The euro: Kicking the can down the road

The Americans have some charming and resonant expressions.  Apparently “kicking the can down the road” means providing a temporary fix for a problem, in the knowledge (or perhaps in blissful ignorance) that the problem is merely postponed, not solved.  Walk a little further down the road, and it’ll be back to bite you. That’s what Brussels is doing with the euro-crisis.

I sometimes hesitate to write about the euro, because there are so many excellent commentators in the mainstream media.  Ambrose, Jeremy Warner, Roger Bootle.  But I was inspired by a commentator on BBC’s Today programme around 6:15 this morning, who said “For me the question is not if Greece will default.  It’s when”.  I think he’s right.  He also said that Brussels is treating the problems with the PIGS as a liquidity problem, when actually it’s a solvency problem.  In other words, they don’t just need a loan to tide them over until things get better.  It’s past that point.  They can’t repay their debts today, but they also have no prospect of paying them.  Ever.

They’re in a classic debt trap.  The money they’d need to meet their eye-watering commitments can only come from growth.  Yet the aggressive and long-term austerity mandated by the debt will prevent growth.  Their revenues cannot support their interest payments.  The debt can only get deeper, the problem worse.  The ECB has started, ever so tentatively, to raise interest rates, and that merely exacerbates the problem.  They face a vicious circle.  A black hole.

And the politics get worse too.  The standard economic solution for Greece, unable to devalue within the euro straightjacket, would be years, perhaps decades, of grinding internal deflation.  Many commentators are questioning whether such deflation is achievable in a democratic political context.  Voters will turn to any party — perhaps a far-right party — which offers a way off the hook, even if it’s unable to deliver.  Shades of Weimar.  These problems also read across to Ireland and Portugal — the latter recently unable to agree an austerity programme, leading to the fall of the government.

This is the problem that eurosceptics have been predicting for more than a decade.  Germany is doing relatively well, and needs higher interest rates to stave off inflation.  The PIGS need the lowest interest rates they can get.  You cannot satisfy both within a single currency.  The PIGS also need to devalue, and again they can’t do that within the euro.

The political problems are not limited to the PIGS.  In stronger countries, notably Germany, voters are losing patience.  The successive attempts that Brussels has made to re-establish confidence never quite seem to work, partly because it’s too little too late, partly because the moves which the EU have made have seemed so tentative, so behind-the-curve.

The one thing that might work economically would be a full EU debt union — in effect, Germany underwriting the debts of others.  But it’s clear that the German voters, and the German courts, will not allow Merkel to go down that route, even if, to save the euro project, she wanted to.  A debt union won’t fly politically.

And most recently we’ve seen the remarkable electoral success of the True Finn Party in Finland (time for a True Brit party in the UK?) based on robust opposition to euro-bailouts.  “We won’t allow Finnish cows to be milked by other hands” declares their leader, the redoubtable Timo Soini.  George Osborne, please note.

Of course Gordon Brown took Britain perilously close to a Greek-style debt trap.  Our saving graces have been first, an independent currency, and second, the Coalition’s robust approach to the deficit.  So while the leftists and malcontents scream on the streets against the cuts, our reply should simply be “Think of Greece. There, but for the grace of God….”.

It’s worth recalling that debt problems in the USA are also at emergency levels, and Obama seems remarkably unwilling to address them.  But that’s another story.

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3 Responses to The euro: Kicking the can down the road

  1. Peter Adams says:

    Roger, you ask is it “time for a True Brit party in the UK?”. Yes it is and we already have one. It’s the UK Independence Party (UKIP) the only party standing up for the UK in the fight against the EU.
    Stop wasting your time in the CONservative party come and join us.

  2. swbk2345 says:

    @Peter Adams

    Hear, hear

    The Euro is going to fail and take everyone with it. The only thing to do now, is to get the hell out and Cameron has not got the guts or inclination to do it.

  3. Whilst I agree in full with all of the observations and opinions which Roger has described in this post, I do not agree with Peter Adams and his assertion that UKIP is a “True Brit” party. Furthermore, I am even less certain that UKIP could perform effectively in government. After all, the party has no experience in government and is clearly Libertarian rather than Conservative. Regarding various moral issues, I also have no confidence in UKIP. Indeed, many UKIP supporters seem to favour the legalisation of the drugs trade (for example). Decadent liberal policies started to ruin our country during the sixties. To some degree, a UKIP government would probably exacerbate this moral decline. After all, too much freedom in society is potentially as damaging as too little.

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