Sunday, May 09, 2010

The Euro isn't Dead!

German Chancellor Angela Merkel addressing the Bundestag, Wednesday, May 05, 2010.

The following is a comment on the blog of Prof. Simon Johnson, a former chief economist of the IMF.

Despite current woes, the euro has been a success; net job creation in 1999-2008 outpaced the US and three times more than Europe's record during the same number of years before the euro launch in Jan 1999; intra-region trade has expanded and the record on inflation has been better than Germany's pre the euro launch.

Europe has steadily expanded its share of the world's 100 biggest multinationals compiled annually by the UN Conference on Trade and Development, from 57 in 1991 to 61 last year, while the US number has dropped from 26 to 19.

Greece and Portugal account for less than 5% of the Eurozone’s GDP. Even when Ireland and Spain are added in, the so-called peripheral countries or PIGS account for less than one-fifth of the region's GDP.

Of the 16 members of the currency union, these 4 countries were woefully misgoverned during the international credit boom. In 5 years to 2009, 100,000 civil servants were added to the public payroll in Greece and the prime minister has said his country is endemically corrupt with just 5,000 declaring annual incomes of over $130,000 in an economy of 11m.

Far away hills are green and in the US, it was not uncommon for Ireland's Celtic Tiger to have been held up as a model of development; it's temporary prosperity was built on quicksand; while the Irish became the second biggest investors in commercial property across Europe from the windfalls of a housing bubble at home and employment grew by 25% in the decade to 2008, jobs in the export sector stagnated. Today, 90% of Ireland's tradable goods and services exports are made by foreign-owned firms, mainly American.

In 2006, Spain with a population of 40m, was building as many new housing units as the US.

In the early years of the last decade, Germany went through painful labour and welfare reforms and was called the "sick man of Europe." In March 2010, it was the only Eurozone economy to have added jobs compared with March 2009.

Yes, restructuring of debt may be inevitable, but to do it now would not serve the interests of those countries in dire need of reform.

I admire Pres Obama but getting involved in this issue would be counterproductive; as for DSK and his role in the IMF, Simon's views may be coloured by some personal issues.

As for Trichet's press conference last Thursday, with banks and broker analysts begging for public protections, why should he have caved-in when he deemed it inappropriate.?

The ECB has considerable firepower in its arsenal and has shown since 2007 that it can act very aggressively when necessary.

As for the future of the Eurozone, the reversion to own currencies, high interest rates and inflation, may be a cure worst than the disease. The majority of Iceland's exports are its own fish resources; devaluation for other countries without hard fought reform, could only be a short-term benefit if at all.

Ireland will only become a net contributor to the EU budget in 2013 -- 40 years after joining what was called the European Economic Community; Spain, Portugal and Greece have also benefited from huge cash transfers, mainly funded by Germany. In the period 1994-2006, Greece was given cash foreign aid of $60bn to support its infrastructure development. Germany is now blamed for being a huge export success to emerging markets.

Yes the rules for entry to the EMU were too easy and fiscal surveillance was weak, nevertheless the euro has been a success.

The Euro is a success; Free lunch yet to be invented