The sheer size and scale of Member State GDP decline may differ from nation to nation but the message is abundantly clear – the EU is headed for an unprecedented period of economic contraction from which it will take many years to recover. UK apart, the situation is far worse for those that are stuck with a grossly overvalued euro. We should care more for their plight. Having thrown away all independence to come under the spell of the European Central Bank, there can be absolutely no escape from further GDP devastation though 2009. How much longer I wonder before the political voices of discontent really do begin to be heard that the ECB, the guiding hand of the Euro and the great protector of the Euroland economy is failing to act? Perhaps not that long! And how much longer before voices of discontent from smaller euro members such as Ireland, Portugal, Greece, Spain and even perhaps Italy lose faith in the euro?
It is probably easy for some to believe that the treachery of abandoning the euro, creating a national currency that can be allowed to freely devalue and that would allow any current member nation to gain an upper hand competitive hand on export potential, the reality would be very different. Believing that it might be possible to make yourself more competitive is one thing, but for any weak nation the reality of abandoning the euro probably also means abandoning or being thrown out of the EU. I am in no doubt that there are some, including perhaps some of my own colleagues, that would love to see the EU begin to break down. I do not share such a view and neither do I wish to see an end to the euro. But what I do want to see is the ECB acting in a manner that reflects the seriousness of the current plight of all euro Member States – not just at the beck and call of Germany and France.
What I also want to see is the European Commission abandoning, even if only temporarily, rules that prevent individual action of Member States to provide genuine assistance to their respective industries. Neither do I wish to see a two tier Euroland develop any more than it already has. I believe too that the main institutions of Euroland, meaning the ECB, and the European Commission itself are duty bound protect all rather than just a few Member States. They created the bed – they must fair and make enough room for all to lie on it.
Back to the departure issue though, the problem behind any Member State actually abandoning the euro. Walking away from the euro is one thing – abandoning the Europe Union is surely quite another. To do that would essentially also mean being cast aside by the rest of Europe and maybe, if the external perception of rating agencies, and other fine institutions is that the economy is so weak and that there may be dangers of political unrest developing, being cast aside by the rest of the capitalist world too. My guess is also that the banking system in any country that left the euro would very quickly collapse and that they would be forced into the hands of the IMF. Thus, unless the situation weakens to the point that serious political unrest takes hold, I am forced to take the view that the barriers to leaving would be very much greater than the formidable existing barriers to entry.
For now then we should think it very unlikely that anyone will seek to abandon the euro. Perhaps we in the UK should be grateful for that. No matter what, with the die already cast there really is no alternative for the minority but to stay in the euro unless and if political unrest really did take hold. Even allowing for concern within some newer euro members, I think that situation very unlikely. Overvalued it may well be and with most Member States desperate to see some form of euro devaluation, for good or ill we must remind ourselves that over the ten years since it was formed the euro has probably done far more good than harm.
Back in the real world and given horrendous, if well anticipated, Q3 GDP figures for France and Germany this morning it seems that current IMF projections that the euro economy will decline by 2.5 per cent in the current year may well be far too low. We could be talking here of a 3 per cent or even 3.5 per cent decline in fiscal 2009. And just what is the European Central Bank doing to ease the plight of Member States? Little more than adjusting inflation expectations down and signalling that interest rates will be further cut next month. Slow, slow…..plod, plod….slow. Yes, it is playing the game of attempting to provide additional liquidity for banks and it has attempted to join in a coordinated approach with other global central banks to the economic ills we suffer when it could. But it has done nothing to alleviate the problem that the euro is too high. What should the ECB do? Exactly what the US and to a lesser extent, the UK is doing – throw caution to the wind and throw money at the system.
True, the ECB is restrained through a certain lack of freedom. It is responsible to all members of the euro and it is the individual Member States that in the end would need to effectively stump up. It isn’t quite so easy for the ECB to pile into a quantitative easing strategy as it is say, for the UK. Essentially we are talking here about extending the national debt of each Member State to the point of breaking the self inflicted borrowing rules. And at some future point, anything the ECB eventually has to be paid for by those sameMember States through higher taxes.
With Germany – the engine of the euro economy – posting a hefty 2.1 per cent GDP decline in Q3, Italy down 1.8 per cent and France down 1.2 per cent the extent of the problems facing the euro economy can be easily seen. At the heart of this is the decline in manufacturing exports that can perhaps predominantly be blamed on the uncompetitive euro together with the undeniable fact that as this is a global recession few nations are buying.
What you see is what you get and with Germany so reliant on manufacturing it comes as little surprise that the GDP decline here tops the list. Across the whole EU area, car sales have been devastated and with it production of steel and all related component activity. This is likely to get even worse in the months ahead. In part, due to the longer lead times necessary and the traditional rules of late cycle performance, heavy industries will also find the position worsening over the coming months and for these guys, there can be little comfort as they look toward 2010. Can Euroland industry survive this crisis intact? Much will depend on amounts of individual government cash that gets thrown at them. For instance, France has already thrown its car industry a lifeline in the form of a EUR6bn package of relief. Quietly Germany is seeking to do something similar despite the raging argument that individual relief packages – be they loans or whatever else governments seek to call them – are effectively protectionism by another name. Hardly fair on those euro based governments that do not have the resources to throw at their systems and that are now forced to be reliant on actions to reflate coming solely from the ECB. Not that any amount of complaining such packages are unfair is likely to worry either French or German governments even though we might well assume that sooner or later relief ‘loans’ such as those that we have seen announced by the French could well be outlawed by the European Commission. By then of course, it will be too late.
