Has the EU failed its original agenda?

28th August 2012

The first stage of the economic union came in the form of the Exchange Rate Mechanism (ERM), which required each participating EU member state to control their individual exchange rates within 2.25% of set parameters. Unfortunately many of the countries in the ERM could not maintain the rates within the guidelines set by the European Commission (EC), so either had to leave the ERM of faced economic hardship.

Difficulties were seen in the earlier attempts to introduce a single European currency, which seemed to be ignored when in January 1999 the Euro was introduced. The Euro completed the original plan of the EU movement to provide both political and economic union across the region. However after over a decade of use the Euro and the many problems it has brought with it have put the European Union movement into contention.

The economic problems caused by the Euro pose the potential to undo the political union, which seemed to work successfully for fifty years prior to the introduction of the single currency. Portugal, Italy, Ireland, Greece and Spain, which are collectively known as the PIIGS, have all entered into Sovereign Debt Crises forcing them to ask for financial help from the rest of the EU.

It has been argued that the economic difficulties in these states and perhaps the wider problems across the region have been created by the single European currency. I have previously written about the benefits the wealthier member states receive at the expense of the weaker states due to the effect the Euro has on their ability to buy and sell goods outside of Europe. If you are interested you can read that article here.

The single currency seems to make some countries in the Union more economically viable than other countries depending on how their economy is set up and the market which they appeal to. This disparity in the financial benefits the EU brings, or at least is ‘supposed to bring', is putting great strain on the European Union movement as a whole. Some of the countries which have been at the brunt of the economic difficulties are questioning whether they should stay in the Euro or even leave the EU all together.

Continue reading…

 

More on Mindful Money:

The future of the eurozone

How exactly can the ECB 'save the Euro'?

Can the Eurozone be saved without a treaty change?

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35 thoughts on “Has the EU failed its original agenda?”

  1. Rods says:

    Hi Shaun,

    At some point reality will intervene and it will be interesting to see what happens when the current global bond and stock market bubbles burst to the unexpected surprise of all central banks, most politicians, the majority of state economists and the MSM. I suspect the countries with the weakest banks and biggest bond bubbles will take the greatest hits on their bank balance sheets where they have to revalue their bond holdings which they will have used to flatter their profits or more likely reduce their apparent current losses!

    I was talking to a friend yesterday who has just come home from 2 weeks at his holiday home in Spain. His comment was that there were many Norwegian tourists enjoying their £2 glass of beer compared with a £10 cost in Norway!

    With no growth in sight, I think things are going to get very messy financially in Spain and this may happen sooner rather than later keeping the Troika very busy in the second half of 2013 and many people regretting not emptying their Spanish bank accounts, where they are bailed-in to any EU backed bank bailouts.

    The Eurozone is like a barrel a gunpowder, we all know what the inevitable endgame is going to be, but none of us know how long the lit fuse is or how much the Troika can slow down the speed it is burning at!

    1. Anonymous says:

      There will be a haircut and if any Spanish depositor over the €100k level in any institution or group has not taken their funds elsewhere, they are simply daft. But the haircut will not be enough. Funds from abroad as long term ‘loans’ will be needed, and the Spanish will have to set up substantial organisations to limit housing loans (construction as well as mortgages) to very prudent levels in future. No more cheating!

  2. Justathought says:

    Hi Shaun,

    Excellent article, I would suggest…
    Thanks to the “Abenomic”’s phenomena, Spain slightly plateaued within her infernal declining spiral.

    The festive/touristic season hasn’t started yet and it doesn’t seem to augur well. The speed of business going bankrupt is frightening. The rise of youth unemployment is beyond belief; her youth is living to “greener” pasture in mass.

    And unfortunately, red districts in Brussels predominantly “Eastern” languages spoken are slowly replace by “Mediterranean” languages.

    1. Anonymous says:

      It doesn’t help that it has been unusually wet and cold this spring. Usually here in the south of Spain the temperature is well into the 20’s by now. Today: 12 degrees and heavy rain. I am not used to the colour green around me here. Much more usually it is brown.

      1. Anonymous says:

        Hi Guys

        I note the weather point which was something I was thinking about watching some late night tennis yesterday from Rome. Whilst it was heading towards midnight there I did spot one or two in the crowd with blankets on their knees which is not quite what you might expect….

        Has Southern Europe shared the disappointing spring/summer that the UK has had?

        1. Rods says:

          Hi Shaun,

          Ukraine is having normal weather and temperatures, when I was out there the daily temperatures were 25-35degC which is normal for the time of year. The coldest overcast day following rain and thunderstorms during the night was still 20degC. Coming back to the UK with maximums at the beginning of last week of 7-9degC feels like winter again. :-((

  3. pavlaki says:

    Shaun, The last figures I saw for property values (Spanish real estate mkt index) showed a 10.5% drop in April compared to last year and 37% down from the peak with a trend indicating accelerating drop rate. The contact I have in Spanish banking (albeit in the Canaries) told me that the banks are no where near recognising the true market values of the properties on their books and if they did there would be a massive black hole! Everything he has told me so far has been spot on so I have no grounds to doubt him but wonder if you have seen any numbers to quantify the difference between what the banks have their property valued at and reality?I would have thought at some point this would have to be written down and very likely the banks bailed out.
    Other Spanish contacts paint a very gloomy picture of business prospects. It really isn’t getting any better is it?! Despite the ‘jam tomorrow’ forecasts of the Eurocrats.

    1. MS says:

      There’s no way it could possibly get any better. With the current ‘strategy’, the only route up involves hitting the bottom en route, and there’s a long painful way to go yet, before that happens.

    2. Anonymous says:

      The problem is not just the houses that are in enormous over-supply. It’s the matter of the banks’ balance sheets that concerns many people here. They know that the banks are not noted for their straightforward honesty when it comes to the real market value of their loan ‘assets’. If things cannot get better, it would be better to get the adjustment to a sensible value done and finished with, even if that value is only the land. The number is enormous, isn’t it ECB and Rajoy? Of course you have private estimates of its size. Then, swallowing hard, a good number of the surplus dwellings could be demolished. Who will eventually pay for that is of course the key question, but we are probably looking to Germany, France, UK and other places of financial weight. This must not happen again, and hopefully Brussels has learned its lesson on very low interest rates.

    3. Anonymous says:

      Hi pavlaki

      There is something of a “grey zone” here where different banks have different methodologies so 1. We do not know the position right now and 2. Estimates of further house price falls (I believe S&P suggested another 20% over the next 3/4 years) are on top of an uncertain existing position!

      However the Bank of Spain is looking into this (in itself a sign…) as this below shows.

      “There is some dispersion across banks, which may be indicative
      of different business and risk-management models, but also of differences in accounting practices. Owing to this latter possibility, on 30 April the Banco de España approved a letter to be sent to banks detailing the criteria on loan refinancing and rescheduling in
      Circular 4/2004.

      Banks will be bound to review the accounting classification of refinanced or rescheduled loans to ensure compliance with these criteria, informing the Banco de España of the outcome of this review and of the related accounting effects before 30 September 2013.”

      Meanwhile out apochryphal Martian would be bemused by “differences in accounting practices” for the same type of assets….

      1. pavlaki says:

        Interesting that The Banco de Espana feels it necessary to issue this letter. Again this multiple accounting practice ties in with what I have been told – some banks are playing head in the sand when it comes to their dodgy loans. I wonder if the BdeE will publish the findings after September and if the banks submitting the data will be honest? If my contact is correct then the deficit on the books will be vast. I just cannot see Rajoy being transparent about this – if he’s still around at that point in time.

  4. MS says:

    Hi Shaun,

    Everything is going as grimly as expected. The financial markets defying gravity is a particularly bad omen — if one were to liken the crisis to head trauma, then this would be akin to the lucid interval preceding coma and death. Too bad our ‘doctors’ seem to have been trained in the art of medieval ‘medicine’. Their diagnostic and predictive abilities seem almost perfectly analogous, too, in fact.

    I guess this is a good example for future generations of what happens when you shackle a bunch of countries with very different economies into a single currency, a single monetary policy, and add a bunch of destructive regulations and buraucracy to top things off — and then when the inevitable crisis comes you decide the economic equivalent of strangulation is the solution.

  5. Anonymous says:

    Off topic (for Spain) but here is a view on a previous crisis:
    http://www.craigmurray.org.uk/archives/2013/05/plus-ca-change-2/

    1. Anonymous says:

      Hi Kit

      Thank you I did not know about that boom and then bust back in the past history of India, As I believe Mark Twain put it

      “History doesn’t repeat itself, but it does rhyme”

  6. pavlaki says:

    Shaun, The last figures I have seen for the Spanish property market are probably well out of date by now and despite my internet searches I cannot get anything more up to date. The last info I had showed: 1.7m unsold properties of which 1.1m were new and 0.6 resale plus 330k under construction but not finished (and never will be) plus 1.1m planned for which credit has been extended but nothing built. I would be interested in more up-to-date figures if anyone has them.

    1. Anonymous says:

      I can only talk personally here – sold a property 40% less than the off plan purchase price in 2002.
      And lucky to sell, there is basically no market.

  7. Anonymous says:

    There is some positive news in Spain, for example VW and Ford are expanding their factories here. But my chats with the locals indicate substantial depression (personal as well as financial), utter lack of trust in the government and it’s notable that the bars at lunchtime are full of young people eating tiny tapas and sipping beers slowly. I guess they are part of the 50% with no job. They have my sympathy. I hope they are not expecting improvements any time soon.

  8. geoffk says:

    Shaun..Skyped my friends in Fuerteventura and they are suffering in more ways than we can imagine..

    They
    are having a heat wave at the moment and it is getting unbearable as
    one said the ac has been running 24hrs a day for weeks now and the
    electricity is not cheap.

    One of my friends who was one of the
    few British i knew over there has come home to the uk after 17 yrs and
    had to do a moonlight flit leaving massive debts behind after his
    building business has gone down…

    The others are hanging on by
    not much and one who expanded massively in 2010 thinking the worst was
    over has run into trouble as the the numbers are just not stacking up as
    more and more people stay away….

    I know one who sold a stack
    of villas and apartments in 2007 and has said it will be at least five
    more years before the banks market at reality prices for the repossessed
    property’s of which there are many as the Irish went on a spending
    spree on the island over the last ten years…The Russian building money
    has completely dried up and not a ruble is being spent on the island…

    I am out in a few weeks and will report…

    It has become very very expensive for food items and the hike in prices every time i go over are eye watering on some items…

    Things like fruit that used to be given away are at prices comparable to the uk if not more..

    Interesting times we live in…..

    1. Anonymous says:

      Hi Geoff

      Thanks for the update. I thought that you had scotched our cold weather theory/debate until I remembered that you are discussing the Canaries….

      I guess the Russians may not even less keen on investing in islands in the Euro after Cyprus.

      As you know I follow inflation and price trends closely and would be fascinated to see some examples of the price rises.

      1. Anonymous says:

        Hi Shaun,

        I’m seeing a small post Cyprus uptick in Russian property viewings and the odd low value resale & new sale. Bulgaria has a law that helps with residency for property buyers. Helpfully introduced by Borisov, whose wife reportedly develops property …..

  9. Anonymous says:

    Hi Shaun,

    Monetary policy is only 1 piece of the jigsaw of a modern economy. The national governments ought to avoid excessive borrowing. The regulators ought to prevent excessive credit and excessive risk and outright fraud.

    Even Britain has suffered when the regulators slept on the job and govt spent borrowed & recklessly. In theory they are all administered by a single government and the buck stops with David Cameron.

    The actors in the eurozone farce report to different governments and unmanageable euro committees. Nobody has any idea where the buck stops. Just blaming monetary union or monetary policy ignores the underlying dysfunctional political gridlock that is totally failing to administer Europe’s economies.

  10. Anonymous says:

    May I go opposite to the current eurosceptic ideology (very sound economic arguments I believe) of almost all messages and general sentiment in the UK and say the following: So far and in spite of the problems, the exchange of insults, the stereotypes; the threats, the blackmailing, the lies, the empty promises, the dramatic negotiations; the reality and choices show that the Europhile ideology prevails again and again and again; it is quite strong (fact: stronger than the pains of rather extreme and unpopular austerity perceived to be orchestrated by foreigners to nations that feel proud) and could indicate of a European identity (still in its infancy) that prevails over economical harsh considerations. Of course, we are not in equilibrium, it will be painful but even the American States passed much turmoil before they finally unite and develop a common nation. This serious and dramatic episode instead of being the reason for EU collapse it could be the reason for EU strengthening (of course with the countries that feel such bonding). My thesis is that the faith in the common target (US of Europe) is strong, might become stronger and might prevail. Consider it as an option for the future with some finite probability. Do not exclude it. Even in families one can have some dramatic episodes.

    1. Anonymous says:

      Hi Vassilis,

      I consider accountability to be the essential difference between the USA and the EU. US justice isn’t perfect and their litigation exceeds all reason, but sometimes the IRS does triumph and sometimes the crooks like Lay & Madoff do get jail.

      The EU’s current political structure prevents people like Berlusconi & Stanishev (who recently got 99% of the vote in Sofia’s gipsy polling stations – I think this statistic was reported by Dvenik) from being investigated/jailed by a Euro FBI.

      This needs to change before Northern Europeans will accept paying tax to help Southern Europe – paying to help struggling poor people may be accepted, but paying to line the pockets of rich crooks is politically harmful for Northern politicians.

      Accountability for Eurocrats, Euro politicians and national leaders? These turkeys are unlikely to vote for christmas ….

      1. Anonymous says:

        I don’t find this type of discussion very helpful as opinions on leaders can differ, but if you insist. What’s wrong with Berlusconi? Why should he be investigated and not Merkel?

        1. Anonymous says:

          If you want more information on Berlusconi, try reading “The Economist”.

          Angela Merkel pays taxes, Berlusconi avoids them. When the German tax people found Uli Hoeness’s name on a list of tax avoiders, they act against him – regardless of his friendship with Merkel. The rules are enforced and Hoeness will be penalized.

          When the Greek tax people received a list of tax avoiders – they conveniently lost it. The rules were ignored. Northerners think the Greek tax service is corrupt and inefficient.

          So there is a perception that poor German workers are paying extra tax because rich Greeks are not forced to pay tax.

          1. Anonymous says:

            According to many people in the South, Merkel (and others) should be investigated for crimes against humanity. This is more important than money. I don’t expect that we will agree but one should be careful with perceptions. There are many perceptions. If north people unhappy with south people, they should leave the Euro.

          2. Anonymous says:

            It’s just my opinion that the Northerners will want to see rules enforced fairly if they must pay to help Greece. Greek bankruptcy or Eurozone break up are the likely alternatives. Both could be unpleasant for Greek citizens and the Bulgarian economy in 1997 paints a grim reminder.

          3. Anonymous says:

            The same is desired by the Greek population which is not very happy with the deeds of the government imposed to them by the Germans (there were blackmails, letters in Greek in German newspapers etc. not to mention the overthrow of the Papandreou government). What is not really realised by the peoples of the North is that troika is in effective control of everything and anything in Greece, they can demand whatever they want. They can do what they please with the rich Greeks. I don’t expect that the poor Greek workers and unemployed (which in Greece do not enjoy unemployment benefits after few months) have different views than the poor German workers. We can exchange many north vs south messages. There are many arguments. Neither is absolutely right and absolutely wrong. We are in this together. I strongly believe that we will either sink or rise together. If South sinks I am not certain for the prosperity of the North.

          4. Anonymous says:

            The Germans (and many others including poor Slovakians) are paying lots of money to Greece

            This is the money that pays the Greek pensions, police & teachers salaries etc. Greece is welcome to refuse this – problem is pensions etc will not be paid …. and the crisis will become even more nasty.

            As for Greek unemployment benefits – ask your VERY RICH politicians where is our tax money ?

          5. Anonymous says:

            These politicians have not been voted by me and I am doing the best I can to bring them down as they represent the interests of the Germans and I am not interested in their interests and I wish that Greece defaults and all these money not be paid back.

          6. Guest says:

            It is actually unfair for the poor workers of the other countries to lend all this money to South when they know that the won’t be paid. I think that the politicians in the North are together with the politicians in the South to rob the poor people and give money to the rich. If I was worker in the North I would be angry with the politicians in the North that they call the shots and they give these moneys to Greece and other while they know that they won’t be paid back. I am afraid that in the end all the poor people will end up being poorer.

          7. Anonymous says:

            Yes, agreed. The “bailout” is illegal under European law, and it only helps the Banks. (The French banks are probably the most exposed, but there is also considerable subsidy to German banks).

            Eurosceptism is fueled by our own Northern politicians taking excessive euro-salaries for non-jobs in the European commission. The EC is an expensive bureaucracy that delivers very little. Many Britons have given up on reforming the EC and just want out of the EU.

    2. pavlaki says:

      The reality is that surveys are showing a dramatic drop in the belief of the EU / Eurozone with France being the most sceptical of all (and well ahead of the UK). I suppose that I am, deep down, a Europhile but I am not much in favour of the existing set up and the dreadful way it is being handled. It is causing antagonism between countries (witness the anti German sentiment) rather than bringing nations together and causing serious misery for millions of people. An ideal solution would be to tear this plan up and start again (but of course we can’t) hence at this point in time I have to look at things rationally, therefore I am EU / Eurosceptic. Sadly.

    3. Justathought says:

      Sorry Vassilis is not the banks neither the economy, neither US
      nor EZ. Reality is technology has modified not only our communications, but finance and banking system; most of commentators and the lots are off, miles off. The purpose of technology is for you humans to have free time, no work,
      leisure pleasure, as robots and the lot will work for you (machines). Banksters see it otherwise, they are still dreaming on the 19 century as well government, and probably 3/4 of the planet, but the games is over, forget capitalism or communism of the 20th century, this is gone for ever… Technology is not apple, or Samsung, technology is a whole, a process. This is a mechanical process link to your brains and the half of your mind, the other half deals with consciousness.

  11. Anonymous says:

    Shaun, one thing worth mentioning about Spain’s inflation rate is that the Spanish CPI, like its HICP series, and the UK CPI, excludes most owner-occupied housing costs. However the Spanish quarterly housing price index calculated for Eurostat showed a 12.8% four-quarter decline and a 1.4% quarterly decline in 2012Q4. If one calculated the inflation rate for Spain using a consumer price series with a net acquisitions approach to owner-occupied housing, which is, after all, the long-term objective of the European Central Bank, Spain’s 2013Q1 or 2013Q2 inflation rate would certainly be lower than 1.4%, and probably much below 1%.

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