Strains on the Eurozone – Centrifugal Forces in the EU
January 19, 2010

This interesting comment in the FT (Ralph Atkins 14.12.2009 ) points to the relative insignificance of the Greek economy to the EU (3%), compared with California to the US (14%).  Economists (and the markets) view both as bankrupt states, but Greece’s weakness is interpreted as an indication that the Eurozone can’t hold together.   The FT puts it down to a hostile commentariat and to the lack of political cohesion of the eurozone.  Most tellingly, the US can transfer tax income from stronger states to weaker when it needs to and this is not the case in the EU.

“The US economy allows fiscal transfers between states, to help the weakest. But other eurozone countries might well just let Greece fall into an abyss, whatever the consequences”

http://blogs.ft.com/money-supply/2009/12/14/greece-versus-california/

 

For stronger, more central EU states, the scenario of EU expansion originally held the prospect of fresh territories that could be incorporated into their markets, without any responsibility for fiscal transfers, no matter how debilitated the weaker peripheral countries became.  Had they never heard of centrifugal force?  With this imbalance of steady, strong central economies and whirling, weakening peripheral economies, the likelihood of something flying off is ever-increasing.

 Atkins asks if there are any other reasons why the worry about the Euro, when the dollar appears relatively immune from contagion from California’s disease.  One reason, I believe, is that Greece has a well organised and class concious, unionised working class, which will undoubtedly resist the slash and burn approach to renewing economies.

C Flower    19.1.2010