PIIGS may yet fly

Thus starts the title for Roger Bootle's regular Monday morning piece in the DT but it goes on to add, "but not while they're trapped in this rickety eurozone. His piece contains a surprising amount of common sense for an economist, "Debt problems are usually helped by inflation and made worse by deflation" is the truest and most memorable but he also notes that as an economy moves into deflation the real rate of interest rises as interest rates cannot be negative.

Meanwhile in Euroland Mm Lagarde is mangling Churchill by saying, ""We are in the middle of the beginning of the end." The financial powers that be in Euroland, J C Trichet et al, believe the publication of their positive stress test results for EU banks will restore confidence and lending by banks and slowly things will improve as they did in the US following their publication of bank stress test results. It really all depends on how much Eurozone sovereign default risk is included in the tests. Even to admit such risk is significant is anathema to Brussels. But not to include it is unacceptable to the markets who recognise that the Eurozone's problem overall is a sovereign debt not a banking crisis. There are numerous PIIGS banks looking dodgy but they are not Lehmans.

Bootle correctly links the debt problems to lack of competitiveness of the PIGGS economies compared with other Euroland economies principally Germany and he goes on to list some unpalatable choices for Euroland:

1. Higher rates of inflation in Germany would make lower rates of inflation easier in Club Med

2. Default by some or all of the PIGGS inevitably leading to them leaving the eurozone


3. Germany leaves the Eurozone


The EU politicians will continue to try and push water up the hill but inevitably they will start to lose the battle and have to reach for their nuclear option of full fiscal and political union, the Fourth Reich final soluition to the EU problems you might say. This will take place against a backdrop of major civil unrest, riots, strikes death on the streets in Club Med land as the EU/IMF cuts start to bite. We will see the same thing here in the UK.

Something has to give soon in the Eurozone as currently constituted. Now does anyone know what that octopus Paul is doing this week or have the Dutch turned him into calamari.