Foreign Perspectives

This is the first really serious recession that the euro has had to deal with and there are starting to be signs appearing that it’ll be the last.

The problem arose basically because the entry requirements for going into the euro were created with the political aim of getting as many countries into the euro as possible. Net effect of that is that countries never got around to getting the basics of the operation of their economy into line and that’s why we’re now seeing a number of countries getting into more serious trouble than they would do otherwise.

Ireland is perhaps the worst case of this as it was an economy very dependent on European grant money. Go down any new road up to a few years ago and there was a panorama of “x% supported by the European Regional Development Fund”. That was courtesy of its status as a deprived region up until a few years ago. Now the situation is that not only do the roads not get that European support but the Irish are effectively paying for the roads in Poland. Combine that with the global economic crisis and you’ve a big problem.

However, it’s not just Ireland that has problems. Greece is paying its bills by borrowing short term which is a very dangerous game. Italy is in little better shape. For the worst case you need to look at the former eastern bloc countries who went into the Exchange Rate Mechanism which is a pre-euro state: going directly from one of the softest currencies in the world to using one of the hardest is, to put it mildly, a major shock to the economic system.

Will the euro survive all this, or will we see some countries dropping out soon?