The Printing Presses Roll

The price that the European member countries have paid by adopting a common currency is that they lose the ability of tailoring interest rates to meet their own country’s particular requirements. For example interest rates that are advantageous for the German economy, may be disadvantageous for the Greek economy. Effectively they have a coalition and there are problems associated with running a coalition. Perhaps if the European Union had been more decisive several years ago regarding interest rates, several of their member countries would not be experiencing the problems that they currently are.

The real issue seems to lie with the likes of the major investment banks such as Goldman Sachs, who created products that took sovereign debt off the balance sheet of Greece. This was similar in some ways to creating CDO’s that took mortgage debt off the books of lenders in the United States. Obviously it worked well for a while, and contributed to hefty profits for the bankers. But at the end of the day, it all turned to custard with the Greeks paying the price for it.

The Greek Government has been forced to take austerity measures. It needs to dramatically reduce spending. Greek public servants have seen pay cuts, and there no doubt will be massive numbers laid off. This will ultimately flow through to the private sector, as there will be fewer Euros being spent by the locals.

We have already seen rioting in Athens as the locals protest against the austerity measures. There must now be doubts as to how safe Greece is for tourists. Will holiday makers choose to go to other destinations instead? This must be weighing heavily on the minds of those in the Greek tourism industry. Now is really the start of the tourist season in Greece. Tourism is the key driver of the Greek economy.

Economically, Greece is a lightweight in Europe. Greece’s economy is dwarfed by the likes of Germany, Britain, France, Italy, Spain, Turkey, the Netherlands and Belgium. It follows then that the EU will invariably have economic policies that are of most benefit to the economically strong. They also tend to be the most populous countries in Europe.

Printing vast amounts of money primarily for the benefit of Greece is a measure that will not have been taken lightly. If the Greek economy totally fails, there could be major flow on effects especially to Italy, Spain and Portugal. With a common currency and free borders, wage rates across Europe have increased almost to the levels of Germanyand Britain. This has reduced the price competitiveness of what were the lower cost producers such as Spain.

If New Zealandand Australia were to adopt a common currency, we would encounter similar problems. Our economies are different, and need to be stimulated or constrained differently. A dramatic illustration of this has been differences in monetary control by the Reserve Banks of our two countries. Australia has increased interest rates to slow the economy, whereas New Zealand has maintained a low interest rate policy for some time. Until recently, New Zealand has had significantly higher interest rates than Australia. Now the reverse is true. Yet a lot of people regard our economies as being similar. At least New Zealandand Australia have not had to get the printing presses out, unlike the USA, Britain and the European Union.

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