Euro Zone … is it really a crisis?

Increasingly we see the impending implosion of the Euro being commented on in the media. One would think that there is a real crisis and that disaster lies around the corner!

The common claim is that the Euro cannot work because it does not give the weaker economies the ability to devalue and are forced to face up to default instead. Strange that we consider devaluation any different from default! Strange that we consider being paid with a devalued currency (reduced buying power) any worse than taking a discount on a debt!

In my language they are one and the same thing!

The Euro Zone has achieved a certain amount of write down of the Greek sovereign debt, in fact more than Greece could have hoped for through devaluation.

In size the Euro Zone when treated as a single Economic entity is only marginally smaller than the USA. It does have problems about how it deals with the weaker economies that are part of it. That said, we have the same problems. Wales, Northern Ireland, the Midlands, Northern England and Scotland all have different needs to the South East, but our economy is run on a basis of keeping "The City" going.

A brief look at exchange rates to give some perspective. We will compare against the US dollar at beginning of 2007 prior to the credit crunch bite and now


Currency   'Jan 2007 Jul 2009 Jan 2012
Euro   1.297 1.404 1.289
Swiss Franc   0.801 0.922 1.066
GBP   1.971 1.644 1.544
JPY   0.008 0.011 0.013

In 2007 when I first started posting this blog (the original documents were only emailed to selected people), I was asked for advise on how to invest money at that point in time to protect against the devaluation of Sterling that I considered inevitable, and responded Japanese Yen and Euro. Assuming a 50:50 investment out of your Sterling account a £1000 investment would have yielded you £2315 a return of 131%, or an annualized return of 23.5%.

The truth of the matter is that Sterling has been devalued by 22% over the last 5 years, almost as much of bath as Investors in Greek bonds have been asked to take! So are we in default? Have the rating agencies got it right?

The only problem facing the Euro Zone is not one of Sovereign Debt, but how they move funds around to stimulate the weaker Economies. This was something inherent in the original EU treaties, but is not fully available because of the non Euro members of the EU.

The best solutions would involve member countries giving tender preference to companies from the weaker economies on infra structural projects, as well as engaging possibly engaging in major development work within those weaker areas. A time of recession is a time for government intervention on a grand scale … not by printing money (quantitative easing) but development of infrastructures for the future.

Germany signaled that intention, when they announced the phasing out Nuclear energy, to be replaced by renewable energy developments. It is breath taking decisions like this that build a new future with the strong possibility of leading in new the technologies that have to be a major part of the future.

Other means would be for the stronger economies to grant long term revolving trade credits at very favourable rates and terms to companies in the weaker economies. Things that have the potential to kick start those economies, even if it is only to increase the "sales force" of the stronger ones. This would also tend to break EU rules.

It is time we stopped looking at Sovereign Debt and looked at the Trade Balances. The Euro Zone produces a slight surplus in its balance of trade and is therefor not dependent on foreign borrowing, yes they may need to balance their cash flows within the zone, ensuring that the weaker economies, subject to discipline, are allowed to thrive.

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