FT.com / Columnists / Martin Wolf - Eurozone plays ‘beggar my neighbour’

Martin Wolf's column in yesterday's FT.com had a good discussion about possible outcomes for the current eurozone crisis.

To me, there will be several overriding conclusions, but the one of the most important is that all of these events are very deflationary.

In addition, I think that European companies that compete globally will be major beneficiaries. Global competitors - especially the Chinese - will suffer as their cost advantages melt away.

Here's my thinking:

When the markets settle down, European countries will lose the appearance of euro unity - every country will do what is in their own best interests.

Although the euro block was originally billed as a counterweight to the United States, we are different in that we have a common federal government governing the 50 states.

The euro, on the other hand, is really more of a convenience to its 16 member states; that is, it's great when times are good, but when the going gets tough, governments will do whatever is best for own political survival.

For example, think about the close physical proximity of France to Spain and Portugal. Let's just say that the euro leaders to jettison its weaker and less fiscally responsible members. Good-bye, says the ECB, to Greece, Italy, Portugal, and Spain - you're on your own.

If you lead one of the Southern European governments, you are now worried about keeping your citizens happy (not to mention trying to keep your position). You have 20% unemployment, and are hugely in debt to capitalists throughout the world. Your only hope is growth - a growing economy can generate jobs and tax revenue. So what do you do?

You depreciate your currency, cut labor costs, and invite companies in the euro block to come set up shop in your country.

This what happened in Europe when the Berlin Wall came down. Lots of companies closed factories in Germany, for example, and transferred operations just a few miles away to the Czech Republic, where business could be done at a fraction of the cost but the same if not better than their German counterparts.

The obvious losers in this scenario are the big euroblock countries.

Here's the second implication of the market turmoil, in my opinion.

If "beggar thy neighbor" becomes the norm, deflationary pressures hit hard. Prices will fall everywhere. While interest rates would move lower as well (for higher quality credits, at least), deflation makes it harder for debtors to repay their obligations.

Although they might suffer in trades amongst European counterparts, European companies will now be able to compete aggressively in the global marketplace without sacrificing their own profit margins. That's why I have begun adding to my positions in European stocks.


FT.com / Columnists / Martin Wolf - Eurozone plays ‘beggar my neighbour’