaginary !!

  • Comment number 85.

    #27 >>This is precisely what the IMF did to the developing nations - the austerity prevented them from growing, and kept them borrowing.

    After the 1997 Asian Currency Crisis, the IMF "bullied" 4 countries into austerity - Thailand, Indonesia, South Korea and the Philippines !! If you statement is correct, I wonder why they are not in the same boat as the US and Europe ?? There does not appear to be complains of over-borrowing from those same 4 countries !!

  • Comment number 86.

    #28 Austerity means that country can carry on limping along in the bad old ways for a few more years. Default means admitting that the bad old ways are *REALLY, REALLY BAD* and they have to find some other way to survive or starve.

    This is more stark in countries that do not produce sufficient food or other forms of export !! In the case of PIIGS, it means thay will have to survive on bread and water for a while until they have earned enough money to convince other countries to accept their "currency" !! Unfortunately, there is this little problem that membership in the Euro does *NOT* allow them to default !! Therefore, they will have to leave the Euro in order to default !!

  • Comment number 87.

    #33 >>Currently 1.089 Euros to the £1, 1.48 to the S (oil is priced in dollars).

    Err, hello ?? There appears to be a slight discrepancy in your comparison of the quid to the greenback -

    http://www.bbc.co.uk/news/business/market_data/currency/default.stm

    I believe it's $1.63 to £1 as of yesterday !!

    Then again, what do I know about exchange rates ??

  • Comment number 88.

    73 feedbackloop,
    "So increase taxation, increase growth or reduce govt spending or perhaps all three."

    You cannot do all three - if you increase taxes and cut spending: growth stalls, tax revenues decline, benefits go up, bad debt increases, banks take longer to recapitalise. Most of the deficit reduction thus fails to take place.

    "Of these relying on growth to solve matters is probably the most speculative as this looks likely to be anemic for some time to come - no matter how much cash we keep pumping into the system. "

    There is little that is speculative about increasing the denominator (growth in GDP), rather than reducing the numerator (cuts and taxes). When the government spends or invests, this automatically increases GDP (govt spending is included in GDP). The only way it fails is if it is spent the wrong way, and therefore does not create jobs to match the GDP growth.

    As the private sector pays down its debt (with the help of govt spending) and begins to spend again, then tax revenues will rise and benefits and bad debts will fall, along with the deficit.

    The only speculative part of this is how long before the private sector feels they have payed down enough debt and feels able to increase their spending / investment.

  • Comment number 89.

    #34 >>Of course Britons never never will be slaves, I heard that in a song.

    No but they will be indentured servants until their debt is paid off in the next 50 years or so !! So, keep working, slaves, oops, sorry, I mean, indentured servants !!

  • Comment number 90.

    85 ishkandar,
    I think you will find that the countries you mentioned all gave up IMF help eventually due to their's and others' previous experiences, and only then did they start growing properly. Their success had nothing to do with the IMF.

  • Comment number 91.

    #35>> Just watch China get in trouble as their centralised management policy breaks down in the face of domestic pressures.

    The funny thing is that "Socialism with Chinese characteristics" is more Capitalist than any country in Europe !! BTW, Britain is probably more "Communist" than most other so-called Communist countries except the DPRK and Cuba and Britain so seriously does not need comparisons with the DPRK !!

  • Comment number 92.

    #53 FDD>>......we now still await the conditions that push Spain, Italy and Belgium over the top. From the commentries the feelings appear to be that their failue is a matter of when and not if.

    I'm not so sure about Spain. After all, they still have Barca and Real Madrid that they could flog to the Germans if need be !! Think about all those lovely players !!

  • Comment number 93.

    #56>>Why does Portugal need IMF support and Japan, with a far greater national debt, does not?

    Two reasons !!

    1) JGBs (Japanese Government Bonds) are mainly bought by their own citizens out of their own savings whereas the Portuguese bonds are not.

    2) The Japanese have a great many world class industries and companies whereas Portugal has not (Nando's Peri-Peri Chicken ??? Chupa-chups ??) !!

  • Comment number 94.

    #76 >>I would imagine the number of unemployed people in Tokyo begging for a
    Volkwagen factory must be fairly low

    Actually the number of unemployed people in the parks of Tokyo are quite high but they'd rather beg for a Honda or Toyota factory. Such is their mentality !!

  • Comment number 95.

    #78>>...by the way I am non political, I detest all UK politicians.

    Sir, do I detect that you are a well-balanced person; with a chip on each shoulder ??

  • Comment number 96.

    #88>>The only way it fails is if it is spent the wrong way, and therefore does not create jobs to match the GDP growth.

    Therein lies the Keynesian Folly that plagues Britain now !! "Creating jobs" does not mean anything if those jobs are non-export-productive !! We can create a job of "Minister-in-charge-of-counting-toilet-rolls-at -Westminister" and pay him a million a year but how does that earn us more foreign income ?? However, it *WILL* increase the GDP !! Pretty statistics based on smoke and mirrors !!

  • Comment number 97.

    #90>>I think you will find that the countries you mentioned all gave up IMF help eventually due to their's and others' previous experiences, and only then did they start growing properly. Their success had nothing to do with the IMF.

    They didn't "give up" IMF help. They bailed themselves out and swore blind that they'll never ever be caught out without sufficient national reserves. Since their escape from debt slavery, oops, sorry, I mean IMF bailout, they have been very busy piling up reserves are a great rate of knots !! When the current manure met the rotating object, they had nice snug piles of reserves to fall back on !!

    Meanwhile, the Great Gordo piled up debts like they were going out of fashion. For a man from a supposedly religious background, he seemed to have forgotten the lesson of the 7 fat cows and the 7 lean cows !!

  • Comment number 98.

    #88 Charles - you appear to have a certainty about the prediction of growth in GDP and increase in tax take and how it's related to the main economic levers available to governments that I do not share. Although I note that you accept that timing is uncertain.

    For me central economic management is rather more like that music hall routine where the performer is trying to close the drawers on a chest of drawers and whenever you push one in one or perhaps two or three pop out. We only know which one will pop out next because of trial and error and a very rough idea of whats going on inside and occasionally the chest pushes out a drawer we didnt expect. On each economic cycle the chest of drawers is different.

    So I agree that to increase tax and cut spending at the same time is likely to temper growth - especially anemic growth - but of course there are points in the economic cycle when exactly this can be done - Geoffry Howes first budget for example.

    I'm not suggesting that this is the right solution now. For example interest rates in 1981 were 14% and the ability to reduce them below 10% stimulated growth and reducing inflation from 12% to 3% made a firm platform for the recovery. There was however a pretty heavy price to pay in unemployment.

    The point I am trying to make is that economics is a very inexact 'science' and the potential error band on any set of economic actions and predicted results is large because of the vary great uncertainty in the actual starting conditions, the mechanisms at play and the integrated economic behaviour of 60-70 million individuals. Of course if you involve the BOE economic model the standard deviation of the result (ie actual versus predicted) seems much larger than it should be .....but on the other hand they are trying to do something quite hard.

    GDP Growth and the associated increase in the tax take is actually quite an uncertain animal - and actions taken to stimulate it, control it etc are inherently speculative. G Howes budget of 1981 was speculative and so was osbornes first budget - but so is any budget that seeks to achieve material change in the economic situation.

    But you have I think suggested a course of action that I had ruled out - ie increase GDP and tax take by borrowing a shed load more money and increasing/maintaining the public sector spending and then waiting for 'growth in the private sector' to pay down the debt.

    As speculations go I would say thats pretty extreme but of course i

  • Comment number 99.

    There is a real real ancient story may be some few thousand years from the land of Aryas ...

    Here the spirit of water body asks the Yogi to answer a few very difficult questions before he could touch the water in the lake.

    One of the questions was:
    Question by "Yaksha", the spirit:
    What do you find the most surprising thing about human being ?

    Answers Yogi:
    Even after looking, human mostly does not seems to see and even after experiencing he does not seems to learn !!

    Even after these milleniums when Yogi gave this answer, we are all seem to be in the same boat ...

  • Comment number 100.

    84. At 19:45pm 5th May 2011, ishkandar wrote:

    #25 >>Eurozone allows for mass movement but it simply dos not happen (different languages and cultures are but one reason)

    Ahh !! So my Rumanian barber and Hungarian baker are mere figments of my imagination !! Real nice bread even if it's imaginary !!
    =================================

    Check out my post #42 you will find the most recent stats I could find for movement of labour within EU and USA. In the EU there is some movement but it is certainly not "mass", the comparable figures for USA are 11-14x higher. I suspect (but cannot prove) that the new east Europe members of the EU have a much higher movement of labour (Polish builder effect for example)

 

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