The Eurobind

This morning there was news of the bailout for Ireland, and just now the Greens have decided to pull out of the ruling coalition in January and try to force a new election. There's a lot of comment in the newspapers about whether the Euro was to blame or not for Ireland's predicament.

It's my belief that the single currency is partly to blame for Ireland's position. The other reason being that similarly to the UK, Ireland also had too lax bank regulation which led their banks to allow lending to get out of hand. Both the UK and Ireland had too low interest rates during the boom period, for the UK only slightly too low, in Ireland they were far too low.

The Euro, one size fits all interest rate fed the Celtic Tiger its raw meat. The low rates allowed the Irish property boom to take hold and gather pace. Paid for by increased bank lending. The boom in Ireland was far too great but there was nothing the Irish Government could do about it, other than raise tax rates sky high - which would have caused a great amount of unemployment.

There are three main levers for macro-economics; Interest rates, currencies and fiscal management (tax and spend). The Euro takes away interest rates and currency management which meantfor Ireland that the interest rate was too low during the boom, too high now and there is no chance to independently devalue. In the UK we have nearly zero interest rates and an ability to devalue and print money!

The Euro was launched with a fanfare in 1999, and seemed to function well in the boom years. Especially for those countries which are now suffering. For Germany growth was a bit lacklustre and has meant they are in a better position now. They are getting resentful now that they are being asked to bail out for countries which are on the brink. The Euro has not worked out well for the strong economies or the weak.

Several things can happen now.

• Struggle on, propping up Ireland, Greece, Portugal and Spain.
• Allow the PIGS to withdraw from the Euro.
• Reform the Euro taking more powers to the centre.
• Fold the Euro and try to keep the EU afloat.

My feeling is that the ruling elite of the EU have too much at stake in the project to let it fall apart. They will try to take powers away from National Governments to set budgets and tax artes. Will the people of Europe allow it though? I think some, including Germany, will have major problems with it. Civil unrest and more Governments could fall.

Interesting times ahead!

Squiffy.