Saturday, November 6, 2010

Eurozone - A Historical Perspective

Sometime back I attended a lecture by Thierry de Montbrial, Founder and President of the think-tank IFRI. It was an interesting perspective and quite distinct from that of an economist or trader. Summarising what I thought I understood from the same... All errors of commission and omission are mine 
(1) WW I & II were the biggest globalisation themes (though negative in nature) prior to the IT revolution. The beginning of Euro is to be traced here. India & US are two other historical examples of how geographical factors helped create political & economic unity out of diversity.

(2) The history of Europe is a bloody one with no love lost among major nations till end of WW II. It is an amazing feat that within two generations the attitudes have changed drastically. Today's French citizen doesnot think that a German is a natural enemy and vice versa. This is the second seed of Eurozone; it was created by concentrating on what would unite rather than on what would divide. The Russian and East European threat of 50's helped

(3) Enlarging vs Deepening of the Union:The initial efforts for the Eurozone concentrated on enlarging the union, by adding more countries. As a result the deepening process viz., the checks & balances and measures that were required to keep the Union bound together, suffered. e.g. (a) the monetary & fiscal policy co-ordination and (b) lack of a clear centre of power


(4) Conscious Decision: This was a conscious compromise that the EU makers had to undertake. A crisis of sorts emerging out of this was clearly foreseen but the preference was to let the need for the deepening be felt (or rather be forced) by history than by pre-specified conditions that were destined not to be followed anyway

(5) Current situation & Prospects: Dismantling of Euro or excluding one or few countries etc., are not being contemplated as they are seen retrograde.
 Earlier, it was taboo to speak of fiscal prudence at the country-level. The best that one could talk about was monetary discipline. Now that the crisis is in the open, there is open free for all discussion of what is required and there is optimism that what is required will be done
Austerity measures and self-imposed fiscal discipline are seen to be emerging (?). The man on the street, the labour unions etc understand the sacrifices that are required to be made and are ready to make them (?). It is clearly understood at the ground level that entitlement culture cannot persist (??)


Downgrading of credit rating is seen a major prestigious issue by some countires such as France and hence they would work hard to avoid the same 



Growth may suffer and a double dip may ensue but Eurozone will survive. The currency value may dip further, but considering the range that already it had seen in its history, the current levels are not really disturbing



The USA's deficit issues remain and the value of Euro as one of the alternative reserve currencies cannot be undermined (Yuan could and INR couldn't compete here in the next decade or so!)



Problems and crisis will keep occuring but eventually (may be in couple of centuries) the world will be one big union!



The Euro will emerge stronger from this crisis ; This is not the beginning of the end of Euro but the end of the beginning.........

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