23/12/2012 00:00
TW
0

If the Spanish government is in a fury over the BBC2 programme The Great Spanish Crash (Daily B Thursday) they may go ballistic over Rodger Bootle's Leaving the Euro: A Practical Guide. The author of this 114 page report, which won the prestigious Wolfson Economics Prize, has a track record. He forecast the bursting of the dotcom bubble in 1999 and in 2003 the worldwide crash in housing leading to the financial crisis. This time he is predicting the breakup of the euro. Rodger Bootle believes that it inevitable that the PIIGS (the weaker peripheral nations Portugal, Ireland, Italy, Greece, and Spain) will have to leave the euro unless the richer core members (Germany, Austria, Netherlands, Finland and Belgium) don't just loan bailout funds but actually accept much of their debt. For Greece and Ireland their sovereign debt is modest compared to that of our own Spain. Without this gift he argues that the weaker countries will not be able to repay their debt because in addition, being tied to the euro, they have become uncompetitive compared to the richer core members – 35% less. Without action the peripheral nations will default one by one bringing more havoc to the banking industry. He has produced a plan for countries quitting the euro to reduce the inevitable pain involved. Take Spain as an example. The government would announce the decision to quit on a Friday that on Monday all wages, bank deposits, pensions and prices would be reset in Pesetas Nuevas at a 1-to-1 ratio with the euro. All banks and ATMs would be closed over the weekend at least. The President may lie as Harold Wilson did in the 1967 UK devaluation that “the pound in your pocket has not been devalued” but the new peseta would soon lose value against the euro. Real wages and pensions would fall. Bootle estimates a 30% devaluation in effect defaulting on some debt. At a stroke debt would be reduced and as would labour costs realising growth through boosted exports and tourism.

I thought the 30% high until I recalled Spain before the euro when devaluations were frequent. This has not been an option not just from 2002 when the euro came into circulation but in the earlier 3 years when the Spanish government was not allowed to revalue their currency in the run up to the floatation. In the 10 years before 1999 the peseta dropped in fits and starts by 37% against the dollar. The 30% figure shocks mainly because it will come all at once. The effects for Daily B readers will be a large price increase in imported goods but to compensate any UK income will also gain more new pesetas. Obviously any wealth held in euros in Spain – bank deposits, shares, property etc., will drop in value. If you believe Mr Bootle's plan move out of euros held in Spain (if you can). For once putting them under the bed is an option. A safer option might be to the UK or the USA. For those gamblers among us a consequence of the exit of any of the periphery nations and their devaluations would imply a revaluation upward of the euro in the stronger countries so a switch to core countries such as Germany may result in an improvement in your finances. In economic terminology this is capital flight and has already started in Greece and Ireland. Add on lack of inward investment and all of this is not good news for Sr. Rajoy in Madrid.

Mike Lillico
Palma de Palma