25 May 2006

Wet towel round the head situation

I know that international economics is not a subject of enduring fascination but events in Euroland are becoming interesting, especially for the many brits who have property interests abroad. Hamish McRae in The Independent has a (mostly) comprehensible review of the situation, concluding that:
"The fundamental point is that Europe is going to have some combination of higher interest rates and a strong exchange rate and some bits of the Continent will cope better than others. A couple of years ago I think most of us would have worried about the ability of Germany to cope with these pressures. Now we need to worry about Italy and Spain.
If this is right, an important change will start to take place in Europe. Germany will stop being pitied and start to regain its economic power. Spain, by contrast, will cease to be the fastest-growing large Continental economy and will start to lose confidence in the European project. Italy will become even more concerned about the costs of membership of the eurozone than it is at the moment.
None of this will lead to a rupture just yet. The fact that the eurozone's largest economy is doing rather better is tremendously welcome. But if you want trouble, Italy and Spain are the ones to watch."

Read the whole thing. And don't think that the UK economy will necessarily escape the consequences.

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