dr david bull

Merkel and Sarkozy in Emperor’s New Clothes

In Opinion Pieces on July 21, 2011 at 12:34 pm

Bull's Eye!

In a modern re-telling of The Emperor’s New Clothes by Hans Christian Anderson, Angela Merkel and Nicolas Sarkozy have climbed naked into the carriage called the European Single Currency. Fawning admirers lie prostrate at their feet proclaming that their decision to countenance a 2nd bail out of a mere 115billion euros to Greece is inspiring and the only way to keep the dream of the European Single Currency alive. No-one dares tell them that the fiscal clothes they’ve chosen are purely imaginary.

Now I’m no economist but clinging to the Euro in its current form seems to be like trying to stop sand leaching out of  bucket which has been peppered with holes. Each hole has a sticking plaster  applied to it (in this case in terms of monetary support) but its a false economy as it will only prolong the time before the bucket loses all its sand i.e. the inevitable collapse of the Euro. We don’t need plasters. We need a new bucket or maybe two new buckets.

And that’s my prediction. I can’t see how the Euro can survive in its current form. One set of interest rates across the Eurozone is inflexible and has become a noose around the neck of some of the current Southern members.

Clearly there are two different types of economies in Europe. The Northern European countries such as France and Germany are strong and dictate fiscal policy. But this has been disastrous for the Southern states creating an artificial boom and bust. The troubled Southern European countries such as Portugal, Italy, Greece and Spain have remarkably similar economies to each other but they are so wildly different from their Northern counterparts.

I spend a lot of time in Southern Europe. Spain has been wrecked by what’s been going on. Unemployment sits at 21%,(the highest in the Eurozone), huge swathes of land have the beginnings of housing developments but the cranes lie dormant. And shops close on a daily basis. The current situation is untenable. Spain and the others have become too expensive for the likes of the Brits and Germans. Why would you go to Mykonos on holiday when a gin and tonic is 14 euros? Eating out in Spain is no longer a daily ritual – it is a luxury. And so the Northern Europeans are taking their suncream, their beach towels and their money and heading further afield where it’s cheaper

It really is crunch time for Europe and it will need decisive management. Even the markets are sensing a European break up. They are now demanding huge returns on any loan in case the currency is devalued.

So what can be done? Well if the leaders of Europe weren’t so pig-headed, it would seem that the most sensible solution would be for France, Germany and other strong fiscal countries to adopt a new currency – let’s call it the Pean (as in Euro-pean) which can then set it’s own fiscal policies and interest rates. That would leave the weaker countries (the so-called PIGS) in the Euro which they can then devalue and set interest rates that would suit their economies. They can drop rates, encourage growth, make the cost of living cheaper and woo the all important tourists back to the beaches of Benidorm.

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