The Corner

One Size Does Not Fit All

The Daily Telegraph’s Ambrose Evans-Pritchard is never knowingly cheerful, but (as Moody’s becomes the latest rating agency to downgrade Greece), his piece today is a timely reminder of just how painful the single currency can be. The key section follows:

The super-strong euro is having sharply varying effects on the different countries in the eurozone and causing the rift between north and south to widen further, according to a new report by Standard & Poor’s (S&P).

Jean-Michel Six, the agency’s Europe economist, said Italy, Spain, Greece and Ireland have all seen sharp deteriorations in their real effective exchange rates since 2005.

This is likely to reach the pain barrier soon if rate rises by the European Central Bank (ECB) push the euro to $1.70 against the dollar by the end of next year, as S&P expects. “Anticipate some lively debates among eurozone policymakers about the level of the euro in 2010,” Mr Six said. . . .

The headache for the ECB is that Germany seems well able to cope with a strong currency after screwing down wages and raising productivity, even if Club Med is squealing. German firms have gained some 18pc in labour cost competitiveness against Italy and 15pc against Spain since 2005, and far more going back to the mid-1990s when the exchange rates were set in stone.

Jobs are already telling the story. Unemployment fell slightly to 7.5pc in Germany in October, but continued rising in Spain to 19.3pc. The underlying rate in Greece has jumped to 18pc with the expiry of workfare schemes.

The slow-burn damage of sliding competitiveness in the Club Med bloc was concealed for a long time, at first because Germany entered monetary union at an over-valued rate, then because the credit boom masked all sins.

Mr Six said that weaker EMU states are being hit on every front at once. They face de facto appreciation both within the EMU against Germany and outside against the majority of the world’s currencies.

How long can it be before the Greek bailout?

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