The Euro-Dollar crisis

by Politicus

THE US economy is the biggest in the world and is running a vast deficit. That means it buys more from other countries than it sells to them and it spends more abroad than it earns.

This means the dollar falls against the currencies of America's trading partners, mainly the euro and the Japanese yen. That is the market way of remedying a deficit. If a country cannot balance its trade and payments with others at one level of prices, then by its currency depreciating they will balance at a lower level.

The falling dollar means a rising euro. It means US goods are cheaper in European markets and EU goods more expensive in America. This makes a US holiday good value these days for people using euros, but it means the Americans are solving their deficit problem at the expense of the 12 eurozone countries.

Add in the Chinese who have tied their currency, the yuan, to the dollar. As the dollar heads for the floor and the euro heads for the ceiling, the Chinese yuan goes to the floor also. This enables Chinese as well as American goods to undercut eurozone ones, so that the continental EU is being flooded with cheap imports, while eurozone exports to the US are hit.

So the Americans are ruthlessly solving their economic problems at the expense of the Europeans - or rather those Europeans who have embraced the euro - while the Chinese are chortling away to themselves as their cheap labour turns them into the 21st century workshop of the world.

Unfortunately the falling dollar could hit Ireland badly. The Republic does two-thirds of its trade outside the eurozone - a higher proportion than any of its other members. All those computer, software and pharmaceutical companies - the Intels, the Dells and the Pfizers that make viagra - send most of what they make to the USA, but the falling dollar makes it harder and cuts their profits.

Ireland's is much more an Atlantic economy than a euozone one, but having abolished its own currency and replaced it with the euro, the Republic no longer has any control of its exchange rate. It was the floating and highly competitive exchange rate of the Irish púnt vis-a-vis the dollar and pound sterling between 1993 and 2001 that gave the Republic its Celtic Tiger economy.

The Republic's politicians threw that benefit away when they decided to adopt the euro,thinking Britain was going to follow them in a year or two. They were impelled by their usual uncritical europhilia. Now they are praying the dollar will not fall further.

These are some of the delights of membership of the eurozone, which Tony Blair seems so anxious to join. Another delight is the Stability Pact, the rules governing the euro. A furious row broke out recently over this, after Italian prime minister Silvio Berlusconi blamed the single currency for "producing the exact opposite result of what the euro was created for, an asphyxiated economy" and for "hobbling growth under the burden of stupid ties".

The Stability Pact has been widely discredited by events over the past few years. It has been virtually ignored by Germany and France, while smaller countries like Ireland and Portugal have cut public spending to adhere to its rules. There is growing pressure to reform the Pact from some EU States, while others like Austria and the Netherlands are opposed to making the Pact more flexible.

In the Guardian newspaper recently, commentator Jackie Ashley said, "Economically, there isn't a single sane person who thinks that Gordon Brown was wrong to delay British entry to the euro last year (2003, ed)."

Of course Ashley is right and it is a fact that voters have not missed. People were told that rejecting the euro would mean political and economic disaster, but the sky has not fallen. British voters are now much more cautious about the threats of the euro-fanatics. They need only look to Ireland to see the dangers.

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This document was last modified by David Granville on 2005-05-17 12:12:45.
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