The Eurozone

Last week’s big EU meeting of leaders to move a bit further along the road to solving the problems of the Eurozone has been a big topic in discussions, as currencies and their movement really affect the business of our clients. At the moment, the recent weakness of the Euro against the dollar has offset some of the potentially beneficial effects on volume of the recent drop in panel prices. Panasonic’s problems in its TV business, reported in this issue, must have been made worse by the strength of the Japanese Yen against the Euro, especially as Panasonic has its own vertical supply chain for PDPs and LCDs in Japan, many of the costs for which will be in Yen.

As I write this blog, the implications of the Euro deal are still being understood and analysed. I do not profess to being any kind of expert on currency. I know from experience of having a purchase ledger in Yen with sales income in Pounds and 100% responsibility for currency purchasing decisions, that probably the most dangerous thing in currency dealing is to think that you are clever in this area.

At one time, I was a great fan of the UK joining the Eurozone. One of my questions to those that opposed the UK joining the Euro, was whether they thought that the US would have been as strong if there had been a different dollar for every state? I’m still a believer in strong European economic cooperation, but the current crisis has really pointed to the answer to that question.

The fundamental point is about fiscal and even political cooperation. Unless the fiscal policies of the countries in the Eurozone are run ‘as one’, then the Eurozone cannot survive, in my view. If there is a single fiscal policy, eventually, that has to mean much closer political integration, just as there is in the US. States will have to cede sovereignty to the centre, just as in earlier centuries, Germany and Italy, France and the UK were formed from principalities.

The dollar works partly because, despite the different economic conditions in different parts of the US, there are large voluntary migrations from region to region. The history of Detroit is a prime example. From a peak population of around 1.8 million in the 1950s, the city has dropped to around 714,000 now, with 25% of the population leaving in the last decade. That speed of change and decline doesn’t happen in Europe.

In Europe, there is not the same culture of migration to follow jobs even within countries, let alone between countries, so new ways of dealing with the tensions of different economic performance will have to be found.

It’s a view that I’ve heard that Germany, for example, absolutely cannot afford for the rest of the Eurozone to leave it. If that were to happen, a ‘New Deutschmark’ would be very strong and immediately put the great results of recent years under threat, by reducing the country’s competitiveness. So Germany, effectively, has to accept that the cost of being part of a currency that is weaker and therefore helps its business, is that it will have to accept much of the costs of holding the zone together. And over the long term there may be issues on migration as well – but now I’m getting well outside my editorial ‘comfort zone’!