Thursday, 16 July 2015

The Euro makes you sick

If anyone still believed in the community spirit of the European Union they should have found themselves roundly disabused this week.

I have discussed in earlier blog posts the fundamental flaws of the Eurozone system. In brief, by removing the economic safety valves of devaluation and balance of payments effects, a single currency drives countries of unequal efficiency further and further apart by reducing the GDP and employment levels of the weaker.

In single currency areas such as the USA and the UK relatively little fuss is made about arranging compensating financial flows because the members are all parts of a single political state. The Barnett Formula exists to provide this compensation to Scotland (despite imaginative claims for the alleged strength of the Scottish economy.)

In the Eurozone there is no such political unity. This week has seen economic liberalisation measures forced on Greece as the price of its third bailout in six years that are too extreme even for the strong economies such as Germany to stomach themselves.

Yet as the leaked IMF paper reveals, the measures proposed will not allow Greece to pay off its mountainous debts. For all its ineptitude, the Syriza government has been correct about one thing; the so-called remedies are making the situation worse by increasing Greece's debt to GDP ratio.

The common cliche describes the Eurozone as kicking the can further down the road. I prefer to describe them as treating the symptoms (badly) whilst denying even the existence of the disease. Something is rotten at the heart of the single currency and no amount of name calling and blame allocating will put it right.