The Euro – Doomed to Fail in the Beginning

Before deciding whether the UK should join the Euro the then Chancellor of the Exchequer, Gordon Brown, drew up 5 economic tests which the UK must pass for the UK to join. However the 5 tests were superfluous. They ignored the one defining test that was of far greater significance than all of the rest put together and that one thing that doomed the Euro to failure from the start.

That was the growth of Unit Labour Costs throughout the Eurozone. Without that being the same, high levels of unemployment were bound to come about in some EU countries and that is what we are seeing in Portugal, Italy, Greece and Spain already.

Let me explain what I mean by Unit Labour Costs. Simply put it is the labour cost of producing one item of something. Let’s say in a very simple economy you employ me to produce glass tumblers. You pay me £10 per hour and I produce 10 tumblers an hour. The unit labour cost is £1 per tumbler. In another country, let’s say they produce salt cellars. There they pay their workers €10 per hour and they produce 10 salt cellars per hour. The unit labour cost of one salt cellar is €1. So in this simple example, the terms of trade are equal and £1 will equal €1.

If my wages were increased to £11 per hour and but my output remained at 10 tumblers per hour. The unit labour cost is now £1.10 each. If our neighbours increased their wages to €11 per hour and increased their output to 11 salt cellars, their unit labour cost remains €1.00 per unit. The terms of trade are now against us. More £s leave our banks than the €s that are coming in because we now sell less of our products.

Under the laws of supply and demand the exchange rate of our currency would fall. In this simple example it would fall by 10%, bringing the terms of trade back into balance and trade carries on as it did before. This is how countries, like us, for decades have been able to increase the wages to our workers faster than their output has increased. The £ fell in value from around $4 to the £1 in the 1950s to about $1.50 now.

Unit labour cost is a factor of wages paid and productivity, but productivity itself among other things is dependent on the amount of capital invested in each worker and climate. Capital because if you have been given a new machine and I am producing solely by hand you will produce a lot more than I would. Climate because it is much easier to work in the fairly temperate northern Europe than it is in the
hot South, where it is often too hot to work in the afternoon.

For a single currency area to work, unit labour costs have to increase at the same rate in each country all of the time, but that is impossible.
Assuming that the European Commission can do nothing to change the climate, though it does seem to be trying very hard to, I’ll concentrate on capital. The amount of capital invested per worker would have to be the same in every country and increase at the same rate so there would have to be an ABSOLUTELY MASSIVE transfer of capital from the industrialised northern countries to the more impoverished southern and eastern ones. It had never occurred to me until now that the European Commission would deal with this in an altogether different way – move large numbers of people from the East to the West.

So what will be the effect of unit labour prices rising faster in some countries than others? Quite simply it will be loss of exports and jobs in the poorer performing ones, which is what we have seen in recent years. Unemployment rises, the government’s tax receipts fall because there are fewer people in work, welfare spending goes up because there are more unemployed and all of a sudden the government has to borrow large sums of money to keep going and in its turn faces bankruptcy.

The solution to the problem for an independent state, as Argentina did a few years ago, is to default on your debts, reduce interest rates and devalue your currency. These three things are done together and the economy goes through a dramatic recovery. Unfortunately these solutions are not available to the countries in the Eurozone.

Instead the European Commission has imposed austerity measures on the southern European states, putting up taxes and reducing government spending which actually makes the situation worse by creating more unemployment. Incredibly, to try to bring unit labour costs down, they are actually reducing the wages paid to workers. Even if by some miracle this reduction in wages brought them back to parity with Northern Europe it would be a fleeting solution only as in the very next day, unit labour costs would change by different amounts in different countries and we’d be back on the same path to disaster again.

If Portugal, Italy, Greece and Spain had kept their own currencies they would been able to devalue them over the years allowing them to remain solvent. Instead the EU’s great vanity project, the Euro, has been imposed on them and maintained at extraordinary costs to their people.


John Harrison

John Harrison qualifed as a Chartered Accountant in 1973 and is in practice in Worksop, Nottinghamshire. John joined the National Committee on 1999 and became Honorary Treasurer in 2000. He is also Membership Secretary

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The world after the Euro by Robert Henderson

Amidst all the gnashing of liberal internationalist teeth and prophecies of doom if the Euro collapses a question goes unasked in the mainstream media: could the collapse of the Euro leave Britain in a better position than if the currency survives or could its failure even be positively beneficial for Britain? Sounds mad? Well, consider this, Britain may be far better placed to survive the shock than any Eurozone country because of two things: the fact that we have our own currency and our position as a world financial centre.

The Euro’s collapse would cause a good deal of economic riot within the Eurozone because of the difficulties of assigning values to the newly formed marks, francs, drachmas and so on, both in terms of establishing the new currencies and the adjustment of contracts, loans and other financial instruments which are drawn up in Euro values. Most of the contracts and loans in the Eurozone countries will require adjustment. That will involve a massive administrative cost and make Eurozone countries less competitive.

Britain will have none of the costs and disruption of re-establishing a currency. She will be affected where British contracts and loans have been drawn up with the Euro as the unit of value or financial instruments are denominated in Euros, but unlike the Eurozone members that will affect only a small minority of British financial agreements because most of British economic activity is within and for the British domestic market. The lesser costs will make British business more competitive relative to the Eurozone countries.

In addition, while the administrative changes and the task of valuing the re-established currencies in terms of the value of the Euro is proceeding, those wishing to enter into contracts from outside the Eurozone may be reluctant to do so with Eurozone countries until the currencies are fully re-established. This could drive non-Eurozone foreign contracts to Britain which might otherwise have been placed with Eurozone businesses.

While the turmoil of changing from the Euro to the re-established old currencies continues, there would almost certainly be a reluctance to buy the sovereign debt of even the likes of Germany at reasonable rates of interest. That would make British issued bonds more attractive and keep the rate of interest paid on them low. The difficulty in raising finance would also affect non- governmental corporate bodies such as companies, charities and other not-for-profit organisations.

There is of course the possibility of a substantial diminution of Britain’s trade with the Eurozone during the initial upheaval when old currencies are re-established and values assigned to contracts and so on; a much lesser chance of lost trade with rest of the EU which remains
outside the Eurozone (and like Britain retains national currencies) during the period of adjustment and a lesser chance still of disrupted trade with members of the European Economic Area (EEA)such as Norway and Switzerland.

How much might Britain lose? Claims of Britain having 50% of its exports going to the EU are misleading because they are inflated by “….two quite separate effects. The first, the Rotterdam- Antwerp Effect, relates to exports of goods and commercial services to Holland and Belgium. About two thirds of these pass through the two biggest ports in Europe, Rotterdam in Holland and Antwerp in Belgium, on their way somewhere else – some to other EU countries, the rest outside the EU.

“The second, the Netherlands Distortion, relates to Income. This often flows through Dutch “brass-plate” holding companies which offer tax advantages. As a result, much of the investment and income flows recorded in the British statistics as going to or coming from Holland in fact go to come from somewhere else, very often outside the EU altogether.”


How much of an inflation of UK exports to the EU it is difficult to say, but it would probably be reasonable to knock the amount of our exports which go to the EU overall down to 40%.

Would Britain be ruined if the Euro collapsed? It is worth remembering that only around 18% of UK GDP is devoted to exports. UK GDP in in the financial year 2009/10 was £1453billion ( roduct&year=1950_2010&chart=#ukgs303) and exports of goods and service came to £260 billion ( or 18% of GDP. If only 40% of UK exports go to the EU (or strictly the European Economic Area), that would mean around 7% of the UK total economic activity would be at risk.

Of course, no such wholesale loss would occur because stricken or not the Eurozone countries (and even more so the other continental EU countries not in the Eurozone) would not suddenly lose most of their economic activity. Moreover, it is conceivable that the re-establishment of national currencies could stimulate the economies of those involved remarkably quickly because it would allow them to trade on reasonable terms.

It is also probable that the UK financial sector would pick up much of the business involved in the break-up of the Euro as companies and governments both in the Eurozone and the wider world look to the financial expertise of the UK to help unravel the mess.

The problem of the Euro as a reserve currency

It is one thing to be a currency which is a national currency and little else: quite another to be the second largest reserve currency in the world which is the fate of the Euro. Extremely problematic questions arise from that status most pressingly, what will the holders of the Euro as a reserve currency receive if the Euro collapses??

The conversion of Euros to new national currencies of the Eurozone is in principle (but not in practice) straightforward, because the Euro holdings within the Eurozone could be converted to whatever the exchange rate of the each new currency is deemed to be, for example, a one to one parity for the Euro and a new German Mark and three to one parity for the Euro and a new Drachma (the conversion ratios could be achieved either by negotiation within the Eurozone
members or by allowing the new currencies to float for a few months and then using their market valuations).

The position of the holders of the Euro as a reserve currency who are not Eurozone members is completely different for they will not have a new currency to which to convert. All would want the new Mark and none the new Drachma. I suppose that they could be offered a basket of all the new currencies with the contribution of each weighted to a criterion such as the population of each Eurozone member. However, that would be tantamount to a substantial devaluation of their Euro holdings.

Running parallel to the position of the reserve currency holders is the status of private individuals and organisations outside of the Eurozone holding Euros. How will they be treated if the Euro ceases to be?

These are all questions which wait to be addressed. They are capable of causing immense tensions not merely in the EU but worldwide as holders of the Euro face massive losses.

Will the Euro survive?

The intense desire of the EU elites to preserve the Euro to provide the glue to maintain the greatly expanded union and as a platform for further federalisation is not at issue. A collapse of the Euro would both reduce to rubble the EUs attempt to project itself as a superpower and leave the EU subject to economic sanctions by countries outside the EU which had lost out through the Euro’s collapse. That alone would provide the most pressing reason for the Eurozone elites to maintain the currency, even to the point of engaging in large capital transfers from richer to poorer Eurozone members.

But the will of elites cannot keep a political system in place if the fundamentals are wrong. In the Eurozone they are wrong both in terms of the vicious absurdity of the Euro and the profound lack of democratic control. Ironically, the agent of immediate destruction will be a god of the Western elites own creation, globalisation, which has allowed that most truly supra-national of entities, the financial markets, to come into being.

If the Euro does fall, it could herald the end of the EU. That would be a savage irony because the Eurofantatics would have destroyed that which they most desired by feeding it on too rich a political fare.

The euro crisis has turned into a fatal disaster Lars Seier Christensen , co-founder & CEO, Saxo Bank A/S Filed in Lars Seier Christensen Denmark, 09 May 2013 at 13:09    In his keynote speech at this week’s #FXDebates event in London, Lars Seier Christensen, the co-founder and co-chief executive of Saxo Bank, said the euro crisis had turned into a fatal disaster with huge consequences for the members involved.

“I have rarely, in my 25 years career in foreign exchange, witnessed an equally turbulent and fascinating time,” he told the audience.

Here is the speech in full:

Talking points

Thank you for inviting me to open the second FXDebates event.

I am quite excited by the FXDebates initiative, so let me start by telling you a little bit about the initiative.

Last year, Saxo Bank joined forces with Bloomberg and published a series of articles for an e-book covering the latest trends in the Foreign Exchange market. In March, this turned into the first FXDebates event and I am delighted to open the second FXDebates on a rather daunting subject, the euro crisis.

I’m particular proud of our co-operation with Bloomberg as they have been champions in pushing ‘thought leadership’ to a new level with their editorial strategy. I would also like to extend our thanks to CityAM for their support of todays event.

Thought leadership is not just another buzz word. Thought leadership is rather an honest and rational approach to outperform in a rapidly changing digital economy.

It’s about business leaders recognizing the opportunities enabled by new megatrends in the market. Those in my view center around technology, of course, but also a significant shift in investor perception. Investors are looking for transparency, independent information and to enable their self empowerment and independence of thinking, where before they would rely more on traditional sources in the banks.

That is bad news for old, outdated private banking models relying heavily on client trust, but it is good news for financial institutions deploying technology, information sources and communication channels intelligently and innovatively, involving and engaging investors much more actively in the decision making process.

With the FXDebates, Saxo Bank, a specialist in online trading and investment, and our esteemed guests get an opportunity to highlight our and their intent to better educate traders and prepare them in the best possible way for the dynamic world of foreign exchange. The understanding of the importance of foreign exchange and the use of the market, both as an asset class in itself, and as a crucial overlay to other assets classes remains surprisingly limited, even among many professional participants.

Understanding fully the impact of currencies on our world and our investments is more necessary and relevant than ever. Used extensively as centrals tool in defining international trade policies and growth initiatives, investors need to fully grasp the implications on their portfolios. And of course, most importantly, the euro crisis has turned into a fatal disaster with huge consequences for the members involved. I have rarely, in my 25 years career in foreign exchange, witnessed an equally turbulent and fascinating time.

And as this is the main subject of our debate today, let us turn to the situation in the Eurozone.

Frankly, it is a complete mess. And it is a mess that gets worse and worse every day. Only not in Brussels. There we hear an endless litany of promises of recovery in six months time, always in six months time, we hear the Euro is safe, and that if just we all hand over more responsibility to our Masters in Brussels, everything will be just fine.

Nothing could be further from the truth. We have just been through the bailout of the fifth Euro zone country, and both Slovenia and Malta are queuing up to be next. When, not IF, the Troika arrive in these two countries, it will create to an absurd situation where nearly half of the Eurozone countries have been broken by their adoption of the common currency, the same EURO they joined with such high hopes for the future.

Now these are small countries, and can be treated as such… just look what happened to Cyprus. I would suggest to Malta, Slovenia and other bailout candidates that they hang on for dear life until after the German election. After Cyprus, we now know what happens if you get in the way of a German leader seeking reelection.

What is it that is going so wrong in the Eurozone? I think we all know very well by now. The Euro is a political construct, and it simply has no sound economic or fiscal foundation. Unless that is put in place, the Euro will be doomed eventually.

The political capital invested in Euro is gigantic, so the will to keep it alive for absolutely as long as humanly possible, should never be underestimated. Every tool in the box – and I seriously mean EVERY single tool in the box- will be tried, before the unelected, unaccountable people in Bruxelles capitulate to reality. But doomed it is, the Euro, be in no doubt about it.

Actually, a lot of people knew this already when the Euro was introduced. Saxo Bank’s chief economist, Steen Jakobsen, that did work related to the Delors commission back in the nineties, has often told me that the dangers playing out now, were openly discussed at the time. But the political pressure to move forward back then was relentless, and the momentum in the EU seemed so strong, that it was expected by many that the foundation could be put in place after the house was built.

Not so. Because during the first decade of the Euro, it became clear that the suggested benefits from the Euro never materialised. There was no strengthening of Europes clout in the world, there was no discipline among the members, there were serious issues beginning to show for the weaker countries that could not keep up with Germany when it came to competitiveness and productivity. There was no way to manage the economy without controlling your own short term interest rates. There was no way to devaluate your currency to create renewed equilibrium and ability to compete. There was no long term beneficial impact on long term interest rates, as the big winners from the Eurozone, Germany could and would not sell to their citizens that they should underwrite a common Eurobond, or make large transfer payments to the weaker countries forever.

And now, there is no way that the European populations are willing to move forward with the necessary further integration. Not that they get asked directly a lot,as almost all decisions are made by their parliaments or in Bruxelles behind closed doors, because no one dares to ask their populations via a referendum – they know the answer would be a resounding NO! And a NO it should rightly be, because Europe is not, and will never be, the United States. Our cultures, our economies, our populations are far too diverse to ever integrate efficiently and happily in a forced union.
Instead, integration is brought in via the back door, via contributions to the bailout mechanism, by corruption of the ECBs balance sheet, by the banking union that would destroy the credibility of even sound banks if fully implemented, by passing treaty changes quickly and uninformed via the parliaments, claiming that representational democracy justifies that. Well, it doesn’t. A parliament that gives up national sovereignty knowing full well that their population would reject it, are committing treason, in my view.

But one thing is politics, another is economics, although it gets harder and harder to tell the two apart.

Anyone with a rational view of the world now sees the currency collaboration as a historic failure that can lead to even further fatal consequences for Europe and the continent’s competitiveness vis-à-vis the rest of the world.

In my view, there are a number of things that are very clear. The Eurozone will eventually break up. It could happen in a multitude of different ways.

The weaker countries could leave. If this process was managed in an orderly fashion, it could be done at lower costs than the current and future bailouts, and it would quickly set the exiting countries back on a recovery course.

Germany could leave. As the sole beneficiary of the Eurozone until now, this is not likely to happen anytime soon, but as the bills begin to pile up even higher, that may all of a sudden seems an attractive solution to the German citizens. Of course, this would mean a much higher German exchange rate, but with the pressure off for a while, it would reduce the urgency of the crisis for the remaining 16 countries, that would experience a growth boost from a significantly, but not catastrophically lower Euro rate.

A multi-currency zone could evolve, with countries with more similar economic conditions and objective could group together and achieve more appropriate currency levels.

But all of these scenarios would require rationality returning to Bruxelles. It could be certainly be achieved with less chaos and less economic mayhem than what otherwise awaits the Eurozone.

This could even secure attractive outcome of an EU returning to focus on a common market, reducing trade friction between the economies, and benefit from the big diversity of different competences across Europe – we have the benefit of both highly educated workforces and low cost industrial workers, more than 500m consumers, and the benefit of competing tax and social welfare systems.

Again, I repeat, all of this requires rationality to return to the Eurozone. And frankly, this does not seem to be on the cards, unfortunately.

If rationality does not return, what can we expect…

In my view, recession will continue for years, and even turn into depression. Forget about recovery in six months, it will always be six months from now.

Euro denominated assets will remain unattractive, and downright dangerous, to hold for years to come.

Bond yields will rise substantially, in all the 17 countries as the unsustainability of the situation becomes ever clearer.

Bruxelles will claim ever more power, and use it ever more poorly. The financial sector will be drowned in self defeating regulation, taxes and cross border responsibility for failing banks, that will eventually destroy also the healthy banks.

Cyprus WAS a template. Expect not only bail ins, which if defined clearly ahead of time could be part of the solution, but also outright confiscatory wealth taxes, disguised as solidarity payments. The governments of Europe need money, and the private sector has it. It is as simple as that. Be very paranoid.

Expect latent surprises in the Eurozone minefield. The Cyprus chaos has ensured this. A normal private depositor that has worked hard to save up for his family, will not move his account to Switzerland or Singapore. But what will he do when his country is having a bailout over the weekend? I would say the mattress will look a safer place than his bank over that weekend. So bank runs could start instantaneously.

Of course, the answer to bank runs is capital restrictions. Expect a lot more of that, always introduces as short term and temporary, but very hard to remove once in place. Iceland is in its 5th year of “temporary” capital restriction – just for your reference.

There are a lot of things to worry and think about if you are a citizen or investor in the Eurozone.

So all the more reason to welcome the the second FXDebates event about the euro crisis. I for one look forward to hearing what our panel has to say.

This crisis will not pass. This is reality for investors and traders around the world and that’s why this is an important forum.

A crisis is also an opportunity as it creates conditions for change. Hopefully a change towards more transparency, reform but also intellectual honesty. This forum should be a stepping stone towards better understanding based on openness, intellectual capacity and two organizations with a firm belief in that voicing and exposing opinions is key, particularly in time of crisis.

FX and the debate of currencies is very much both part of the solution and the problem of Europe today.

Lord Stoddart on the Eurozone

Lord Stoddart of Swindon: Britain is not a member of the eurozone. We have decided to keep our own currency. There is no prospect of our joining the eurozone. So why on earth does our Prime Minister keep lecturing the eurozone as to how it should carry on, including whether it should have a banking union? Since we are not part of it, it is nothing to do with us, and we should keep out of it.

The second point I want to raise has already been raised-that is, the position in relation to Angela Merkel, the German Chancellor, who seems to be throwing her weight about increasingly these days. The Prime Minister does not have to satisfy Angela Merkel; he has to satisfy the people of this country, and the people of this country, we understand, will suffer austerity for the next 10 years, which means that they cannot afford to pay any more than the £10.3 billion that we already pay into EU coffers. I hope that the Prime Minister realises that he is not answerable to the EU for taxation and our contributions. He is responsible to the British people, who show increasingly that they are not very happy about remaining in the European Union, and who will be even unhappier if they are asked to pay even more towards it.

Lord Strathclyde: My Lords, that is the point that I was trying to make to the noble Lord, Lord Grenfell. I have every sympathy with the view given by the noble Lord, Lord Stoddart. It is entirely correct that, although we believe that the economy is heading for a state of recovery and long-term growth, many budgets are being cut in Britain, and we are not in the business of seeing them being increased in Europe, where British taxpayers will have to foot the bill. But that is a discussion that will take place, first between the Prime Minister and Mrs Merkel and then, later on, in the Council of Ministers.

As for the noble Lord’s question as to why we are interested in the banking union, self-evidently financial services and financial matters are incredibly important to the United Kingdom-it is one of our key interests-and to the City of London. It is entirely right that we should take note of what is happening in the zone where nearly 40% of our exports go. One of the many reasons why this economy has suffered in recent years is because of the uncertainty in the eurozone, which we believe needed to be resolved-and one way in which to do that is through the banking union.

Crisis in the Zone

Everyone will be familiar with the euro crisis and the possible departure of Greece and other countries from the monetary union. The crisis has many sub-plots – political, economic and financial – but even a well-informed reader might be forgiven for not following the curious tale of the TARGET2 (Trans European Automated Real Time Gross Settlement Express Transfer) balances.

It has attracted little attention in the UK press but it has emblazoned all over the German media. The story begins with the birth of monetary union and involves a fundamental lack of transparent accounting which has fuelled complexity and distrust throughout the entire system.

Within a currency area, payments between participants are ultimately settled by their banks in ‘central bank money’. This means that the payer will instruct its bank to transfer money to the recipient’s bank. The respective banks will reflect their settlements via their accounts with the central bank. A central bank will monitor balances with individual banks and may set limits. In addition, it will usually ask for any claims it may have on a bank to be collateralised by, for example, government debt.

Within the euro area, there are seventeen national central banks (NCBs) and the European Central Bank (ECB), collectively called the euro system. These separate organisations have to function in effect, as a single, central bank and the role of TARGET2 is to bind them together.

If a depositor transfers money from a Greek Bank to a German Bank, ultimately the transfer will show up as a claim by the Bundesbank against the National Bank of Greece. These balances between NCBs are not cleared down or settled by the transfer of foreign exchange or gold, nor are they collateralised. Incredibly, there is no cap on how large they can get.

When the euro was set up, the claims were bilateral between NCBs. However, as the pre-euro national payment systems have been replaced by TARGET and now TARGET2, the ECB has stepped in as a clearing house. Intra-Eurosystem balances are now automatically aggregated and, at the end of the day, netted out throughout the euro system, leaving each NCB with a single bilateral position vis-a-vis the ECB. As a result some NCBs have a TARGET2 claim and others are TARGET 2 liability vis-a-vis the ECB.

Lack of Accountability

Does any of this matter? Before the crisis, the balances between the NCBs were not significant at January 2007. The banks funded them through the interbank market privately. However, following the crisis, these private sources of funding dried up and the banks in sovereign states of the periphery (the PIIGS – Portugal, Ireland, Italy, Greece, Spain) could only raise funds via the TARGET2 system. The TARGET2 balances began to rise after 2007 but this was not noticed because of the opaque accounting treatment adopted by the ECB. Any normal bank or company shows the money owed to it in its current assets and money owed by it in its current liabilities so you get a full picture of what is due in and what is owed. But the ECB is not a normal bank. It NETTED OFF the liabilities against the assets so it showed a mere €49.4 billion owed to it by member states.

However in 2011 two enterprising economists, Hans-Werner Sinn and Timo Wollmershauser, found a way of sourcing the full data from the IMF databank and were able to present the full picture.

As of April 2012, the debtor NCBs have BORROWED over €850bn from the rest of the system , €650bn of which is owed by the PIIGS. This is principally funded by Germany (€463bn) and the Netherlands (€152bn) and little Luxemburg ((€109bn. Worryingly, these negative balances have arisen despite public money inflows such as European Union International Monetary Funds loans, which eventually end up in the banking systems. These balances represent massive transfers of wealth – Germany’s balance represents 20% of its annual GDP. This transfer happened without any political accountability or democratic process – just through the automatic function of the monetary union. It is worth comparing this complete absence of political process with the attention and scrutiny associated with the European financial stability facility (EFSF), which was recently increased to €780bn.

Who Knew?

In the absence of standard accounting practices, or at least disclosure by the ECB, nobody knew what was happening. The ECB responded that the TARGET2 system was working as it was intended to, and cannot be capped since a euro must be worth the same in all parts of the currency area, and freely transferable as well. Some official voices have even suggested that the size of these balances is only a problem if the public know about them.

The debate, indeed outcry, in Germany about these balances shows that the full implications of monetary union were not properly understood by the vast majority of citizens, even though there were references to the possibility of this type of event in academic literature.

Concern is particularly high now because if Greece were to leave the monetary union, it would not be in a position to repay the €100bn odd Euros that its NCB owes the rest of the euro system. Of course, the whole edifice was set up without any limitations on TARGET2 balances, wholly on the basis that no country would ever leave the euro. Although this remains the official position of the ECB, in practice politicians speak openly of this as a possibility.

If the ECB were to suffer from an NCB not meeting its obligations on TARGET2, a Greek exit would wipe out the entire capital of the ECB which has capital and reserves of approximately €31bn, rendering it insolvent. This would require the other NCBs, which collectively own the ECB, to contribute additional capital to it but 12 of the 17 NCBs are already heavily indebted to the ECB and are certainly not in any position to contribute more capital.

The absence of proper accounting for these balances deprived the public of visibility on the balance of payments crisis developing within the euro zone after the credit crunch and has the potential to bring down the ECB and national central banks of member countries with it.

Intra Eurosystem Assets (€billion)

Austria                -34.6 Belguim             -52.8 Cyprus                  -7.9 France                -79.6 Greece             -104.8 Ireland              -142.4 Italy                   -191.4 Malta                     -0.4 Portugal             -60.9 Slovakia             -13.6 Spain               -150.8 Total                 -842.0
Intra Eurosystem Liabilities (€ billion)

Estonia                1.0 Finland              66.0 Germany         463.3 Luxembourg   109.5 Netherlands   152.8 Total                 792.6
Adapted from an article which was published in Accountancy magazine

Decline of the eurozone

It is said by the three main political parties that the UK must remain in the EU because it is our major trading partner and hence vital to our prosperity.

Professor Tim Congdon CBE, with the help of figures from the International Monetary Fund (IMF) database (see below) explains: The numbers are immensely helpful because they extend over a 25-year period and so help in identifying trends. They start in 1991, when the Maastricht Treaty was being negotiated and the euro was conceived, and end with forecasts for 2016. (The analysis is slightly incomplete, because it ignores some of the smaller countries, but apart from Poland and Sweden none of these 10 countries is of much importance).

In 1981 the eurozone output represented 21.8% of the world output. Their problem was and remains, that the excessive taxation and heavy regulation inflicted on them by the EU has held them back. The figures show that the eurozone’s share of the world output has plunged by a third – from 21.8% in 1991 to 14.3% in 2011.

It is entirely plausible that out grandchildren will live in a world where the eurozone produces only 6 or 7 per cent of world output. In other words, in their world the nations that today have neither EU membership nor the euro as their currency will outweigh the eurozone by well over ten to one.

Eurozone as a percentage share of world output per year

1991 21.821 2000 18.349 2009 15.015
1992 20.172 2001 18.300 2010 14.556
1993 19.610 2002 17.968 2011 14.253
1994 19.485 2003 17.482 2012 13.861
1995 19.290 2004 16.989 2013 13.478
1996 18.887 2005 16.541 2014 13.100
1997 18.606 2006 16.235 2015 12.722
1998 18.659 2007 15.881 2016 12.350
1999 18.535 2008 15.534

First appeared in EuroFacts, 22nd June 2012