In other words, to go back to the semicapitalist world that would be necessary for a single currency shared by 11 countries to work. People in many European companies want their economies reformed in a capitalist direction; it is unlikely their left-leaning governments will do so. A Europe that reverts to pres statism would not be able to compete with the capitalist economies of the U.
They hope this single currency would give Europe the muscle to push statism on the U. S and Britain. That's what Grard meant. But what about the argument that the euro will create a vast, liquid capital market in Europe and the place will boom? That sounds pretty capitalist. Well, first we all have to get through the risk of world depression before we can talk about booms anywhere.
But if the euro does trigger a boom it will be for the wrong reasons. The periphery is growing much more strongly than the core. So interest rates in the periphery should go up relative to interest rates in the core. I say "should," but we are seeing quite the opposite.
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With the euro, everyone's interest rates will have to converge on those of France and Germany. If those rates are right for them, they will be wrong for the periphery, which will thus suffer boom-bust cycles. Ireland is the most advanced in that process. By the end of this year Irish interest rates will have to come down by almost basis points to meet German rates. In these circumstances, a loosening of monetary policy is crazy. Ireland will have a fevered bubble economy.
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The boom will go bust, and the Irish economy will head southward in a couple of years time. If a worldwide depression doesn't do it sooner. The likely scenario is that the European Central Bank will bail out the periphery. Otherwise there will be political and financial crises as those peripheral budget deficits explode.
But a loosening of credit by the ECB would result in an extremely weak euro -- hugely weak from the point of view of the core countries. Spain maybe a year later. By to a concentration of periphery problems.
And then what will the Eurocrats do? They'll say, "We have to go further. We must make sure they can't. We have to create a euro treasury so that speculators can't attack the bonds of individual governments.
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Europe will have to centralize the issuance and holding of public- sector debt. Germany and France will say, "Okay, but in return we're going to adjust the financial settlement so that, net, we don't pay more. But it will also mean direct executive control exercised over national budgets by the center -- another feature totally unlike that of the U.
The Rotten Heart of Europe
So the periphery countries will end up losing their independence and be no better off in terms of net transfers. And they will have gone through a violent financial crisis. Be wary of the peripheral countries' bonds a few years down the line, since credit spreads are likely to rise as one of them goes into a relative downturn. Be wary of all long-term bonds in euroland which at some point in the next few years will start carrying a hefty eurocurrency depreciation risk premium.
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And don't get over-enthusiastic about low-cap equities either -- a return to statism isn't going to do the profits of entrepreneurial firms much good. The established giants are likely to do much better in that environment. Be alive to the probability that before the ECB gives in and bails out the periphery, those currency-risks premiums hurt stocks throughout euroland. And hope the U.
In a substantial new introduction, Connolly returns to his prophetic account of the double-talk surrounding the efforts of politicians, bankers and bureaucrats to force Europe into a crippling monetary straitjacket. Hidden agendas are laid bare, skulduggery exposed and economic fallacies are skewered, producing a horrifying conclusion. No one who wants to understand the workings of the EU, past, present and future can afford to miss this enthralling and deeply disturbing book.
The Rotten Heart of Europe. Bernard Connolly. Preface to the first edition. Creating the Illusion.
The World Turned Upside Down. Gambling at Maastricht. Unravelling the ERM.