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I am no economist and would not claim to understand the intricacies of this kind of fiscal deal over another but there does come a time when common sense rather than “technical sophistication” should and must takeover. Such a time seems fast approaching for the current situation over the Euro.

There is an interesting article in the Times today concerning Greece: “The Centre for Economics and Business Research (CEBR), a London-based consultancy, has warned Greek ministers they will be unable to escape their debt trap without devaluing their own currency to boost exports. The only way this can happen is if Greece returns to its own currency.” Worth checking it out.

http://business.timesonline.co.uk/tol/business/economics/article7140270.ece

I Do Not Gloat

Another interesting ‘take’ on the whole Euro madness is well expressed by Bruce Anderson in the Independent and it is well worth reading for the additional political perspective it brings: http://www.independent.co.uk/opinion/commentators/bruce-anderson/bruce-anderson-the-euro-is-entering-its-final-phase-1987528.html

At the end of May, Boris Johnson wrote a very good piece about the Euro in the Telegraph: http://www.telegraph.co.uk/news/newstopics/politics/7758012/We-can-take-no-pleasure-from-the-euros-fall.html And like him, my view that however daft the Euro was as a ‘project’ and I did say so at the time, there was no way that was going to work out in the real world. My view then was that it was like taking a group of top performing companies from the FTSE, mixing them up with a group of self employed one man bands and declaring that economically, they were the same, it was a total nonsense and horrific that so called sensible European Politicians couldn’t see the obvious flaws.

If I had realised at the time just how dumb these Muppets were, I would have nipped over to Brussels and ‘sold them’ London Bridge, on the cheap of course ! As with all things, that generation of politicians has thankfully moved on, Kohl, Mitterrand, Andreotti, Delors but, the ghost of their folly lives on to haunt their successors and us. Even though the UK escaped joining the Euro, we are not immune to the fallout as it goes wrong and perhaps it is time to face up to the consequences.

What Has Happened

In crude terms, the original ‘Crisis’ was put down to “Sub Prime US Loans” which I suspect was more a stop along the road rather than the original cause which was low interest rates, a massive expansion in global trade and Billions in currency looking for an “Investment Home”. It was this latter that lead to ever more obscure so called “securities” being bundled up and sold around the World plus Governments the world over thinking that they had found the secret of “Perpetual Motion”, the party would just never end…

However, when it did with a sickening thump, what happened was that in effect, Private Debt in terms of irrecoverable personal loans, were transferred to the Taxpayer, innocent and guilty alike (of personal profligacy), via Bank Bailouts. This has happened before in the USA but then it was only a one off Bank (Savings and Loan), which was returned to the private sector within 4 years or so in good health rather than pretty much the whole Banking Sector – Globally ! There has been a ‘suspicion’ for some time now that whilst in the US and UK, there has been a steady and inexorable “full disclosure” of outstanding liabilities, this may not yet be so within the whole of Europe.

The Investment Tripod

The normal broad advice for an investment portfolio would be a mixture of Property, Equities and Guilt Edge Securities, as they used to be called but now the phrase “Sovereign Debt” seems more fashionable and it is this latter that has obviously become more pressing because whatever you call it, it amounts to the Government of any Country borrowing money on the markets to cover its spending.

Governments borrowing money is quite normal if only to ease their cash flow however and unfortunately as just about every Country is seriously “at it” right now, the idea that whilst a business can go bust, a Country won’t, is wearing thin in the case of Greece, the game is definitely up and Spain, Portugal and Italy are looking dodgy so something radical will have to be done. The radical solution could be to ‘kick them out’ of the Eurozone, and that they return to their original floating currencies which in effect means a substantial devaluation of the “Debt” held by the Banks and other Institutions that have bought Greek Government Bonds.

How Painful ?

Very and all round but, it may be the only way to preserve the Euro if, that is what is desired. A reality would be that a reduced Euro Membership would require far tighter fiscal and tax co-ordination between the individual countries involved which implies a substantial loss of independence, the creation of a “Two Speed Europe” and also, a virtual “Single Monetary and Tax Union State” inside the EU of all the remaining Eurozone countries. Is that desirable ? It is a question.

Obviously such a move with a 10-15% devaluation of the “Loan Book” on each country that left the Euro, would be painful for all EU Banks in every one of the 27 countries involved as well as denting confidence in the rest of the World but, as a “Fire Break”, could it work and is it necessary ?

For the EU itself and the Eurozone, it is probably a minimum requirement simply because it is just not ‘going away’ any time soon. The “rescue package” for Greece a relatively small economy, will only buy it less than two years “out of the markets” to sell Government debt, Spain let alone Italy, are far too big as economies to even try and rescue in the same way, what choice is there ?