Not all PIIGS are made the same. Spain has a public debt that is 50% of GDP. Germany has a public debt that is 77% of GDP. Greece has a public debt that is 115% of GDP.
The issue with Spain is that their economy is deflating after a construction binge. Not that they have a lot of public debt. In Greece they have a lot of public debt.
The situations are not the same in all of these countries. People like to categorize things. You see this all the time. For example analysis sector by sector in the stock market. It makes little to no sense.
The thing is, each entity is different. With different problems. Try analyzing public debt, balance of trade, number of bank defaults, amount spent on bank rescue packages, and it is easy to see things are not the same.
Unfortunately the market flies on perceptions. Create a catchy moniker and keep repeating a lie often enough and people will believe it to be true. No one remembers that France and Germany have a higher level of public debt than Ireland, Portugal and Spain.
True. But Spain, like Greece, needs a weaker currency, and Germany needs a strong one. Ideally, they should all go back to national currencies so they could have optimal exchange rates. However, none of the weaker ones can tolerate being stuck with obligations denominated in a strong euro. So, having the nations needing the strong currency exit, and leaving the ones who need a devalued currency stay in, is the best available solution.
But Spain, like Greece, needs a weaker currency, and Germany needs a strong one.
Actually, both need market forces, including sound money, limited government and flexible labour markets. Then a single currency, or a hundred, will do just fine.
The “currency value” problem would happen in any other large market with a single currency. Such as the US. Reducing the value of the currency has much the same effect as freezing or reducing salaries and prices across the board. In regions where the currency cannot be devalued, such as EMU member nations, this is precisely what will happen and is in fact happening.
The main issue remaining is debt. A currency devaluation would also reduce debt. Without control of the currency there is no easy way out of the debt, so the only alternatives will be to pay it off, renegotiate it, or default. If there is another economic crisis leading to a large GDP contraction soon, it will be impossible to pay off the debt. That will leave renegotiation or default as the only options.
Contrary to some people I do not think breaking the EMU is a good solution. It will make individual nations more susceptible to speculative attacks on their currency which will lead to deeper issues. It is contrary to the interests of the so called PIIGS to devalue their currency much more since it will mean higher oil prices, which will lead to further economic contraction. All these countries have economies heavily dependent on oil. Further economic contraction in the mid term could lead to civil unrest as job loss increases. For example in Spain the unemployment rate is around 20%.
The present lower value of the Euro is actually better for the main european manufacturers (including German manufacturers) who depend heavily on exports such as Mercedes, BMW, Volkswagen or EADS. EADS in particular had been asking for a Euro devaluation for years, since they were losing a lot of contracts to US companies due to the high value of the Euro versus the Dollar.
Not all PIIGS are made the same. Spain has a public debt that is 50% of GDP. Germany has a public debt that is 77% of GDP. Greece has a public debt that is 115% of GDP.
The issue with Spain is that their economy is deflating after a construction binge. Not that they have a lot of public debt. In Greece they have a lot of public debt.
The situations are not the same in all of these countries. People like to categorize things. You see this all the time. For example analysis sector by sector in the stock market. It makes little to no sense.
The thing is, each entity is different. With different problems. Try analyzing public debt, balance of trade, number of bank defaults, amount spent on bank rescue packages, and it is easy to see things are not the same.
Unfortunately the market flies on perceptions. Create a catchy moniker and keep repeating a lie often enough and people will believe it to be true. No one remembers that France and Germany have a higher level of public debt than Ireland, Portugal and Spain.
True. But Spain, like Greece, needs a weaker currency, and Germany needs a strong one. Ideally, they should all go back to national currencies so they could have optimal exchange rates. However, none of the weaker ones can tolerate being stuck with obligations denominated in a strong euro. So, having the nations needing the strong currency exit, and leaving the ones who need a devalued currency stay in, is the best available solution.
But Spain, like Greece, needs a weaker currency, and Germany needs a strong one.
Actually, both need market forces, including sound money, limited government and flexible labour markets. Then a single currency, or a hundred, will do just fine.
The “currency value” problem would happen in any other large market with a single currency. Such as the US. Reducing the value of the currency has much the same effect as freezing or reducing salaries and prices across the board. In regions where the currency cannot be devalued, such as EMU member nations, this is precisely what will happen and is in fact happening.
The main issue remaining is debt. A currency devaluation would also reduce debt. Without control of the currency there is no easy way out of the debt, so the only alternatives will be to pay it off, renegotiate it, or default. If there is another economic crisis leading to a large GDP contraction soon, it will be impossible to pay off the debt. That will leave renegotiation or default as the only options.
Contrary to some people I do not think breaking the EMU is a good solution. It will make individual nations more susceptible to speculative attacks on their currency which will lead to deeper issues. It is contrary to the interests of the so called PIIGS to devalue their currency much more since it will mean higher oil prices, which will lead to further economic contraction. All these countries have economies heavily dependent on oil. Further economic contraction in the mid term could lead to civil unrest as job loss increases. For example in Spain the unemployment rate is around 20%.
The present lower value of the Euro is actually better for the main european manufacturers (including German manufacturers) who depend heavily on exports such as Mercedes, BMW, Volkswagen or EADS. EADS in particular had been asking for a Euro devaluation for years, since they were losing a lot of contracts to US companies due to the high value of the Euro versus the Dollar.