Swirling information

A recent rash of articles are hinting, pondering, and discussing a very possible brewing issue for Europe, a real currency crisis. The latest hits close to home for many readers:

France’s AAA rating may be at risk as the deepening economic slump erodes tax revenue and forces the country to raise borrowing, according to ING Groep NV.

“I’m not saying France is going to be downgraded, but the level of debt puts them in a spot of danger,” Padhraic Garvey, head of investment-grade debt strategy in Amsterdam at ING, said in an interview. “Their AAA rating is under stress.”

Standard & Poor’s affirmed France’s AAA rating last week, assigning it a "stable" outlook.

S & P hedges in their outlook with a jargoned comment:

The French economy "will again begin to expand once the global economic uncertainties fade," S&P said Jan. 13. "Should the large budgetary imbalances and relatively high gross debt deteriorate over the medium term beyond our expectations, the ratings would likely come under downward pressure."

Translation, maybe a 40ish% chance of being downgraded. Despite being with the New York Times, Landon Thomas has an informative article and points to a key problem for our euro:

For some of the countries on the periphery of the 16-member euro currency zone — Greece, Ireland, Italy, Portugal and Spain — this debt-fired dream of endless consumption has turned into the rudest of nightmares, raising the risk that a euro country may be forced to declare bankruptcy or abandon the currency.

The prospect, however unlikely, is a humbling one. The adoption of the euro just a decade ago was meant to pull Europe together economically and politically, ending the sometimes furious battles over who could devalue their currency the fastest and beggar their neighbor.

The important part being the euro has been run as a political rather than economic currency. None of this is "news". The very rules for euro entry and membership, written by the Germans in the 1990's, were meant to keep the less fiscally sound in Europe (Italy, Greece, Portugal) from free-riding on the back of, at the time, more prudently fiscal members of the EU. These rules, the Stability and Growth Pact, were of course jettisoned for political reasons in the early 2000's when France and Germany ran afoul due to cratering economies and mountains of governmental spending (aka "social justice" to some). Should we even go into the strong suggestions that the whole convergence process when the euro began may have been built on rather questionable economic data being reported?

One wonders if the first president of the European Central Bank, Wim Duisenberg, had it right when he said in an interview with Deutsche Welle in 2002:

DW: A central part of the treaty would no doubt be the Stability Pact, the criteria now in place for current euro zone countries. Those criteria are now being discussed in European capitals -- especially the three-percent cap on deficit spending. What do you think about suggestion criteria should be softened, especially in light of Germany's economic troubles?

WD: I would be very much against it. The criteria are only just in place. It's natural that there are times when it really bites and causes difficulties for some European countries. Then countries talk about changing it. But I'm one who thinks you should never change the rules in the middle of the game. The fact that some countries are now having difficulty meeting the criteria -- like Germany, France and Italy. It is precisely because of the fact that in the recent past, when everything was going well, they didn't grasp the opportunitiy to better consolidate their public finances. Now, because they haven't done that at that time, they are sitting on their blisters. But that's no reason to change the rules. It's all the more reason to finally do what should have been done long before. Out of the 12 euro zone countries, eight have already reached that goal.

A currency can and should be used for political reasons, sparingly and when needed, but this should not ecplise the over-riding purpose of a currency, which is to provide a relatively stable economic instrument allowing for the facilitation of the transfer of goods and services.

Regardless of what should be and what actually is at the moment, this current spate of articles, coupled with the sterling plummet in the UK (aka southeast Iceland), foreshadow nothing good for the euro, Europe, or the global economy.

Still think politicians and ever more governmentalism are the answer? Enjoy the blisters.