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  1. Wealth
December 8, 2008

Is it time for the Euro?

By Spear's

The siren voices of the Europhiles call for the abandonment of Sterling and its replacement by the Euro.

As Sterling sinks under the ponderous weight of Gordon Brown’s Great Mismanagement – like selling off the UK’s gold reserves at the bottom of the market, removing the Bank of England from its traditional regulatory role so that bank lending goes completely out of control, losing 750,000 jobs in productive industry and replacing them with 750,000 positions in unproductive bureaucracy, introducing over 300 new stealth taxes that takes the Public Sector to over 40% of GDP while the PSBR goes to £73 billion (both figures are stated before the cost of bail-outs are added on), unemployment soaring towards 2.0 million and set to go on past 3.0 million – the siren voices of the Europhiles call for the abandonment of Sterling and its replacement by the Euro.

As the difference in their respective values narrows, the Europhiles say there’s no point in maintaining Sterling separate from the Euro. But there are many – too many, far too many – issues over surrendering Sterling: from sovereignty over decision-making and budget-making, both so important to Gordon Brown, and there are all the question marks over the Euro itself.

It is not the time to blame Sterling’s independence, however, but to blame the architect of Sterling’s misfortunes: it’s not “Hello Euro” time, but “Goodbye Gordon Brown”. Don’t confuse the message with this failing messenger from the failing Soviet Socialist Republic of Scotland and its broken banks!

Unfortunately, this particular not-so-wee failure is now running around in his tartan kilt showering money wherever he can, as though in a mad rush to alienate himself from that formerly continent Lady that he called Prudence, the one who said she had found the pill of seeming economic rectitude, the one that would ensure that no boom would ever end in bust, ever again!

This disaster is nothing to do with Sterling, but everything to do with Gordon, the boy who has now ditched Prudence, just when she finds herself pregnant with massive debts, as she ruminates: “T’was ever thus with these Socialist boys, who promise so much, but deliver so little, except future and ongoing liabilities…”.

Now, as to the Euro itself, it does have its own strengths and weaknesses, like any man-made creation. The strength is that it is still with us after 15 years or so, and has spread from the original six to embrace over twenty countries; it has achieved a certain stability and acceptance in the world’s markets; its value has risen since inception; and it is even talked of as a reserve currency to rival the Dollar, all of which are no mean achievements in a short space of time at all.

The problem, however, was that all this was achieved during the biggest boom ever, but now the global economy is entering the biggest bust ever, or at least the biggest since the 1930s. And the first cracks in the Eurozone are now visible and point to problems in the pipeline.

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About a year ago, the first tiny fissure appeared in the ‘one-size fits all’ Euro: Italian State 10-year Euro-bonds were trading at 17 basis points below the equivalent German Euro-bunds; when I looked again a few months ago the fissure had grown to 73 basis points; on 4 December 2008 the fissure was a crack at 123 basis points, or a 1.23% higher interest rate.

Why? Well, the perception is that an Italian Bond does not have the same value as its German counter-part; more particularly, there are €200 billion of these bonds maturing in 2009, and as repayment is out-of-the-question they will have to be rolled over – but on terms that will see the crack widen. And Giulio Tremonti, Italy’s finance minister, doesn’t help when he says “Buy them. They are absolutely solid”. Hmm!

Then take a look at Ireland, where inflation was reaching 10% just as the ECB was lowering its base rate to 2.5%. Ireland has received billions of EU aid and now has roads going everywhere, but not to an economy that works. With the hand-outs over, why stay in the Eurozone?

And the same could be said of Spain, Portugal and Greece. And the new boys in the east might be waking up to the reality that the ECB is not setting rates to suit them. They are all facing the same question: can their economies live with the Franco-German axis?

Another aspect of the Eurozone has been thrown up by this recession, namely the lack of a co-ordinated response to the crisis. Sarkozy calls a meeting in Paris in November and a communiqué is issued about the determination to co-ordinate a stimulus package.

Sarkozy goes on the announce a £23 billion boost for France, but Merkel does a volte-face and abandons any idea of an economic jab as she calmly contemplates a potential 4% German contraction in 2009.

So the flaws that are exposed for all to see, namely that every country sees a different solution and a different interest rate to its particular circumstances and that the Euro is the world’s only currency that does not have a common political foundation.

Sterling does not suffer from these manifest defects. Sterling will recover value if, as seems probable, the Euro flies apart and retreats to the original six, or five if the Italian crack lets in the weather, or when the UK recovers before the EU.  

Do you think GB should apply to join the Euro if and when parity is reached?

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