Hamish McRae: We will survive a eurozone collapse

Economic View

On it goes. The Group of Twenty economic summit in Los Cabos,
Mexico, tomorrow takes place against a suitably apocalyptic
backcloth. If, we are told, the Greeks do the wrong thing at the
polls, the euro will collapse and the world will be plunged into
another recession.

Click here to view the graphic

But this is inherently improbable: Greek GDP is some $300bn, roughly the same size as Argentina or Thailand. If Argentina or Thailand were to face economic disaster – and both have had bumpy rides over the past 20 years – we would be concerned for humane reasons, for no one should play down the cost of economic hardship on ordinary people. But we would not pretend that difficulties in those two countries could threaten the rest of the world. Only if Greece were to become a Lehman Brothers – where a relatively small incident sets off a chain reaction, undermining other and more important institutions – could the votes of the Greek electorate determine the direction of the world economy.

So, is Greece another Lehman or, my preferred analogy, is the eurozone akin to the Bretton Woods system of fixed exchange rates?

There are certainly Lehman-like elements to the Greek situation, for were it to leave the eurozone, there would be a knock-on effect from financial and commercial contracts not being honoured. Leave aside the speculation that this would provoke a run on Spanish and Italian assets, based on fears they might do likewise, for in the short term at least it should be possible to maintain a firewall between Greece and the other weaker eurozone members.

No, the point is that thanks to the eurozone's design, any exit will lead to disruption, just as the international banking system's design did not make allowance for a large bank being unable to meet its obligations.

But there is one crucial difference. The Lehman collapse was a sudden shock. There was no preparation for it. By contrast, the possibility that Greece might leave the euro has been around for at least a couple of years. Common sense has said so, even if politicians haven't. So while it might be a shock, it would not be a surprise. That is the most important single reason why it could be managed.

Now, take the other possible parallel: the end of the Bretton Woods fixed exchange rate system. This was set up after the Second World War to avoid the competitive devaluations and trade restrictions that had wrecked international trade in the 1930s. Countries had to maintain their currencies within 2 per cent of a central rate and they intervened on the markets to do so.

If they needed additional firepower to maintain a rate they could borrow short-term from the International Monetary Fund – they could, if a rate became unsustainable, devalue or revalue. Liquidity for the whole system was provided by the two reserve currencies, the dollar and sterling, both of which were convertible into gold at a fixed price.

In the early post-war years the system worked well enough, though devaluations of sterling in 1949 and 1967 undermined the pound as a reserve currency. The franc, the lira and the peseta were also devalued. There were occasional revaluations too, most notably of the deutschemark. But the system did provide a discipline of sorts, enabling rapid growth of international trade. What went wrong was a lack of faith in the dollar, for while the US was the dominant world economy it could underwrite the entire system. As that dominance faded, the pressures mounted and eventually, in 1973, the world moved to floating rates.

But – and this is the key point – there was huge resistance to the idea that Bretton Woods might break up. There were attempts to patch it up, culminating in the 1971 Smithsonian Agreement, which allowed the dollar to devalue against gold. This was hailed by Nixon as "the greatest monetary agreement in the history of the world". Britain left in 1972 and the system lasted less than 18 months.

Now apply this experience to the euro. Like the Bretton Woods system there are fundamental flaws in its design. There is also huge political commitment to keep it going. And the euro, despite its flaws, has worked reasonably well for a while. But it is even more rigid than Bretton Woods and it has not prevented a sharp divergence of trade balances.

As you can see from the main graph, there has been a substantial divergence of current accounts of the major eurozone members, with Germany moving from deficit to surplus, France and Italy moving the other way, and Spain reaching a deficit of more than 10 per cent of GDP before hauling that back somewhat. (The UK also moved from near balance to sizeable deficit, but we have exchange rate flexibility.)

What I find fascinating is that were we all in the Bretton Woods system, Germany would have been under pressure to revalue, and France, Italy, Spain and the UK to devalue – as the UK has done. So, we are all behaving exactly as we did in the 1950s and 1960s: Germany behaves like a strong currency country and the rest of us are, shall we say, somewhat less rigorous in our financial discipline.

The puzzle, I suppose, is why financial markets bought the idea that there would be financial convergence when there was already economic divergence. Back in the 1980s, Italy, Spain, France (and the UK) had much higher bond yields than Germany. Then, thanks to the euro, yields converged. Now, as you can see from the small graph, over the past year Italian and Spanish 10-year yields have risen from a gap of 2 per cent over Germany to around 5 per cent. For the bond markets it is as though the euro never existed.

I find this long view of financial relations comforting. We do face another Lehman moment, but this time we are more prepared. We may get some indication of the plans after the G20 summit, but business is well advanced in its contingency planning. And, if the Bretton Woods parallel is valid, the world economy could, even at some cost, still cope with the break-up of the eurozone too.

Will Huawei be the Chinese Tata of the mobile handset world?

Will it be Microsoft or Huawei that takes over Nokia? Yes, I appreciate that the question is a little premature but the investment community now seems to feel the only future for what was once the world’s largest mobile handset maker, and Europe’s most valuable company, will be for it to be taken over.

After a sharp fall in its share price last week it is valued at a 38 per cent discount to its net assets, the sort of level that might tempt a predator to step in.

But who? The obvious potential partner is Microsoft, its partner in smart-phone technology, with Nokia having dumped its own operating system for a version of Windows. That would be a defensive move on Microsoft’s part and might make sense for both. There was a rumour that Samsung might buy, but that was denied and it is hard to see why it should do so.

The most intriguing possibility, however, is that the buyer might be Chinese, in which case Huawei, the tech giant would be a prime candidate. The buyer would gain global access, manufacturing capacity, a great if somewhat battered brand, and some important patents. There are huge risks because the company has to be turned round, but to have a solid home market, the largest market for mobile phones in the world, would enable a Chinese buyer to offset those inevitable risks.

What I find fascinating is the way the unthinkable suddenly becomes the obvious. Ten years ago it would been unthinkable that Nokia would be so vulnerable. But, 10 years ago it would have been unthinkable that it would be Tata of India that would rescue Jaguar Land Rover – and be so hugely successful where others had failed.  

News
peopleTop Gear presenter and all-round controversialist is at it again
Life & Style
techHow a 'grey brick' took over the world of portable gaming
Sport
Aaron Ramsey celebrates after opening the scoring in Arsenal's win over Hull `
sport
News
peopleActress speaks out against historic sexual assault claims, saying things have 'gone quite far now'

VIDEO
News
Coren Mitchell, who is the daughter of the late broadcaster Alan Coren and is married to comedian David Mitchell, produced a hand to make poker history at the 98th EPT main event.
peopleJournalist and TV presenter becomes first ever two-time winner of the European Poker Tour
Arts & Entertainment
A stranger calls: Martin Freeman in ‘Fargo’
tvReview: New 10-part series brims with characters and stories

Life & Style
Guests enjoy food and cocktail parings by Chefs Jimmy Bannos, Jimmy Bannos Jr, Daniel Rose and Mindy Segal with mixologists Josh King and Alex Gara at Bounty & Barrel: A Jack Daniel's Single Barrel Dinner Series at Heaven on Seven on April 9, 2014 in Chicago, Illinois.
food + drinkSprinkle Palcohol 'on almost any dish' for 'an extra kick' firm says...
Arts & Entertainment
Shaun Evans as Endeavour interviews a prisoner as he tries to get to the bottom of a police cover up
tvReview: Second series comes to close with startling tale of police corruption and child abuse
Arts & Entertainment
Schwarzenegger winning Mr. Universe 1969
arts + entsCan you guess the celebrity from these British Pathe News clips?
News
politicsLabour launches the 'completely hollow' Easter Clegg
Sport
Luis Suarez celebrates after scoring in Liverpool's 3-2 win over Norwich
sport Another hurdle is out of the way for Brendan Rodgers' side
News
Portrait of Queen Elizabeth-II by David Bailey which has been released to mark her 88th birthday
peoplePortrait released to mark monarch's 88th birthday
Arts & Entertainment
The star of the sitcom ‘Miranda’ is hugely popular with mainstream audiences
TVMiranda Hart lined up for ‘Generation Game’ revival
Life & Style
The writer, Gerda Saunders, with her mother, who also suffered with dementia before her death
healthGerda Saunders on the most formidable effect of her dementia
Arts & Entertainment
Last, but by no means least, is Tommy Cooper and the fez. This style of hat became a permanent trademark of his act.
comedyNot Like That, Like This centres on alleged domestic abuse
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Database Team Lead ( Leadership, Sybase, Computer Science)

Negotiable: Harrington Starr: Database Team Lead ( Leadership, Sybase, Compute...

C#.NET Delphi SQL Developer (C#,DELPHI,SQL)

£40000 - £50000 per annum + Bonus+Benefits+Package: Harrington Starr: C#.NET D...

VB.NET SQL Junior-Mid Level Developer (VB.NET,SQL,Excellent com

£25000 - £35000 per annum + Bonus+Benefits+Package: Harrington Starr: VB.NET S...

Trade Support, Application Support, Operations Analyst, CRM MS

£45000 - £55000 per annum + Bonus and Benefits: Harrington Starr: Trade Suppor...

Day In a Page

Rubin ‘Hurricane’ Carter: The man who could have been champion of the world - and the Bob Dylan song that immortalised him

The man who could have been champion of the world

Rubin ‘Hurricane’ Carter and the Bob Dylan song that immortalised him
Didn’t she do well?

Didn’t she do well?

Miranda Hart lined up for ‘Generation Game’ revival
The Middle East we must confront in the future will be a Mafiastan ruled by money

The Middle East we must confront in the future will be a Mafiastan ruled by money

In Iraq, mafiosi already run almost the entire oil output of the south of the country
Before they were famous

Before they were famous

Can you guess the celebrity from these British Pathe News clips?
Martin Freeman’s casting in Fargo is genius

Martin Freeman’s casting in Fargo is a stroke of genius

Series is brimming with characters and stories all its own
How I brokered a peace deal with Robert Mugabe: Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC

How I brokered a peace deal with Robert Mugabe

Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC
Video of British Muslims dancing to Pharrell Williams's hit Happy attacked as 'sinful'

British Muslims's Happy video attacked as 'sinful'

The four-minute clip by Honesty Policy has had more than 300,000 hits on YouTube
Church of England-raised Michael Williams describes the unexpected joys in learning about his family's Jewish faith

Michael Williams: Do as I do, not as I pray

Church of England-raised Williams describes the unexpected joys in learning about his family's Jewish faith
A History of the First World War in 100 moments: A visit to the Front Line by the Prime Minister's wife

A History of the First World War in 100 moments

A visit to the Front Line by the Prime Minister's wife
Comedian Jenny Collier: 'Sexism I experienced on stand-up circuit should be extinct'

Jenny Collier: 'Sexism on stand-up circuit should be extinct'

The comedian's appearance at a show on the eve of International Women's Day was cancelled because they had "too many women" on the bill
Cannes Film Festival: Ken Loach and Mike Leigh to fight it out for the Palme d'Or

Cannes Film Festival

Ken Loach and Mike Leigh to fight it out for the Palme d'Or
The concept album makes surprise top ten return with neolithic opus from Jethro Tull's Ian Anderson

The concept album makes surprise top ten return

Neolithic opus from Jethro Tull's Ian Anderson is unexpected success
Lichen is the surprise new ingredient on fine-dining menus, thanks to our love of Scandinavian and Indian cuisines

Lichen is surprise new ingredient on fine-dining menus

Emily Jupp discovers how it can give a unique, smoky flavour to our cooking
10 best baking books

10 best baking books

Planning a spot of baking this bank holiday weekend? From old favourites to new releases, here’s ten cookbooks for you
Jury still out on Manchester City boss Manuel Pellegrini

Jury still out on Pellegrini

Draw with Sunderland raises questions over Manchester City manager's ability to motivate and unify his players