That Glorious Euro

The root cause of the crisis is in a sense Europe\’s monetary union. The euro effect halved Spain\’s interest rates almost overnight. Rates then fell below Spain\’s inflation rate for several years, fuelling an explosive credit boom. The country\’s current account deficit has reached 10pc of GDP, the highest of any major economy.

This is the bit that all those federasts panting for the euro rather forgot to mention. A single currency is indeed lovely for the transaction costs side of things. It also, inevitably, means a single interest rate though. And with different inflation rates, widely disparate economies, this might not be a good idea.

The rate was clearly and obviously too low for Spain: as it is now too high for Spain.

"We have a very worrying situation. The developers simply cannot refinance their debts. We need to cut interest rates by 2pc, which is obviously not going to happen,"

There is no solution to this….other than leaving the euro.

8 thoughts on “That Glorious Euro”

  1. Hmmn. When rates are “too low”, the Government can raise taxes and pay down debt. In the future when rates are too high, Government can borrow to cut taxes to stimulate demand.

    It’s supposed to be what the Euro stability pact is about. But of course that was never going to work while we live in an idiocracy.

  2. The problem surely lies with the method used by central banks to manage their currencies.

    If the currency was managed by buying and selling assets thus increasing or decreasing the supply of money to maintain its value, then interest rates could be allowed to find their own level in any particular market.

  3. Why does there have to be a single interest rate?

    Within the sterling-zone, different people pay vastly different interest rates depending on risk profile, security etc.

  4. The country’s current account deficit has reached 10pc of GDP, the highest of any major economy.

    I take it the growth and stability pact is long forgotten these days, then.

  5. Did the Growth and Stability pact have any reference to current account deficits? Surely this just relects a willingness of foreigners to invest in the country.

    I’m going to make a guess without looking at the article – it’s written by AEP. One of the most interesting writers on financial matters in the non-specialist UK press, but rabidly anti-euro. It would be nice if he’d note that Iceland seems to be having a lot of difficutlies despites not being in the euro, and I wonder how many other smaller European countries would have suffered in this financial crisis out of it.

  6. It’s also worth remembering that the euro has been a stablising influence – one much needed – on the international financial system, by taking much of the adjustment against the US dollar that most regions aren’t prepared to do.

  7. “Did the Growth and Stability pact have any reference to current account deficits?”

    No. I think Tim N is confusing current account and government deficits. And yes, the article is written by AEP.

    Since Spain is currently running a 2% government surplus, a few Keynesian infrastructure projects to shore up demand [or tax cuts, if you prefer to swing that way] would seem like an excellent way of resolving the problems.

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