Euro Crisis Deepens

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Marine Le Pen closes in as Poison Dwarf Sarkozy is cut down to size

The Euro crisis has been with us so long, it almost seems like there is no crisis, but that has changed over the last few days.

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It was no surprise to find the French credit rating cut because this event had been trailed for several weeks and prompted a vicious attack on Britain by French politicians attempting to divert attention from the serious plight of the French economy and the critical threat it posed to Sarkozy’s hopes for re-election.

There was also little surprise that further cuts were made to the credit ratings of most other EuroZone members. There was some surprise that Greece was left unmentioned, although this signifies the depth of Greek Euro problems because it is no longer considered a viable member of the EuroZone and not worthy of further credit rating consideration.

There was little surprise that Italy emerged as the next primary target. The general credit logic runs that most of the EuroZone members now have large questions over their ability to service their debts and that any individual member could suddenly become the new target for deep concern and panic. Italy, as one of the major economies in the EuroZone, is more concerning than the other PIIGS because of the size of the problem. Some financial commentators believe that Ireland is the most likely economic survivor, if it leaves the EuroZone, because Britain is likely to directly help and mobilize other support for its neighbour if it re-introduces the Punt. In spite of Home Rule, disputes that led to the creation of an independent Eire, Britain and Ireland have a long relationship and enthusiastic trading, making British economic support both fraternal and in its own self-interest.

Greece is now at the point where remaining in the EuroZone is a masochistic act that will extend the damage done to the Greek economy. The best time for Greece to have returned to an independent economy would have been 14 months ago before it was saddled with more debt and higher interest rates. Some financial commentators take the view that Greece could rapidly bounce back with its own economy because it could devalue to suit itself and benefit hugely from the advantage in holiday pricing that it would hold over Spain, Portugal and Italy, although this advantage might be short lived if those three Mediterranean tourist centers followed Greece out of the EuroZone. Other commentators consider that Greece still has strong advantages in reintroducing its own currency but is now so burdened by costly debt to keep it in the Euro, there will be many years, possibly decades, of severe austerity and increasing political instability.

The capacity of EuroZone members to cause widespread damage outside the zone has been reducing. Many investors have been withdrawing and taking their money to Britain which is currently considered a safe haven. Some commentators consider that this is in effect an orderly preparation for Euro defaults. That does not mean that the British economy is completely immune to the failures of the EuroZone, but it does mean that the British economy is rapidly growing away from Europe as evidenced by the very significant announcement that London will become the largest trading center for the Chinese currency outside of China. The move of Volkswagen/Audi export funding out of Frankfurt and into London is another key indicator of the growing strength of London as a global trading centre, but adds to German problems, hence the Franco German attempts to destroy London as a financial center.

It is clear that the EuroZone political elite is still in denial and failing to produce any credible plan to immediately tackle the systemic problems of the Euro. The half-baked attempt of Germany, aided by Sarkozy who wanted to stave off any credit down grading until after the French Presidential elections in April, to get EU members inside and outside the EuroZone to agree to submitting their budgets to Germany for approval rapidly ran into trouble but was always a plan that had no short term relevance. To produce a Euro currency that can survive, all members have to join as a single state, but before that can really work, they must first decide on a set of rules that everyone will have to stick to. This almost certainly means that the real first step is to dramatically reduce the size of the EuroZone and at least for a period abandon the political drivers behind the Euro. Some commentators have suggested that the best solution would be a planned withdrawal of all members from the EuroZone to tackle the serious debt crisis and then to consider if and how a new single European currency might be created with possibly a new currency shared by members of a new state based on Germany, Finland, Luxemburg and the Netherlands. If those countries agree to become a single state with a single currency, it is argued that they could establish the global position of their currency before considering the addition of new members as German Landes. This might be financially sensible but is unlikely to win the favour of the European political elite who still cling to the discredited and out-dated European Project of a Federal Europe, ruled by unelected Eurocrats and a self-regarding political elite.

All of these considerations were dwarfed by the decision of credit agencies that the Euro Bail-out Fund should also be down graded in view of the down grading of those countries that would have been major contributors. This is a very serious decision because it serves notice that the finance markets have run out of patience with a patronizing political rabble that assumed they could stave off the markets by a steady stream of Summits and Initiatives that distracted attention until the detail was examined and found wanting. In mitigation, the process had been working to an extent over a six year period, increasing the confidence amongst politicians that they were fooling the markets. As each new announcement fell apart, the date of the next one was announced to buy more time. The problem was that the politicians were fooling themselves more effectively, whilst the markets were progressively becoming more skeptical to the point where they lost patience completely.

The result has been that Britain has been putting in place a set of plans on the basis that the Euro will begin to implode this year and also on an appreciation that once countries begin to leave the Euro the implosion will start to pick up speed and begin to overwhelm the stronger EuroZone members. What has worried many governments outside Europe is the forthcoming French and German elections that could see major change in government policies, or no change and policies at all.

In France, Marine Le Pen is closing in on Sarkozy, who in turn is trailing the Socialist candidate. The real situation may be even more dire because both the Socialist vote and the base on which Sarkozy depends may both fragment, leaving Le Pen with a clear run on a second vote. The French face a very difficult political choice. Sarkozy is now so seriously damaged internationally that his re-election would only further damage the French economy, but his Socialist opponent would be equally disliked by the financial markets. That only leaves Le Pen as a credible choice with a Party that has never enjoyed power and was once regarded as an extreme right wing fringe party. This may have been unfair to Le Pen and her father with French voters now looking much more seriously at the potential choice of candidates and their Parties. Starting with a completely clean sheet, Le Pen does have the freedom to present policies that are radically different and could make France much more attractive economically.

In Germany the situation is even more confused. There is no candidate with a currently clear policy on getting firmly to grips with the Euro crisis. However, public opinion is firmly behind German withdrawal from the EuroZone and the re-introduction of a strong DMark. If that happened during 2012, either before the elections or immediately after, there would be no Euro and that must be worrying for Finland, the Netherlands and Luxemburg who could find themselves faced by disorderly defaults across the EuroZone and no plans in place to withdraw before the implosion.

One of the most interesting situations is how Britain will fair. During the last twelve months British exports to Europe have been falling and British investors have been moving out of the EuroZone. At the same time, exports to Asia, South America and the Commonwealth have been increasing, more than compensating for the decreasing business with Europe. Money has also been flowing into Britain from European investors and there are signs that this is increasingly coming from Germany. This growth is not without its dangers, but it does demonstrate the very significant change in position relative to Europe. If Ireland leaves both the EuroZone and the EU, its trade with Britain and trade between Britain and the rest of Europe will rapidly shrink as trade within the EU. That places further pressure on the ten EU members currently outside the EuroZone to reconsider their free trading interests and question the remaining EU membership benefits.

2012 could mark the end of both the Euro and the European Union, but if it does, it will not mean an end to free trade within Europe. It may well see the re-emergence of the European Free Trade Area as a commercial non-political confederation of independent European nations. This will be very bad news for the ruling elite and the Eurocrats, but it could be very good news for Europeans.

Editor.

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