Thursday, September 23, 2004

We’d never have guessed

Rather an odd headline in the business section of the Daily Telegraph today: Eurozone 'crippled by single currency'

For sure, it is a quote, but the thought occurs that the "Eurozone" is defined by the group of countries which have adopted the euro – i.e., single currency. To proclaim, therefore, that the Eurozone is crippled by the single currency is rather like saying that a dog is handicapped by having fur, a tail, and barks.

Anyway, that little bit of pedantry aside, what follows is unalloyed good news – or bad, depending on what side of the divide you sit.

According to Edmund Conway, who wrote the piece (but was probably not responsible for the headline) "two enduring myths about the benefits of the euro were quashed yesterday by influential reports claiming the single currency had not encouraged fiscal prudence or attracted extra investment".

The first report is from the International Monetary Fund which, in the first part of its World Economic Outlook, has criticised the Stability and Growth Pact – there’s bravery for you – arguing that "the pact's strict rules" (Strict? Am I reading this right?) "may have had the perverse effect of encouraging profligacy from euro members."

It suggests that prospective eurozone states practised fiscal restraint in the 1990s in order to secure membership, but started to run up deficits after the currency was introduced in 1999. The report says: "The empirical analysis suggests that fiscal behaviour under European Monetary Union (no… Economic and Monetary Union, if you please) has not improved as much as might have been hoped for, and in some respects ...may have slipped, resulting in an increasing bias towards deficits."

What this hunk of jargon means – I think - is that Eurozone countries have not been charging their loving citizens enough tax and have been relying more of spending deficits to fund government spending – presumably because, in a single currency area, the markets don't take it out on the currency of the delinquent nation for the very simple reason that it doesn’t have a currency. Thus, the euro provides a shield behind which governments feel safe to practice unsound economic practices – until the whole thing goes belly-up of course, which cannot be very much longer when, as the IMF remarks, eurozone members will be permanently crippled by debt.

With that happy thought in mind, the other report is the annual United Nations analysis of foreign direct investment (FDI), which shows that the magic that the Eurozone was supposed to exercise on inwards investment simply hasn’t happened – so much for those drongos who argue that we should join or lose out on all the goodies.

It seems that FDI flows fell throughout the world by 18 percent in 2003 – which is why sundry Europhiles can claim that the UK has lost inwards investment and blaming it on our euro-less status - without saying that everyone else has lost out as well. In fact, in the UK, although FDI flows dropped in 2003, the amount of foreign stock held in the UK rose 18 percent to $672billion, making the UK Europe's top inward investment destination… so there.

The money is expected to flow again this year but that ain’t going to make any difference to the beleaguered Eurozone. “Lower growth prospects for the eurozone, compared with the United States and the United Kingdom, are likely to dampen FDI prospects there", says the report.

It is then down to Neil Collins in the Business Comment section of the paper to put all this in perspective, and one has to admire his style. "Buried in 700 pages of top class blether from the United Nations and the International Monetary Fund", he writes… (why didn’t I write that?) are two discomforting arguments against the long-term viability of the single currency. Its members are not attracting extra investment. Foreign direct investment is falling everywhere in Europe, as capital flows instead towards the cheaper and less regulated developing world to the east.

Worse still, the IMF has been surveying the euro's foundations and discovered some nasty cracks. It has long looked clear to outsiders that the rules of the Stability and Growth Pact were severely flawed, but the IMF now reckons that they actually encourage bad behaviour.

There we are… the expert has pronounced. The euro is garbage. We'd never have guessed otherwise.

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