Having read the articles and comment on Europe and the UK over the weekend, it may be useful as the last word (I promise) on Europe to explain the fundamental problem facing mainland Europe and why this has not been resolved (and ultimately it is doubtful as to whether it gets properly sorted out).

The fundamental problem Europe faces is that of the 17 Countries that have pooled their currencies (i.e. have the Euro) some are creditor nations and some are debtor nations.

To put this in simple terms and to draw the distinction of how the United States of America operates (as opposed to Europe).

  1. Europe is a collection of separate sovereign states which means they all have the power to set their own tax and spending rules (this is not the case in the US) and their debts are individually traded on the market, so they have a joint currency but singular debt instruments (this is not a good mix)
  2. Some countries in the Euro spend more than they make (debtor nations such as Spain and Italy) some are creditor nations and make more than they spend (such as Germany)

In the US the total tax of all states goes into the central Government pot and the debt of the US is backed by the total of all 50 states; in the Euro this is not the case.

Those countries that are uncompetitive cannot devalue the currency and cannot print more money as they have given away this power (they no longer own a printing press).

The creditor nations such as Germany who have gained positively from trade with Euro debtor nations WILL NOT use some of this surplus to help them or backstop their debts.

Countries with large debts and uncompetitive economies within Europe are being told by Germany (and France) to cut expenditure which is recessionary when what they desperately need is growth and lower currency.

So we have at the last summit, the Euro big boys telling the naughty boys to behave and then, well……to go away and cut services, cut welfare, cut their public sectors and after all of this – in all likelihood their situations get no better in real terms.


Ultimately Europe has got to decide whether it is a one for all Union, similar to the US, (which means joint Euro Bonds) or it is a collection of separate Countries in a trading block, if it turns out to be the latter then they will ultimately have to dismantle the Euro currency and let individual currencies float to find their natural levels, because at the moment the whole construct is a dysfunctional mess.

The German currency should be way higher than the Italian, Greek, Spanish or Irish currency.

As debt is priced on an individual nation basis (so Italian debt at 7% and Germans at 2%) the Germans currently enjoy the best of both worlds (low borrowing costs and low currency).

This is just not sustainable; I am absolutely comfortable that tighter fiscal constraints on countries is the necessary first step but now they collectively have this after the last summit, either they embrace European collective debt structures or the Euro experiment is a bust.

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