Euro crisis could lead to a federal Europe
The cracks are starting to appear as the borrowing difficulties of southern EU states, including Greece and Portugal, start to give the big money investors cause for concern.
We are all too familiar with that situation but Greece in particular is the big worry that has sparked the euro crisis.
Those within individual countries with leadership roles who had he authority to question where Europe was heading, such as our Central Bank and the ESRI, to a lesser extent, never fully articulated the insanity of weak economies, such as Ireland’s, being part of a low interest rate regime when the economy was heading for the rocks.
That was the case elsewhere, too. Quite simply the leadership wasn’t there and the Central Bank, desperate to keep its head down for fear of upsetting the EU or their ECB overlords looked for every possible weak signal that suggested the property market was not going to blow up in our faces. As a result, several countries across Europe are struggling to fund their debts and the fear is that Greece may have to be bailed out in the end.
By September 2008, the Irish Government had to row in behind the banks to prevent them collapsing before our eyes.
That’s now history, but the price to be paid for that outrageous debt binge is only starting to emerge as the Greeks and others like ourselves face mounting deficits that have resulted in a huge loss of confidence in the euro, which has fallen 10% against the dollar since November.
History has shown that in all cases to date attempts to create transnational currencies have failed, even going back to the time of the great Roman Empire.
The analysis highlights that unless the links between states become federal, as in the US, such ambitions are generally doomed.
Without the federal system that dictates the total borrowing exposure of the states involved, the risks are huge, as the euro model has clearly demonstrated.
It’s been suggested by various sources at this point that the crisis will end the euro dream as we know it.
Instead of Greece and others leaving the euro, Connolly Global Advisers, a consultancy, suggests Germany could leave instead. Berlin would reacquire its strong Deutschmark, while those left in the eurozone could then devalue the euro to provide themselves with the out they need to boost their credit ratings and to improve their loss of competitiveness, lost during the boom times.
Connolly isn’t on its own in this growing perception of the euro. It was claimed yesterday that the over-valued euro and loss of competitiveness would lead to the break up of the euro bloc, according to Societe Generale SA’s London based strategist, Albert Edwards.
Their problem is that years of inappropriately low interest rates resulted in overheating and rapid inflation resulting in the current turmoil for these euro denominated countries.
Greece already has a debts above 100% of GDP while Ireland’s figure, though rising sharply, stands at a much more modest 65% and Spain’s at 55%.
Lenders are fearful that the Greek situation could ultimately lead to a debt default that will force a re-think on the euro.
Reassurances from the EU in the last few days that Greece will not be abandoned by the euro states has not halted the slide in the currency.
Without doubt the fledgling currency is facing its toughest test to date.
In the end if we want a strong euro then we are likely to face much tougher central controls from Brussels and that seems another way of saying a federal Europe.
