Britannia Radio

Well, here's one Irishman's musings on the euro to which Ireland is 
firremly tied - for now!

My musing on this is that Ireland was crazy to join the euro before 
Britain did, for  its two main markets  - the USA and the UK - are 
floating freeely and able to take their own decisions about their own 
future.  The story circulates in Ireland that we told the Irish we 
would join and that they acted on that.  To which i can only say "Why 
believe politicians?"  or that story for that matter!!!

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IRISH INDEPENDENT   1.4.09
Sean O'Grady: Next stop in the crisis could be the collapse of the euro
It makes no sense in a single-currency zone if one country does its 
own thing

Artist Conor Casby caused a bit of a stir recently by surreptitiously 
hanging unflattering likenesses of Taoiseach Brian Cowen, in a couple 
of Dublin galleries.

Mr Cowen himself remarked "that's not funny" when shown them.
Not funny then, and not pretty, but as good a description as any of 
the economy right now. The mighty of the G20 meeting in London are 
unlikely to give much thought to Mr Cowen and his artistic and 
economic challenges.

Yet, in its own way, Ireland and the other economic sick men of 
Europe could presage the most violent international currency crisis 
in decades -- the break-up of the euro.

Alarmist? Certainly. Impossible? Certainly not.

On Tuesday the Standard and Poor's ratings agency downgraded 
Ireland's debt from its prime AAA rating to a AA+, with a "negative" 
outlook. It was expected, but no less disquieting for that. The 
country's budget deficit will approach 11pc of GDP next year; as bad 
as the UK. However, Britain's deficit is essentially a matter of 
private grief. Our deficit, like those of Spain, Greece, Italy, 
Portugal and other fiscally incontinent states, is not -- for we all 
have to share a financial bed in the euro with the fastidious 
Germans. And the Germans may soon get a little impatient at the 
financial mess being created all around them.

We join Spain, Greece and Portugal, the other bad boys of the 
eurozone in having the sovereign debt downgraded. Italy tumbled a 
while back. More may follow.

The markets are already demanding 'risk premia' -- much higher 
interest on euro debt issued by the Greek and these other subprime 
governments compared to that issued by German government securities, 
the relatively safe Bunds.

So what? Well, simply that it makes no sense in a single currency 
zone if one nation -- or a group for that matter -- just do their own 
thing on the public finances, endangering the credibility of the 
whole scheme and leaving the fiscally responsible, principally 
Germany, to pick up the pieces, and the bills.

Now, to be sure, the Germans are ideologically, almost mystically, 
committed to the euro in a way that few in these islands can properly 
comprehend. Since Helmut Kohl, at least, it has been an unwritten 
article of German nationhood to anchor the federal republic in the 
European project, the single currency being the proud symbol and 
instrument of that. But, even in the Kohl era, there were limits to 
that ambition. Hence the strictures on budget deficits and national 
debt in the Maastricht Treaty, which framed the euro and left the UK 
with its famous 'opt-out'.

True, that was never designed with the credit crunch and deflation in 
mind, and the treaty provides wriggle room.

Nonetheless the Maastricht criteria were the next best thing to a 
Europe-wide treasury controlling the budget deficits of member 
states. Without even the Maastricht barriers there is little to 
prevent the euro taking on the shape of a new drachma rather than the 
stentorian qualities of the old deutschemark, guarded as it was for 
40 years by the ever vigilant Bundesbank. The independent European 
Central Bank, headquartered in Frankfurt, was created on the 
Bundesbank model, yet that has not stopped big beasts such as Sarkozy 
and Berlusconi from trying to bully it.

Soon, though, the Germans may run out of cash, if not patience. The 
OECD says that the German economy will contract by 5.7pc in 2009 -- 
even worse than the UK -- and grow only very slowly after that. 
German unemployment is already at 8pc, and her exports are 
collapsing. The problem with the euro -- as federalists and 
eurosceptics agree -- is that it suffers from not having a single 
treasury function behind it; someone or something to ensure that 
national budget deficits don't threaten the viability of the currency.

The politics of it are just too difficult, and the European 
Commission seems to have given up trying to shadow the role. In the 
end, monetary policy and fiscal policy must face in the same 
direction, and that means a single treasury working in harmony with a 
single central bank. The eurozone is a one-legged man auditioning for 
the part of Tarzan.  [!!]

None of this would matter if the euro were the dollar, the yen, the 
pound, the Swedish Kroner or even the Thai Baht -- the currencies of 
single indivisible states. The euro is not. Think about the US, say. 
If West Virginia or Michigan are having an especially rough time in 
the recession, no one pops up to say they ought to have their own 
currency and opt out of the dollar so they can devalue their way out 
of trouble. Neither will they be chucked out of the US.

That is because West Virginia and Michigan are not sovereign states. 
New York famously went bust in 1975 without leaving the US or 
exploding the dollar. Yet that possibility is attached to the 
fortunes of Italy, Greece and the others. It is not clear that the 
euro will be able to withstand these strains. Could Germany allow 
these nations to go bust? Could she actually afford to prop them up? 
And if she did, would she not then be 'infected' by their debts and 
crumbling credit ratings?

All extreme scenarios, but we live in a world of extreme scenarios. 
The euro could be a casualty. It may well be that A euro, rather than 
THE euro, would emerge; a curious currency made up of a mix of 
nations with relatively solid public finances and those so tiny they 
don't matter.

Thus the New Euro might comprise, under German leadership, Finland, 
Malta, Cyprus, Luxembourg and Slovenia, with France in borderline 
contention for membership. Ireland, Greece, Spain and the rest would 
go back to their old currencies, but flexibly pegged to the New Euro. 
Not pretty, but not impossible.