Watching the EU unravel (2)

It might be the Euro-zone, rather than the EU that unravels first. Just over half of EU members are in the Euro-zone. The frictions between the Germanic hard-currency bloc and the Club Med countries are well documented, and tensions between the two are developing nicely.

But within Club Med, there is a sub-set of countries whose economies have relied unduly on a boom in construction stoked by EU-subsidies* and low Euro-interest rates**, namely Ireland and Spain. An article in The Telegraph*** gives us a few clues...

"We're in a classic post-bubble recession, yet we can't do anything that a country would normally do in this situation because we're inside the eurozone,"

The Nordic rescue [of the early 1990s] is seen as a model of how to tackle a banking crisis. However, Sweden succeeded only after it left the ERM's fixed exchange system and regained control of its monetary instruments.

However, [Ireland] is the most exposed in the EU to both the dollar and sterling blocs, leaving it more vulnerable to trade and investment effects of the soaring euro. Prof Kelly said Ireland had lost 20pc competitiveness against its trade partners since the launch of EMU.

*As at 2003, €392 per capita in Ireland, €214 per capita in Spain, with Portugal and Greece somewhere in between.

** When these countries joined the Euro-zone, real interest rates became negative. It is also interesting to note that despite the number of dwellings in Ireland increasing from 1.3 to 1.8 million since 1996, and despite half-a-million residential properties being built every year in Spain for nearly a decade (in a country with a population two-thirds of that of the UK), property price rises have been highest in these two countries.

*** Via Tim W and HousePrice Crash