August 04, 2010

The Euro's cycle of destruction starts again in France

Spain is in great difficulties at the moment. The reason for this is that it is getting over the bursting of an enormous property bubble. The reason for the enormous property bubble was that for years it was forced into running negitive real interest rates while the economy was growing strongly and so everybody with any sense took out huge loans, with the largest loans most people can get being the ones backed by property. Unwinding this mess is going to take years of austerity that makes the UK's problems look like a walk in the park since we have a floating exchange rate to soften the blow and they don't.

France however has whethered its recession relatively well. The economy is growing again, with lending to households picking up strongly thanks to the Euro forcing them to run negative real interest rates. Oh dear.

The ECB will eventually raise rates. The question is whether it will raise them by enough and soon enough to stop what happened in Spain and Ireland happening again in France, because if the French economy goes down like Spain or Ireland then there is simply not enough money anywhere to bail it out. It probably will, the size of the French economy means that they cannot ignore it. However if they raise rates soon enough and by enough to stablise France it could well lead to a second phase of economic crisis in the current problem countries like Spain, Ireland, and Greece as the number of people unable to service their loans shoot up.

Whatever happens is not going to be pretty because fixed exchange rates simply do not work and always cause problems for those trapped within them. The sooner the Euro collapses the better it will be for everybody.


Post a Comment

<< Home