Thread: Whatever Germany does, the euro as we know it is dead

Angela Merkel's ban on short-selling is just a distraction from the horror to come

Whatever Germany does, the euro as we know it is dead

By Jeff Randall, Telegraph
Published: 7:56PM BST 20 May 2010
Comments 315


Angela Merkel's response to the euro crisis is 'doomed to fail' Photo: Bloomberg

"Money can't buy you friends, but it does get you a better class of enemy" – Spike Milligan

For Angela Merkel, leader of the eurozone's richest country, a queue is forming of high-quality adversaries. As she tips German Geld und Gut into the furnace of a rescue package for the euro, while going it alone in a misguided ban on market "manipulators", the brass-neck Chancellor has infuriated domestic voters, angered her EU partners (in particular the French) and invited the so-called wolf pack of global traders to do its worst.

In one respect, Mrs Merkel is right: "The euro is in danger… if the euro fails, then Europe fails." What she has not yet admitted publicly is that the main cause of the single currency's peril appears beyond her control and therefore her impetuous response to its crisis of confidence is doomed to fail.

The euro has many flaws, but its weakest link is Greece, whose fundamental problem is that for years it spent too much, earned too little and plugged the gap by borrowing in order to enjoy a rich man's lifestyle. It flouted EU rules on the limits to budget deficits; its national accounts were a moussaka of minced statistics, topped with a cheesy sauce of jiggery-pokery.

By any legitimate measure, Greece was unworthy of eurozone membership. That it achieved card-carrying status was down to the sleight-of-hand skills of its Brussels fixers and the acquiescence of central bank bean-counters. Now we know the truth, jet-hosing it with yet more debt makes no sense. Another dose of funny money will delay but not extinguish the need for austerity.

This is why the euro, in its current form, is finished. The game is up for a monetary union that was meant to bolt together work-and-save citizens in northern Europe with the party animals of Club Med. No amount of pit props from Berlin can save the euro Mk I from collapsing under the weight of its structural dysfunctionality. You cannot run indefinitely a single currency with one interest rate for 16 economies, when there are such huge fiscal disparities.

What was once deemed unthinkable is now, I believe, inevitable: withdrawal from the eurozone of one or more of its member countries. At the bottom end, Greece and Portugal are favourites to be forced out through weakness. At the top end, proposals are already being floated in the Frankfurt press for a new "hard currency" zone, led by Germany, Austria and the Benelux countries. Either way, rich and poor are heading in opposite directions.

When asked on Sky if, in five years' time, the euro will have the same make-up as it does today, Jeremy Stretch, a currency analyst at Rabobank, the Dutch financial services giant, told me: "I think it's pretty unlikely." The euro was a boom-time construct. In the biggest bust for 80 years, it is falling apart.

Telegraph loyalists with long memories will be shocked by none of this. In 1996, Sir Martin Jacomb, then chairman of the Prudential, set out with great prescience in two pieces for The Sunday Telegraph why a European single currency, without full political integration, would end in disaster. His prognosis of the ailments that might afflict the eurozone's sickliest constituents reads as if it was penned to sum up today's turmoil.

"A country which does not handle its public finances prudently will find its long-term borrowing costs adjusted accordingly," Sir Martin predicted. "Although theory says that default is unlikely, nevertheless, a country that spends too much public money, and allows its wage costs to become uncompetitive, will experience rising unemployment and falling economic activity. The social costs may become impossible to bear."

Welcome to the headaches of George Papandreou. The bond markets called his country's bluff. Greece is skint, but its unions don't want to admit it. There is insufficient political will to tackle incompetence and corruption, never mind unaffordable state spending. But, locked into the euro, Greece cannot devalue its way out of trouble, so it relies on the kindness of strangers.

Dishing out German largesse to profligate Athens, with little expectation of a reasonable return, is a sure way for Mrs Merkel to join Gordon Brown as a political has-been. Fully aware of the revulsion felt by Mercedes and BMW employees at the prospect of their taxes being used to pay for a Hellenic car crash, she has resorted to creating a bogeyman – The Speculator.

By announcing a ban on the activities of short-sellers (those who bet to profit from falling prices in financial markets), she is hoping her decoy will avert German attention from the small print of Berlin's support for Greece, which talks of developing processes for "an orderly state insolvency". This sounds ominously like a softening-up process for a form of default.

Greece's severe difficulties were home-made. The euro has come under pressure not from dark forces of speculation but respectable investors, many of them traditional pension funds, which, quite correctly, worked out that when the crunch came, the Brussels elite would sanction an abandonment of its no bail-out rule and cough up for a messy fudge.

In 1990, the late Lord Ridley, when still a government minister, caused a storm by telling The Spectator that Europe's planned monetary union was "a German racket designed to take over the whole of Europe". One knew what he was getting at, but it has not turned out that way.

Protecting the euro has become a project via which profligate states dip their fingers in Berlin's till. Germany is taking on nasty obligations without gaining ownership of the assets. Germany's version of The Sun, Bild Zeitung, feeds its readers a regular diet of stories about the way ordinary Germans are being taken for mugs. Trust has turned to suspicion. Next stop is divorce.

As for the United Kingdom, we must be grateful that those frightfully clever Europhiles, such as Lord Mandelson and Kenneth Clarke, did not get their way. Had they been able to scrap the pound and embrace the euro this country would be even closer to ruin. Without a flexible currency, the colossal deficit clocked up by Mr Brown would have crushed us completely. We have little to thank him for, but it would be churlish to deny that his decision to reject Tony Blair's blandishments in favour of the euro was a life-saver.

Sterling's devaluation has not been pretty, but it is helping to keep our exports competitive while the coalition Government begins rebuilding the nation's finances. Siren voices from across the Channel, calling for closer integration between Britain and the rest of the EU, can be confidently rejected. As for joining the euro, I find it impossible to imagine any circumstances under which it would be in the UK's interest to do so.

http://www.telegraph.co.uk/finance/comm ... -dead.html

Britain no longer has the worst deficit in Europe

By Edmund Conway Economics
Last updated: May 21st, 2010
26 Comments

You have to feel for Alistair Darling. No sooner is he ejected from Number 11 Downing Street than the Office for National Statistics declares that Britain’s budget deficit last year was actually significantly lower than it originally thought. Far from being a Greek-style 12pc of gross domestic product or £163bn (as prophesied by the Budget), Britain’s deficit last year (2009/10) was actually £145bn – just over 10pc of GDP.

This may still be pretty ugly, but at the very least it undermines the European Commission’s claim earlier this year that Britain would have a worse deficit than Greece this year and next. The chart below shows government debt in full-year terms rather than the April-year-end of the UK, but you get the picture: Britain was previously regarded as a real dog. It is now at the very least less of a dog. In 2009, Britain had less hideous a deficit than the US or Spain; in 2010 the UK is highly unlikely to be worse than Greece.



These revision alone have improved Britain’s public finances by £18bn – some three times the £6bn of savings the Conservatives campaigned on in the election (and now intend, as a coalition, to implement). What happened? In broad terms, tax revenues were far punchier than expected; as the economy recovered, businesses made more profits, paid more salaries and so the Government scraped in more cash. If ever you were looking for a better example of why plain old economic growth matters for your public finances, here it is.

The pound jumped by almost a cent against the dollar after the figures came out – no mean feat given that it has fallen all week. In all, these were about the best public finance figures we’ve had for a year or more – but they come too late for Alistair Darling.

That said, the news was hardly unequivocally good. The deficit is still hideous. The £10bn deficit in April alone may have been better than expected, but was still a record. George Osborne still faces a monumental task in bringing the public finances back in order – so the improvement should not necessarily be taken as a signal to ease up on his plan to cut debt quickly. However, my suspicion is that it will have provoked some spiky debate in the cabinet office between the Conservatives (who always wanted to cut fast and deep) and the Liberal Democrats (who wanted to cut slower and shallower).

Today’s public finances figures underline the fact that if one encourages the economy to grow – perhaps by cutting public spending more slowly – this can actually serve to reduce the deficit.

The Tories and LibDems may have agreed on a broad outline for the emergency Budget next month, but the all-important details are still under discussion. How much of the deficit reduction is done through spending cuts? How fast does the Government wield the axe? How much of the structural budget deficit should one aim to remove in the next five years? All of these questions have yet to be answered. Today’s figures will make those behind-the-scenes wrangling between Osborne and Vince Cable all the more fraught.

UPDATE: 13.30pm

A quick, but important, addendum. The deficit figures above (the£145bn one in particular) include the effects of “financial interventionâ€

The Euro and European Union are just a bunch of WEALTH REDISTRIBUTION farces to tap Germany out of whatever they can...