Our economic commentators, and here I am not sure how much encouragement comes from the Political establishment, will always point a finger at the Euro, predict its imminent collapse, more to distract us from our own problems.
The decision to create a monetary union without a political union is difficult for us to accept. It denies the individual countries the ability to devalue, prevents them from utilising interest rates to manipulate, is supposed to stop them from expanding the money supply beyond certain predefined limits. However, this decision is the most momentous economic event of the last century! It comes close to being an embodiment of Keynes proposal at Bretton Woods for a new currency called the “Bancor” to which all nations would fix their exchange rates, automatically devaluing or revaluing based on their International trade position.
Keynes was calling for a disciplined monetary system that would force Governments to manage their economies in a disciplined and sound way. If you were ill disciplined your currency would automatically be devalued, your buying power would shrink the people feel poorer and, no doubt, kick out their government at the next election.
There are flaws with the Euro, not least, that all members of the EU are not members of the Euro. Sooner or later they will be faced with the question of whether to leave the EU themselves or force the non Euro countries to join.
Obviously they need to strengthen their regulatory disciplines to ensure that banking within the zone operates with a single set of rules, that individual Governments maintain budgetary discipline. There is a need to create structures that will facilitate capital flows to those parts of the zone in need.
With Spain, while there is a structural unemployment issue, the current crisis is related to the asset bubble that was created by the excesses in the worlds banking sector in the run up to 2007/2008.
As I have said before, Banks should not be propped up or “rescued” by the state. We cannot pay lip service to a “market economy”, if we are to operate with free markets we must allow those markets the ability to adjust for excesses.
Deposits in Bankia should be converted to Preference Share Capital with full voting power, possibly a preference dividend rate slightly above the average interest rate due on those deposits and redeemable in 15 years. The Assets should then be valued on a realistic value and written down to that value. I imagine that this would result in Boards of Directors being fired, as the new shareholders would vent their anger at the excesses of the past.
It might send shock waves through the World Banking community. It would be the first step to bringing sanity back into the markets. While there might be shouts that this could result in a new credit squeeze as banks worry about the solvency of each other … then so be it!
This would not solve Spain's other problem … the structural unemployment. Obviously there is a need to boost economic activity, there may also be a problem where the education system is not designed to give the right balance of skills and desires among the younger generation. That is something for the Spanish people, but in the same way as I said that it is up to the Euro-Zone to build a thriving economy for Greece so it also needs to tackle Spain, Portugal, Ireland and the Eastern members.
As far as Greece is concerned, the Greek people need to decide whether they will accept the rules and constraints implied by being part of the Euro. If they do not, then the Euro-Zone needs to be strong enough to sever the tie. If they accept then the Euro-Zone needs to do all in its power to bring about a strong and thriving private sector in Greece, the Government sector should not be propped up.