Zak Mir on The Euro: Break Down Before Breakup?

My first memories of the alleged benefits of the EU in the 1970s, apart from the free trading zone between member countries, were the prospect of passport free travel (yes, I believed that at the age of 9) and the prospect of a single currency.

But it has to be said, and it is not stressed enough even now, that the aforementioned “plus points” were really a distant second to the events of 1914-1918 and 1939-1945. The Treaty of Rome was signed in 1957, and the European Economic Community was the result. Even if with a Grexit in 2015 one has to say that by one route or another the EU has managed to break the early 20^th Century pattern of a Europe wide war every 21 years.

Indeed, Greece and the turmoil there does remind us how the process of financial instability then disrupts the political process and leads to extremism and potential conflict between nations. It is likely to be the Troika is there with its chequebook and Greece inside the Euro is better than what will happen after the January 25^th election result. But of course, the people there will make a choice on the basis of what the politicians spin for them. As we know from Westminster to Washington, there is no idea so robust, or concept so great, that cannot be ruined by politicians. I would class both the EU and the Welfare State over here as classic examples. Both are now and have been bloated gravy trains for years.

But what of the predicament of the ECB, the Euro and the war on deflation for 2015?

The markets are already assuming a Grexit, and take the view that it is too small an economy and too small an event in itself. In fact, the big plus of the Greek crisis is that much as the “do whatever it takes to save the Euro speech” worked for Draghi in 2012 without costing a Euro, the Greeks have delivered the kind of currency devaluation that QE would have done. If you add in the massive U.S. Dollar strength, helped along by the capital flight from Russia, and associated Crude Oil collapse, and the ECB is probably rather happy at the state of play currently.

Will it be enough to get rid of inflation, bring in an asset bubble in real estate which lifted the U.S. and UK and then fed into other parts of the economy?

Perhaps. But one would suspect that the single currency really needs to be at parity or below with the U.S. dollar for any decent results to be seen. The lesson from Japan is that once deflation takes hold it is a very stubborn beast, especially as your neighbouring central bank is likely to be doing everything it can to devalue its currency while you are weakening yours.

The fear ahead of this though is a domino effect of peripheral EU nations heading for the door. Ironically, they might find they are doing so just before the correct policy came good, one that the Germans rather unhelpfully, but understandably delayed in the wake of the financial crisis. Of course, for those who are on the right of the political spectrum a reversion to the pre-single currency position would be heaven on earth. Although, we should remember that one of the main beneficiaries of the Eurozone’s failure has been the UK, especially London and the City, with the flight to quality. This may turn out to be a shining example of “be careful what you wish for.”

The UK is also apparently heading for an exit, judging by the way someone who is clearly a pro EU politician – David Cameron, being bent into the eurosceptic direction. This is of course his attempt to snuff out UKIP, a strategy which it would appear will work. An acknowledgement of this is the way Nigel Farage is finally being forced to get off the one policy soapbox, with the latest mention of the NHS and taxation thresholds.