William Hague, the British foreign secretary and known as a Euro-sceptic, should still have been able to have shown more confidence on behalf of the UK in the future of the Euro-zone, when interviewed recently on the BBC Radio 4 Today programme. Speaking from Lisbon during a NATO summit, he saw it as very much in the British national interest for the Euro-zone to be stable (some 60% of British exports are towards Euro-zone markets). There was also a specific although separate (from the Euro-zone) case for assisting Ireland with its current financial problems (British and German banks are amongst its biggest creditors). However, he failed to reject the suggestion that the Euro-zone was in danger of imminent collapse, pointing out instead his own view over the years of the inherent tensions in having a Euro currency zone which essentially locks together the exchange rates and interest rates of countries with very differently functioning economies.
The problem for the UK is perhaps encapsulated in the opinion of Dominique Strauss-Kahn, at the head of the International Monetary Fund (IMF) and a potential challenger to Nicolas Sarkozy for the French presidency, who considers the only solution to the financial crises now facing Ireland and impacting Greece, Portugal and Spain, is for more centralisation within the European Union, especially in financial, economic and social policy.
However, the German chancellor Angela Merkel also did not build confidence in the financial markets when, in response to political pressure from voters opposed to bailing out weaker countries, she increased nervousness amongst lenders by suggesting that banks and investors should in future not just be bailed out by taxpayers but take some of the losses themselves. This drove lenders to charge more for their loans to reflect their perception of added risk and increased the pressure on Ireland, where a run on its crisis-hit banks was essentially already underway as companies quietly withdrew their deposits.
Being outside the Euro-zone has allowed the UK the same flexibility in monetary policy it has used in the past to allow the pound sterling to depreciate against the Euro and other trading currencies in an effort to stimulate growth in the economy particularly from exports. However, a break-up of the Euro-zone would hurt not only the UK but also seriously undermine the current global recovery, given the major trade imbalances and talk of currency wars between the major trading nations.
Within the Euro-zone, Germany has followed through with its normal, correct economic discipline and maintained its competitiveness by only allowing its unit labour costs and pay per employee to rise by 10% or less from 2000 to 2009. Today, therefore, it is showing a healthy trade surplus as customers have continued to buy the German-made quality goods they value, despite the appreciation of the Euro. Over the same period, however, most of the problem-hit economies such as Greece, Spain & Ireland have allowed labour costs to rise by 20- 30% compared with Germany and are now suffering the consequences. Other European countries such as Italy and France have also lost significant competitiveness compared with Germany over the 11 year existence of the Euro. There is a need, therefore, for greater economic discipline by the weaker members of the Euro-zone.
If we consider the options, one view is that Germany cannot expect these very different but weaker economies to be able to emulate its own very low inflation, weak domestic demand and export driven model for the Euro, based on the Deutschmark experience. Germany, therefore, has to find a more middle way with its Euro-zone partners by reducing its current account surplus and stimulating its own domestic demand for imports, in an effort to generate more stability in the Euro-zone. Otherwise the only other solution would appear to be that proposed by Dominique Strauss-Kahn for more centralisation and fiscal consolidation within a viable single currency union, backed by a European federal budget to enable e.g. the poorer, less competitive regions to be supported by the richer ones, an option not likely to be popular with German voters (see Categories/Chairman?s Blog/Federal EU? In the right hand index column) or indeed the UK.
In the meantime, a monthly Reuters poll has 34 out of 50 economists questioned, predicting that Portugal will likely follow Greece and Ireland in requiring bailout funds. Already 10-year bond yields in Portugal and Spain are increasing rapidly, with Spanish banks also major holders of Portuguese bonds. The tension between the Euro-zone periphery and the core is then demonstrably clear with the German and French economies having been performing well, now indicating the case eventually for higher interest rates.
Just to get eveybody on the same page about this, the proposed (and inevitable) bailout of Portugal has nothing to do with helping out the Portugese people, it » »s about bailing out the foreign banks that are owed money by Portugal. This is a bailout organised by politicians in the pockets of the banks for the benefit of those same banks, let » »s never forget that as we are deluged with cries of « Austerity! »