EURO ZONE DEBT – are we looking at this from the wrong perspective?

The Eurozone has many problems which appear to be further highlighted with every day that passes.  The markets are getting themselves into a tizzy at every rumour or politician’s sweaty brow, while the car crash which is the Euro zone crisis continues to play out.

The problems are familiar now.  We have:

  1. Countries who should never have been allowed to join the Euro in the first place
  2. A lack of a decision making framework that would encourage financial stability
  3. 17 different economic policies
  4. 17 central banks
  5. 17 finance ministers
  6. 17 heads of government, many of which lead and have to satisfy an array of coalition partners
  7. A bureaucratic and long winded European decision making process
  8. One interest rate set for 17 different economic regions
  9. No convergence of economic indicators
  10. Fiscal divergence
  11. Different tax regimes
  12. Cultural differences regarding the role of the state
The list could go on, but really it doesn’t need to.
My opinion on the outcome of the Euro is based on all of these factors and there are 3 main options
  • Jettison the weaker economies often referred to as the “southern economies”, leaving a core Euro zone of a few northern European countries and continue tightening fiscal and political union.
  • Split the Euro into 2 currencies – a northern Euro and a Southern Euro if you like
  • Quick decision making bringing rapid convergence of fiscal, tax and political union, taking economic decisions away from the peripheral economic zones and a larger role for the President of Europe and the European Central Bank (ECB) – ensuring the knowledge that there will always be enough money to keep the Euro going
The first option appears to be by far the most likely at the moment, but is still unthinkable although the rumour went round earlier this week that Angela Merkel and Nicolas Sarkozy were considering just that.
However, maybe we have all got it wrong.
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ARE WE LOOKING AT ALL OF THIS FROM THE WRONG PERSPECTIVE? 
The Euro is meant to be one currency with the benefits and flaws that this entails.  When we look at the USA, we never really look at the micro economic factors of each state, only the USA as a whole, over 300 million people making a whole.
The Euro zone has 317 million people and 17 countries.  Our fixation has been on the debts of particular nation states, but is this the way we should be looking at it?
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If we take deficit levels, they are rising out of control in Greece and Spain, but as a whole, the Euro zone has almost half the deficit that the UK  has. The UK has a deficit of 10.4% of GDP, while Greece  has a deficit of  10.5% and Spain 9.2%.  But  the Eurozone has a deficit as a whole at 6% of GDP.
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If we look around the world we can see that the USA has a deficit of around 1.3 trillion $ which is about 8.6% of GDP.
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Debt is the next problem which contributes to the instability of the economy. Japan has an enormous debt at over 220% of GDP. The USA has 94.3% debt, Greece 142% and Italy 119%.
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Crucially the Euro zone has a debt of  85.1%. (source)
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If we were looking at the Euro zone as a whole entity rather than it’s individual parts, a bit like looking at the USA as a whole rather than it’s states, or the UK rather than it’s regions, would we be so worried?
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This perhaps indicates just how important it is to show the markets and onlookers that the Euro zone is one economic and political entity, and if people had confidence in the model of governance, then the crisis would never have got this far.
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Maybe for the sake of our sanity, we have to look at the Euro zone as a whole rather than at it’s constituent parts, or face the economic Armageddon that is surely to follow.
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One response to “EURO ZONE DEBT – are we looking at this from the wrong perspective?

  1. I really do like this blog – it’s one of those that says what I sort of already know in the back of my head, but in a much clearer and more refreshing way than I can. Keep up the good work, although more frequent posts would also be appreciated!

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