Thursday, 28 March 2013

Resurrection for the Euro (2)

In the run up to Easter last year I wrote an article which remains topical and worth a re-read as we face another Easter.


The situation did not get any better since then.  Two more countries have had to be bailed out bringing the Euro members in the sick bay to five.   And presently we are seeing scenes on the streets of Nicosia which practically mean that Cyprus is a Euro area member only in name.

How can a Euro area member be considered a full paying member of the Club if a Euro in Cyprus in not the same as a Euro in Germany, Finland or Netherlands?  How can an EU member, let alone a Euro area member, be forced to impose restrictions on movement of capital, and restrictions on bank deposit withdrawal.

Hopefully this is only for a short period and life will return to some sense of normality in Cyprus pretty soon.  Economically Cyprus will undergo a crushing economic contraction over the next few years as its financial services industry gets wiped away and it will have to recreate growth in other sectors, most notably by re-energising its tourism potential and developing its freshly discovered natural gas resources.

As always there is a silver lining.    Probably the scene is being set for a favourable scenario to make another attempt for the reunification of Cyprus based on the Annan plan which the Greek Cypriots rejected in 2004 prior to their EU membership.

Cyprus' has dire need to exploit its natural gas resources to rebuild its economy following the financial disaster suffered.  This basically guarantees that a fresh vote would now produce a strong approval on both sides of the green line.

So many thing have changed since 2004.   Suffice it to say that in 2004 Greece as a Euro area member could easily borrow 10 year money at 4% whereas Turkey as a backward emerging economy would have had to pay double digit rate.   Things have turned on their head.  Turkey can now borrow at 4% and Greece cannot borrow at any price and has to depend on the EU for bailouts.  Indeed Greece not only crushed their own economy but caused collateral damage to protege Cyprus, bankrupting its banking system and causing shocking distress to Cyprus economy.

The Euro system needs a resurrection.  In its present structure it will collapse sooner rather than later.   Such resurrection cannot be engineered before the next German Chancellor puts the elections behind him or her.   But after that the Euro can only be saved and avoid the dismal scenes we saw today on the streets of Nicosia if:

  • a Euro area banking union with common supervision and a cross border Euro-wide deposit insurance scheme is implemented
  • we start moving to a structure that controls more effectively the fiscal policies and borrowing commitments of separate Euro area sovereigns, possibly creating a central debt agency which issues Euro bonds on collective responsibility and re-lends to the individual sovereigns subject to appropriate conditionality and cost margins to reflect their fiscal prudence or lack of it.
For the time being we enjoy the Easter religious resurrection and with some good reason.  Whilst on the streets of Nicosia the situation is shameful and pitiful, on Wall Street and the streets of other main Exchanges stock markets are peaking to new highs.  They have full faith that after the German elections the EU will do whatever it takes to resurrect the Euro.

Happy Easter!!

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