Catalonia’s strife; currency’s knife

Posted: October 6, 2012 in Currencies, Europe
Tags: , , ,

Catalonia is Spain’s wealthiest region. In a way it is to Spain what California is to the US. And like California, Catalonia has major debts. Unlike California, it has recently gone cap in hand to central government asking for a bail-out. But, and here is the curious thing, it has imposed terms on the bail-out. Yes that’s right, the troubled debtor, desperate for money, has said: “Okay, I will take some money, but only if…”

In fact the only if relates to it not being required to impose too much austerity.

As the richest region in Spain, one assumes that if it did indeed have independence, and then received 100 per cent of taxes paid by its citizens, its debt crisis might prove to be a good deal less serious. One also assumes that Madrid’s tax receipts would fall quite considerably.

This publication is not qualified to comment on the details of the issues that lie between Catalonia and the Madrid government, but sometimes an outsider can see things that those too tied up in the minutia of details don’t spot.

It is certainly curious that when the clear lesson of the euro is that single currencies don’t work without political union, some regions in Europe are calling for political independence but want to stay in a currency area. So that’s the euro area for Catalonia, and the sterling area for Scotland.

Mind you, something could be said for going in the opposite direction of the euro, and going for more and more currencies. Certainly if London had its own currency – let’s call it the Boris – then it would surely surge in value, and Londoners would find their Boris’s would stretch a lot further, and could buy a lot more stuff from abroad. What was left of sterling – let’s call it the Cameron – would fall in value, giving non-London based manufacturers a massive terms of trade advantage, probably leading to an export-led recovery in the UK’s regions.

Likewise, Barcelona’s new currency – let’s call it the Mas – may surge and Spain’s Rajoy may crash.

The thing about freely trading currencies is that they can help ensure countries with strong exports import more, and give the big importers the price advantages in selling their wares. They can cut though imbalances like a knife through butter. And by the way, Martin Wolf – the FT’s economics guru – recently argued that the German people are worse off thanks to the euro. Paraphrasing an argument from Charles Dumas – an economist from Lombard Street Research – he said: “Euro membership has encouraged Germany into a costly mercantilist strategy at the expense of its people and the productivity of the economy.” He continued: “Germany’s real personal disposable incomes have risen remarkably little since 1998.”

So there is one fix: end the euro and give London, Catalonia, the Flemish part of Belgium, Wales, Cornwall, and every other region in Europe its own currency. There is a less radical solution however.

Also see the following related articles:

Is there hope for the euro? Catalonia’s rift with Spain
Spain’s woes are not down to debt
Catalonia’s strife; currency’s knife
Political shenanigans in Europe
The fix to the euro crisis

©2012 Investment and Business News.

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