The Euro was explained very well recently in The FT –
If you are holding euros – or too much in the way of euro investments – this is what should be getting you worried.
Because it means that the great European currency experiment is under increasing strain.
There is a general view in the markets that because the ECB has as its priority the creation of price stability (the prevention of inflation) it won’t go down the same stimulus routes as the US and the UK. It won’t move interest rates to zero and leave them there indefinitely or print money in the hope of softening the effects of recession because it won’t tolerate the inflation that would result in, particularly given the apparent growth in its two most important economies. That in turn, or so the story goes, means the euro will stay strong relative to the pound and the dollar.
It’s a nice idea, but, says Russell Napier of brokerage CLSA, it won’t wash.
Because the failing economies in the region won’t be able to cope with the deflation needed to make them competitive again in such an environment.
As financiers Jim Mellon and Al Chalabi pointed out in their 2007 book, The Top Ten Investments for the Next Ten Years, when countries in trouble have no control over their own interest rates, exchange rates or monetary policy, the only way they can work to regain any degree of competitiveness is to manufacture deflation – that is to cut wages as fast as possible.
And that doesn’t stay politically acceptable for long. Indeed, says Napier, while most governments can survive the slow destruction of a nation’s wealth via inflation (we notice this less) “it is unlikely that any democratic government would survive . . . rapid deterioration in the wealth of its populace” by deflation. The question then is how the ECB will “respond to this increasingly desperate political and economic dynamic.”
See the full article from August 21 2009 here –
This is what I wrote on Conservative Home on this topic today –
There seems to be an occasional effort amongst (e)utopians to push again for the Euro, saying how lucky Ireland has been that they are inside the Euro, compared to Iceland which is now (possibly) applying for membership.
Nothing could be further from the truth. Ireland can only regain competitiveness by cutting wages and living standards as her currency cannot fall. This is proving politically destabilising. The Irish/Euro story is far from over.
Iceland has 10% inflation but her unemployment is nothing like as bad as unemployment and falling wages in Ireland.
While seeking more EU opt-outs and a reduction in our EU relationship, just be grateful that Sterling has been able to fall to keep us competitive. Our Euro-inflicted brethren are struggling.
Strangely Gordon Brown is still given the credit for keeping Britain out of the Euro, but it was IDS who made keeping out of the Euro permanently, Conservative Party Policy since 2001, putting the Euro beyond Brown’s political reach.
Had Portillo won the leadership in 2001, or Kenk Lark, I am sure it would have been different.
Let’s be grateful for our past eurosceptic victories, and anticipate confidently those to come.