The Euro
Two of the best holidays I've ever had have been to Crete (part of Greece) and the following year the Algarve in Portugal. In both we stayed in lovely hotels, close to lovely sandy beaches, enjoyed beautiful weather and excellent food, and thoroughly enjoyed ourselves.
Of the two, Crete was marginally the better. The hotel was a small, family run affair, and we were given a split-level room on the top floor (of three), with a balcony overlooking the pool area and, perhaps half a mile away, the beach. We hired a car for a week and had some good excursions, to Chania (the nearest big town) and further along the north coast to Heraklion where we met up with an old friend for work who happened to be holidaying at the same time. It was a super drive along the coast road, winding alongside the seashore with lovely hills to our right. We also drove across to the south west corner of the island, to Elafonisi, still the loveliest beach I've ever seen, and the drive through the mountains on a winding, narrow road with a sheer drop on one side and a gear change needed every fifty yards or so exhilerating. I would happily go back there.
The Algarve was different. We stayed in Vilamoura, a golfing centre that in comparison to our Cretan village was a thriving metropolis. The hotel was massive, with a couple of pools and adjoining a long sandy beach. Again, the food was excellent, and our 5th floor room offered a view across the pool and beach area and was very peaceful. Again we hired a car for our expeditions, across the border into Spain and north to the Catholic shrine at Fatima (a long long drive for a disappointing visit). It was also a long haul for our flights, as we flew into Lisbon so on arrival faced a 4 hour coach ride and arrived at the hotel in the early hours of the morning - not ideal with a three year old in tow! But for all that, we had a lovely holiday.
* * *
Now, of course, both countries are in crisis - in a financial meltdown that threatens the entire EU if either country defaults on billions of euros worth on government debt. In essence, both countries have for years spent far more than they generated in tax revenues, and topped up the shortfall by borrowing from the international bond markets. It's not a new thing, they were doing it long before the advent of the single currency in 1999. The difference is that in those days, when they had their own currencies (the Portuguese escudo and the Greek drachma) they had control of their own destiny. If they needed to devalue the currency to bail themselves out of a similar crisis, well that was purely their choice and affected only their own populations.
Neither country had a reputation for fiscal responsibility, even in those days. Both relied extensively on tourism to boost their coffers, and Greece in addition had its shipping industries. Both were relatively poor countries on the fringes of the European continent, with high levels of seasonal employment, and in Portugal's case also carried significant baggage from its colonial days. Their populations also had a bit of a reputation for being workshy - happy to do as little as possible, for as much as possible, and to avoid paying tax as much as possible. In that they were not (and indeed are not) alone - tax avoidance is a lucrative industry that has generated huge and profitable businesses in Switzerland, Luxembourg and many offshore centres (the Channel Islands, Bahamas, Netherlands Antilles and others).
Then came the euro. The single curreency.
Every nation that joined (the majority of countries in the EU signed up for it) had to agree to very strict and measurable spending limits, restrictions on government debt issues and other tools aimed at stabilizing exchange rates prior to the creation of the euro, and thereafter maintaining its value in the world markets. Countries were still permitted to set their own tax regimes but within those the scope for action in case of crisis situations was limited, since there would inevitably be a knock-on event to the other member countries. In essence, if a euro member state got into financial difficulties the rest of them helped out by manipulating currency rates, lending to the problem state to help them out, and other measures. When this happened (as it has periodically throughout the currency's life) the restrictions, known as convergence criteria, tended to go out of the window. Even the Germans, who as the strongest economy in Europe and hence the euro, have always been very consistent and strong in their insistence that these criteria must not be broken, have seen fit to breach their own rules and temporarily exceed their own limits - to much derision from Britain who has never joined the euro (and hopefully never will) and others.
The financial crisis over the past couple of years, that cost millions of jobs globally and saw the demise of Wall Street giants like Bear Stearns, Merrill Lynch and, most famously, Lehman Brothers - financial powerhouses throughout the 80s and 90s who dominated the industry - has resulted in the problems of Greece and Portugal (and to a lesser extent Ireland and Spain) becoming intolerable. So called "austerity measures" (essentially pay freezes, increased personal tax liabilities, and the forced sale of government assets to repay the huge debts, now including bail-out loans from the IMF) have been introduced in all these countries, and of course been highly unpopular in them all.
Ireland has bitten the bullet and forced them through, and seems to have stabilized. The population have grumbled about it, but by and large got on with it. Portugal too, despite an election that resulted in a change of government, seems to be moving forward despite loud protests from their people. Spain so far has stayed away from the worst of it, despite wide belief that it too is in serious difficulties.
But Greece..... That is quite another story. There the people are implacably against the measures. The country is riven by regular and wide-spread labour strikes in protest. There are daily demonstrations, some violent, outside the Parliament building in Athens. The country is essentially broke, and has taken a huge multi-billion euro loan from the IMF to tide it over and wants another. It has no chance of repaying either loan, nor its existing government debt. Default is not so much a question of "if", more a case of "when". Quite what will happen then is unclear. There is a real fear that a Greek default will lead to a knock-on effect and bring down Portugal and Ireland, possibly Spain, and cause widespread difficulties in the rest of the EU where other nations and their banks hold huge piles of debt in those countries. The US too will take a huge hit, for the same reason. The euro itself will plunge in value (it's already well down) and some of the more pessimistc views put the whole future of the European Union, not just its currency, at severe risk of breaking up - on the basis of survival of the fittest and every man for himself, probably.
* * *
To be honest I'm not surprised. If anything, I'm surprised it hasn't happened earlier.
When you look at the EU, it's a collection of 27 or so individual countries and peoples. Apart from being located on the same continental landmass, they have little in common. Each one has its own beliefs and customs and financial requirements, and histories that invariably contain wars between themselves and against each other. How any sane person can believe that all this thousand year history can just be forgotten and swept away in a single generation is a mystery to me. It will take many many generations before the years of mutual animosity between say Poland and Germany or France and Britain are swept away. Let's face it, if the Catholic and Protestant communities in Northern Ireland, a very small part of a relatively small country in European terms, still can't get along then what chance have the rest of us got? Similarly the Walloons and Flemish in Belgium (although at least they never seem to take that animosity to violent levels). Or the Basques and the rest of Spain?
There are precedents, where countries have been cobbled reluctantly together to make a bigger and hopefully more powerful nation, and it always seems to end in pain and huge amounts of bloodshed. Look at the USSR and its disintegration, or more painful still (and that's saying something!) the former Yugoslavia. In both cases there have been few winners and many losers, and conflict still riddles both.
Back in 1998 I was working for a little company that was struggling to implement and launch a very innovative financial market in London and Europe - the details don't really matter, it failed anyway (at least our initiative did). But at the time the Bank of England were preparing for the euro - even though Britain had voted not to join there was a massive impact on the country and more specfically the City of London and banking industries. We were invited to attend a meeting with some officials in the Bank and give them our views. We had some discussions in-house, then our CEO, our Head of Legal, and bizarrely myself hopped a cab to the Bank of England. We met in a lovely old oak pannelled office: the furniture was probably 18th century and the IBM mainframe computer perched on the small and lovely old leather-topped desk looked a little incongruous. The office window overlooked the courtyard that sits in the middle of the building. I found it all very interesting, I must say.
Our CEO of course did most of the talking. Our position was basically that on paper the euro was a great idea but in practice wasn't likely to last. We referred to those Europe-wide animosities as a potentially de-stabilising influence. We pointed to the lack of a continental regulatory regime that covered all member nations equally. We suggested that since every country would still want to control its own budget and support its own financial and debt requirements, including the ability to raise taxes, there could never be a continent wide conensus. We were of the opinion that at some point in the foreseeable future, there would be a debt crisis, probably sparked by what we called the Club Med countries - Spain, Portugal, Italy and Greece) that could potentially bring the whole edifice tumbling down.
The Bank officials were absolutely stunned. It seemed we were the most pessimistic representatives they had spoken to. They thanked us for our time and showed us out. When their report came out, some weeks later, our views were faithfully represented as a minority view, and we were duly listed in the appendix of contributors to the report. Then the euro was launched, and over the ensuing years has been largely successful
But it's interesting that what I and my colleagues predicted nearly 15 years ago, a group of very minor workers in this huge multinational market, and now forgotten, now seems to be coming to pass. We got the timing wrong though - we thought 10 years, but it's taken 13.
Of the two, Crete was marginally the better. The hotel was a small, family run affair, and we were given a split-level room on the top floor (of three), with a balcony overlooking the pool area and, perhaps half a mile away, the beach. We hired a car for a week and had some good excursions, to Chania (the nearest big town) and further along the north coast to Heraklion where we met up with an old friend for work who happened to be holidaying at the same time. It was a super drive along the coast road, winding alongside the seashore with lovely hills to our right. We also drove across to the south west corner of the island, to Elafonisi, still the loveliest beach I've ever seen, and the drive through the mountains on a winding, narrow road with a sheer drop on one side and a gear change needed every fifty yards or so exhilerating. I would happily go back there.
The Algarve was different. We stayed in Vilamoura, a golfing centre that in comparison to our Cretan village was a thriving metropolis. The hotel was massive, with a couple of pools and adjoining a long sandy beach. Again, the food was excellent, and our 5th floor room offered a view across the pool and beach area and was very peaceful. Again we hired a car for our expeditions, across the border into Spain and north to the Catholic shrine at Fatima (a long long drive for a disappointing visit). It was also a long haul for our flights, as we flew into Lisbon so on arrival faced a 4 hour coach ride and arrived at the hotel in the early hours of the morning - not ideal with a three year old in tow! But for all that, we had a lovely holiday.
* * *
Now, of course, both countries are in crisis - in a financial meltdown that threatens the entire EU if either country defaults on billions of euros worth on government debt. In essence, both countries have for years spent far more than they generated in tax revenues, and topped up the shortfall by borrowing from the international bond markets. It's not a new thing, they were doing it long before the advent of the single currency in 1999. The difference is that in those days, when they had their own currencies (the Portuguese escudo and the Greek drachma) they had control of their own destiny. If they needed to devalue the currency to bail themselves out of a similar crisis, well that was purely their choice and affected only their own populations.
Neither country had a reputation for fiscal responsibility, even in those days. Both relied extensively on tourism to boost their coffers, and Greece in addition had its shipping industries. Both were relatively poor countries on the fringes of the European continent, with high levels of seasonal employment, and in Portugal's case also carried significant baggage from its colonial days. Their populations also had a bit of a reputation for being workshy - happy to do as little as possible, for as much as possible, and to avoid paying tax as much as possible. In that they were not (and indeed are not) alone - tax avoidance is a lucrative industry that has generated huge and profitable businesses in Switzerland, Luxembourg and many offshore centres (the Channel Islands, Bahamas, Netherlands Antilles and others).
Then came the euro. The single curreency.
Every nation that joined (the majority of countries in the EU signed up for it) had to agree to very strict and measurable spending limits, restrictions on government debt issues and other tools aimed at stabilizing exchange rates prior to the creation of the euro, and thereafter maintaining its value in the world markets. Countries were still permitted to set their own tax regimes but within those the scope for action in case of crisis situations was limited, since there would inevitably be a knock-on event to the other member countries. In essence, if a euro member state got into financial difficulties the rest of them helped out by manipulating currency rates, lending to the problem state to help them out, and other measures. When this happened (as it has periodically throughout the currency's life) the restrictions, known as convergence criteria, tended to go out of the window. Even the Germans, who as the strongest economy in Europe and hence the euro, have always been very consistent and strong in their insistence that these criteria must not be broken, have seen fit to breach their own rules and temporarily exceed their own limits - to much derision from Britain who has never joined the euro (and hopefully never will) and others.
The financial crisis over the past couple of years, that cost millions of jobs globally and saw the demise of Wall Street giants like Bear Stearns, Merrill Lynch and, most famously, Lehman Brothers - financial powerhouses throughout the 80s and 90s who dominated the industry - has resulted in the problems of Greece and Portugal (and to a lesser extent Ireland and Spain) becoming intolerable. So called "austerity measures" (essentially pay freezes, increased personal tax liabilities, and the forced sale of government assets to repay the huge debts, now including bail-out loans from the IMF) have been introduced in all these countries, and of course been highly unpopular in them all.
Ireland has bitten the bullet and forced them through, and seems to have stabilized. The population have grumbled about it, but by and large got on with it. Portugal too, despite an election that resulted in a change of government, seems to be moving forward despite loud protests from their people. Spain so far has stayed away from the worst of it, despite wide belief that it too is in serious difficulties.
But Greece..... That is quite another story. There the people are implacably against the measures. The country is riven by regular and wide-spread labour strikes in protest. There are daily demonstrations, some violent, outside the Parliament building in Athens. The country is essentially broke, and has taken a huge multi-billion euro loan from the IMF to tide it over and wants another. It has no chance of repaying either loan, nor its existing government debt. Default is not so much a question of "if", more a case of "when". Quite what will happen then is unclear. There is a real fear that a Greek default will lead to a knock-on effect and bring down Portugal and Ireland, possibly Spain, and cause widespread difficulties in the rest of the EU where other nations and their banks hold huge piles of debt in those countries. The US too will take a huge hit, for the same reason. The euro itself will plunge in value (it's already well down) and some of the more pessimistc views put the whole future of the European Union, not just its currency, at severe risk of breaking up - on the basis of survival of the fittest and every man for himself, probably.
* * *
To be honest I'm not surprised. If anything, I'm surprised it hasn't happened earlier.
When you look at the EU, it's a collection of 27 or so individual countries and peoples. Apart from being located on the same continental landmass, they have little in common. Each one has its own beliefs and customs and financial requirements, and histories that invariably contain wars between themselves and against each other. How any sane person can believe that all this thousand year history can just be forgotten and swept away in a single generation is a mystery to me. It will take many many generations before the years of mutual animosity between say Poland and Germany or France and Britain are swept away. Let's face it, if the Catholic and Protestant communities in Northern Ireland, a very small part of a relatively small country in European terms, still can't get along then what chance have the rest of us got? Similarly the Walloons and Flemish in Belgium (although at least they never seem to take that animosity to violent levels). Or the Basques and the rest of Spain?
There are precedents, where countries have been cobbled reluctantly together to make a bigger and hopefully more powerful nation, and it always seems to end in pain and huge amounts of bloodshed. Look at the USSR and its disintegration, or more painful still (and that's saying something!) the former Yugoslavia. In both cases there have been few winners and many losers, and conflict still riddles both.
Back in 1998 I was working for a little company that was struggling to implement and launch a very innovative financial market in London and Europe - the details don't really matter, it failed anyway (at least our initiative did). But at the time the Bank of England were preparing for the euro - even though Britain had voted not to join there was a massive impact on the country and more specfically the City of London and banking industries. We were invited to attend a meeting with some officials in the Bank and give them our views. We had some discussions in-house, then our CEO, our Head of Legal, and bizarrely myself hopped a cab to the Bank of England. We met in a lovely old oak pannelled office: the furniture was probably 18th century and the IBM mainframe computer perched on the small and lovely old leather-topped desk looked a little incongruous. The office window overlooked the courtyard that sits in the middle of the building. I found it all very interesting, I must say.
Our CEO of course did most of the talking. Our position was basically that on paper the euro was a great idea but in practice wasn't likely to last. We referred to those Europe-wide animosities as a potentially de-stabilising influence. We pointed to the lack of a continental regulatory regime that covered all member nations equally. We suggested that since every country would still want to control its own budget and support its own financial and debt requirements, including the ability to raise taxes, there could never be a continent wide conensus. We were of the opinion that at some point in the foreseeable future, there would be a debt crisis, probably sparked by what we called the Club Med countries - Spain, Portugal, Italy and Greece) that could potentially bring the whole edifice tumbling down.
The Bank officials were absolutely stunned. It seemed we were the most pessimistic representatives they had spoken to. They thanked us for our time and showed us out. When their report came out, some weeks later, our views were faithfully represented as a minority view, and we were duly listed in the appendix of contributors to the report. Then the euro was launched, and over the ensuing years has been largely successful
But it's interesting that what I and my colleagues predicted nearly 15 years ago, a group of very minor workers in this huge multinational market, and now forgotten, now seems to be coming to pass. We got the timing wrong though - we thought 10 years, but it's taken 13.
posted by Travellin' Bob @ June 24, 2011
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