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April 12, 2005

The Joys of the Euro.

Of course, all point to the joys of the euro as being one of the defining institutions of the European Union, one of those wonderful things that the beneficient bureaucrats have brought us. We can now cross borders without having to change money! (We could do that before. Called an ATM card.) What gets missed is the true economic impact, as a single currency inevitably means a single interest rate. It is therefore necessary that those areas that do have a single currency be what is known in the jargon as an optimal currency area.

There are those who argue quite seriously that the UK is even now not one of those, and that it took the US some 150 years to become one. The current news therefore does not surprise me much:

A top European Union official said France, Italy and Spain faced a "catastrophic" slump in exports as a fresh batch of gloomy data hit the eurozone yesterday.

French industrial output slumped 0.5pc in February, following a 2.2pc contraction announced last week by Germany. The slide was blamed on high oil prices and the continued strength of the euro against the dollar and key Asian currencies.

Clearly, interest rates are too high for Germany and perhaps so for France.

The Spanish economy is in the final stages of a credit boom caused by inappropriately low interest rates. Spanish property rose 17pc last year, while the trade deficit ballooned to €60.7billion, or 7.7pc of GDP.

Too low for Spain.

Italy has lost 20pc in competitiveness against Germany over the past eight years, but is now locked in a currency union with no monetary, exchange or fiscal levers left to pull. Its budget deficit, already bursting through the Stability Pact's 3pc limit, is forecast to reach 4.6pc in 2006.

Italy’s screwed.

Aren’t we lucky little people, having the continental economy screwed in the name of a political project?

April 12, 2005 in European Union | Permalink


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Tracked on Apr 12, 2005 2:04:06 PM


One size fits none.

Posted by: Rob Read | Apr 12, 2005 1:08:19 PM

So is Portugal in the same position as Spain?

Tim adds: To some extent. Consumer boom, rising house prices.

Posted by: Rub-a-Dub | Apr 12, 2005 11:21:34 PM