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Euro Break Up?

Posted 01-19-2009 at 11:36 AM by Cableboy
There is an article in the Daily Telegraph today that warns of a possible exit by the Irish of the Euro. Now, wouldn't that be something?

An Irish economist has said that the Irish Government should threaten the EU, that they will pull out of the Euro unless they get more help to handle the economy. Ironic really, because Ireland has greatly benefited from being in the EU, and hence the Euro.

But I can see his point. The Euro is a great idea in times of economic prosperity, but a rubbish one when there is economic turmoil.

I think it was flawed from the start, and I have always said so. The idea that you can have monetary union without the possibility of fiscal transfers is ludicrous. The United States has one currency, but they have the possibility of moving funds (federal tax money) from one part of the country to the other in times of economic problems in one part of the country.

In Europe, there is no mechanism to do this. If the Irish bank system goes bust, Angela Merckel can hardly raise taxes in Germany to pay for its rescue. The Germans will not accept that - believe me, I have lived there.

I always think of the book, Gullivers Travels, when thinking about Germany's position in the Euro; like a giant being held down by the Lilliputans.

Germany has suffered from the relatively high interest rates caused by the smaller EU countries having no fiscal discipline because the consequences on their currency is non existent. In those smaller countries (i.e. everyone except Germany), the interest rates have been relatively too low, meaning massive credit has been created. Hence the problems now.

When you lock a country's currency, you lock the interest rates. That turns two economic variables to constants, which means that the other variables are more volatile. The end result of it all is lower competitiveness and unemployment, because Euroland has high relative interest rates.

You can see it in the bond spreads beteen Germany and Italy, for example. The system is under strain. If there is 15%+ unemployment in Spain or Italy, there will be social unrest unless a populistic politician steps in and resolves the problem by leaving the Euro. Now, who could that be, I wonder?......

So, if the Euro broke up, what would happen?

Well, the demand for forex dealers would go through the roof! Apart from that, we will probably trade Italian Eruos against German Euros, just like we have three Scandinavian crowns as currencies.

So, let's see what happens.....
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