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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Martin Hutchinson
August 24, 2012
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The two largest problems by far are Italy and France. Italy has failed to address its structural problems, which are primarily those of over-powerful public sector unions. While the replacement last autumn of Silvio Berlusconi by Mario Monti may have pleased The Economist (which sees Italy as remaining in a smaller euro while Spain departs), it has in reality made matters worse because no significant reforms have been carried out and the Monti government has no legitimacy and must be replaced in new elections next March. Since Italy has the highest government debt in the eurozone (now that part of Greece’s has been written off), it is far more likely than Spain to be the trigger for a eurozone breakup. Even though Italian GDP declined in the second quarter by 0.7%, more than Spain’s, the markets do not realize this; they currently trade Italy’s 10-year government debt on a 5.68% yield compared with Spain’s 6.64%. The markets are wrong.
The markets are even more wrong about France, whose 10-year bonds trade at only a 2.16% yield. While France’s GDP was flat in the second quarter, that does not reflect the damage being done by the new Hollande government. This has reversed the modest reforms in pension age carried out by Sarkozy, has increased the already onerous wealth tax and plans to introduce a 75% top rate of income tax on the rich. Given that most wealthy Frenchmen speak English and often German, this will cause not only capital flight but emigration over the next year, reducing France’s tax base and its GDP, and causing a massive government funding crisis. Even if France survives Greece’s exit from the euro, and the inevitable Italian crisis, it will itself need to leave the common currency within the next year, since there are no funds large enough to bail it out.
The obvious euro split would form a “Mediterranean euro” of France, Italy, Spain, Portugal and probably Malta and Cyprus (but not the hopeless Greece.) This would allow the Mediterranean countries to retain much of the efficiency benefits of a multilateral common currency, while gaining trading advantages of a weakening of perhaps 10-15% against the northern euro economies.
However, the eurozone’s unhappy history over the last few years has demonstrated that if you don’t trust the governments of your neighbors, you don’t want to be in a common currency with them. At the current time, it would be madness for the relatively well run Spain and Portugal to enter into a currency union with Italy and France, without the counterbalance of Germany. Both Italy and France as currently run would see departure from the euro as providing them room for profligacy, the last thing Spain and Portugal should want to tie themselves to. Equally, if France and Italy left the euro, the Spanish and Portuguese economies are probably not strong enough to remain with the northern euro and suffer a further 10-15% uplift in their exchange rates against Italy, France and the world.

Hence a euro split would probably leave Greece in solitary sub-Balkan disgrace (possibly accompanied by Cyprus), while France and Italy each went their own way, their profligacy weakening their currencies but with nobody else tied to their failure. Spain and Portugal could form an “Iberian euro” and might very well be joined by other small economies who, while reasonably disciplined, find the current euro too strong, perhaps Slovenia, Slovakia, Malta and Ireland. Belgium is a special case; it has very little fiscal discipline but benefits enormously from being at the center of the expanding EU empire – on balance it would probably find its Imperial revenues enhanced by remaining a member of the stronger euro.