Euro Zone

The Euro has been much more successful than many supposed and it has, in a relatively benign economic period established itself as a credible currency. Now, however times have changed. There are serious problems looming. These are not just economic. If they were solutions to Greece and shortly Spain, Portugal and maybe Italy would be tough but obvious. They are structural and social.

Yesterday there was a first aid type statement from the Euro leaders about firm intentions, but no plan, no cash and no action. Germany kept its cheque book firmly closed as news came through that its output growth had stalled, threatening the optimism that the worst of the recession is over. Meanwhile Greece has not asked for money in the hope that when it goes into the markets to refinance maturing debt in March, the cheque books of Asia will open obligingly. Much depends on Beijing. Much will now always depend on Beijing. If Asia says no, or puts the price up too much, default will loom.

This will most likely force Germany to stump up, since the cost to it will be the greater if the whole of Euroland finds the cost of borrowing rising. It is not the other counties are not in debt. It is that some have gone way over the top. But Germany is determined that the spendthrift countries of the sunshine belt shall learn a lesson. Merkel knows that German taxpayers will be very angry if they have to pay for the financial indiscipline of weak governments in other counties. It will force draconian measures like Ireland has adopted (to Germany’s warm approval) on Greece which will cause social unrest and bring down its government. It will go on demanding fiscal austerity until even the volatile Greek population sees no alternative. That will serve as a warning to the others to get a grip and do it fast.

All of this or something like it will make it clear that, in the end, it was the actual adoption of the Euro which assured the inevitable transfer of financial soveriegnty and budget control to a Federal Europe, not any number of negotiations and treaties argued over in the early years after its launch.

Because in the end that eternal truth will out. You cannot have a currency without a Government.  Especially not in troubled times.