Doomsday for the euro

MEP Godfrey Bloom says unless tough action is taken the eurozone is doomed.

I wonder if there was even a currency, or indeed concept, which was so much misunderstood by so many self-styled experts. Over 15 years ago I wrote a short paper, published in a leading British national broadsheet newspaper, explaining why the common currency was fundamentally flawed. I was marked down as something between a swivel eyed lunatic by some and harmless eccentric by others. I decided to take a trip down memory lane and re-read the article in question.

Here I will therefore outline again the position on the euro as I did 15 years ago with no amendments - none is needed.

The Euro is a political currency. Yes, I know most FIAT currencies with state banking and fractional reserves are to an extent political, but none so overtly political as the euro.

The fig leaf covering the pretence that it was anything else was the Maastricht Treaty criterion based on debt/GDP/budget deficit bench marks. These in themselves were absurd to anyone with even a working knowledge of international economies. Even the most chinless private client stockbroker ‘relationship' manager understands a portfolio valuation is but a snapshot of the position at that time, that nano second when the computer delivers it. A portfolio produced on a Monday for a lunch meeting on the Wednesday can bear no relationship at all, and, OK, it saved my bacon once or twice when I was presenting funds for Mercury Asset Management many moons ago. A clever statistician on the team is worth his weight in gold.

In short it does not matter where, say the Italian or Greek economy was or is in ‘the cycle'. Locking it into the same interest rate and currency as the Deutschmark was doomed to failure and this may be true of all the Mediterranean economies, in the eurozone and for that matter outside it. Imagine boiling a tin of beans without puncturing the lid will eventually lead to an explosion. There is no point in watching it bubble away for the first few minutes and persuading yourself all is well, but this is what the Northern members of the eurozone have been doing.

Take levels of unemployment, especially amongst the under 25s in the Iberian Peninsula, Italy, France and Greece is rising alarmingly. These socially volatile economies are already starting to fracture. The only hope is severe fiscal reform, which is impossible without democratic support. The euro, whilst considered essential to the political class in the eurozone is deeply resented by almost all ordinary people in it, although admittedly for quite different reasons. Markets have for too long pretended that the euro is a proxy for the old Deutschmark. It is not, it never has been. It is an appalling confit of peseta, lire, franc, drachma, punt et al. The only solvent economy in Europe is Germany and we will see what little political appetite there is for bailing out the spendthrift economies that infest the zone. Is it co-incidence that 15 of the new 27 EU commissioners are communists and socialists?

The common currency is unsound. Some obvious questions are: who is the lender of last resort? What or where is the equivalent of the US Fed? How can capital transfers be democratically agreed and why should they? Yet as you read this article, the politicians and bureaucrats in the zone are trying to create a bailout fund.

Of course the European Central Bank has underwritten Greek bond issuance, albeit at a hefty 6.5% coupon. This of course is simply monetisation of the Greek debt, spread across the zone. So the bailout is already happening. Yet here is the moral hazard, where is the incentive for recalcitrant members to put their own houses in order? Underwriting Greek debt is a green light for Spain and Italy to remain unreformed and offers no incentive to apply stringent economic measures. The Irish, making noble efforts to bite the bullet, must wonder why they bother. The German public are on the verge of shouting "enough!"

There is little doubt that unless tough action is taken and by that I do not mean a bailout of the most indebted economies, the currency and the whole concept of the eurozone is doomed, something that was obvious to some of us all those years ago.

Godfrey Bloom is a member of the economic and monetary affairs committee in the European Parliament and a former fund manager.