Monday, 21 June 2010
The beginning of the end for the European single currency?
Douglas McWilliams is bright, particularly so, even by the standards for Economists. He is the Chief Executive of the Centre of Economics and Business Research in London. I have known him for twenty years and rate his opinions highly.
His views on the current crisis in Greece is realistic and bleak.
The European authorities did well to cobble together a rescue package for the weaker European economies.
However, no matter how much sticking plaster is applied, the fundamentals remain the same. A member state can sort out its problems, if it has a competitive problem but no debt, or a debt problem but no competitive weakness.
Ireland for instance, has a deficit problem compensated by rising exports. Greece has a huge deficit which cannot be alleviated by external demand for its exports.
In the days before the single currency, Greece would de-value its currency. So it must leave the Euro, but if it does so, it would default on its debts.
Greece certainly cannot pay its debts in Euros with a devalued Drachma, so part of the package of aid for leaving the Euro must be at a minimum to convert the debt into the new currency unilaterally. This would mean accepting a fall of at least 15% and even then having possibly to write off a high proportion of the remaining debt.
Would Spain and Portugal be also forced to leave the single currency?
At the recent ABTA travel conference he said:
"Spain's failure to address its banking crisis brought on by over exposure to a weak housing market will precipitate an exit from the single currency and other countries like Italy may use this as an excuse to leave too.
Traditional destinations will attract more British tourists to go back when the good old days of Lira and Drachmas return"
Sustained drives to attract tourists with special incentives will hasten economic recovery, even in Greece.