Buy euros – the single currency is finished
The debt bill is too high for the Club Med nations and they will have to leave the zone, says Jeff Randall.
The problem was, in order to exploit his genius a bankroll was required. At this point, a credulous father was inveigled into the scheme. Suspending disbelief, the hapless parent signed a six-figure cheque and wished his son good fortune as the boy left for
After a few days with no contact, Dad started to fret and sent the lad a tentative message: “How are we doing?” No reply.
A week later, he tried again, only this time was rather more panicky: “What’s happening?” Still no reply.
Finally, the desperate man sent an ultimatum: “Get in touch – or else!”
His delusional offspring eventually replied: “Delighted to inform you system is working. Please send more money.”
This, now, is the position of the Club Med countries within the eurozone. The single currency is functioning so brilliantly, its vulnerable members are sliding towards bankruptcy. Frittering away their credibility in remorseless bond markets, they turn to Das Scheckbuch in
On current form,
Yes, the system is working a treat. No luck required, just more money. But from where will it come? The bail-out fund of 750 billion euros, cobbled together by the European Union and IMF, will not be enough. It may buy time, allowing
Of the six eurozone countries that still have triple-A credit ratings – Austria, Finland, France, Germany, Luxembourg and the Netherlands – only one really matters: Germany. As the EU’s economic powerhouse (GDP growth was 3.6 per cent in 2010), it has become the lender of last resort. So far,
So what can be done? Some are calling for the issuance of an all-embracing euro bond, enabling the weaklings to access credit on terms similar to those enjoyed by more muscular neighbours. Last week, I asked
What about the ECB? Can it be relied upon to loosen monetary policy and allow rising inflation to ease the pain of the over-borrowed and inefficient? Not while Jean-Claude Trichet is in charge. The central bank piper is unmistakeably French, but the tune he plays is that of a Bavarian oompah band. Forget a cut in the ECB’s interest rate; it’s more likely to go up.
In short, there is no get-out-of-jail card. As the Bank of England’s governor explained this week, eurozone countries that binged on cheap money and self-indulgent pay awards must face up to improving competitiveness: “But because they are part of a monetary union and so do not have their own currency, they can do so only through outright falls in nominal wages. And to force that adjustment, unemployment has had to rise very sharply, compounding the impact on living standards.”
What, I suspect, Mervyn King believes, but dare not say, is that the excruciating realignment of income to output in the Club Med has much further to run.
As long as
The same will apply to