When the introduction of the euro equalised interest rates across the zone, the five biggest beneficiaries were the countries now clubbed together with a certain moniker: Portugal, Ireland, Italy, Greece and Spain. And saints they were not.
As interest rates plummeted from, in some cases, the high teens to the single digits, everybody went on a spending spree.
Real estate boomed and then bubbled. Consumers loaded up on debt – in the case of Ireland to nearly 200 per cent of an average household's yearly disposable income. Industry followed – the 1996-2006 decade was arguably the best period that many companies in these countries had had since the Second World War.
Governments followed with liberal spending – several already had a history of dodgy fiscal management, and they gratefully grabbed this license for borrowing money at cheaper rates.
The Greek bureaucracy eventually became so bloated that roughly one in four Greek workers worked for the government. Budget deficits of more than 10 per cent became commonplace, and debt/GDP ratios ballooned, in cases to near 100 per cent or more.
Unfortunately, when the time came to tighten belts, governments found themselves without their traditional weapons, which had been given over to the European Central Bank, or signed away in the Zone's Growth and Stability Pact.
They could not, for example, devalue their way out of trouble (making exports cheaper), fiddle domestic interest rates (to regulate lending), or simply, print money. Dozens of other factors aided the bubbles, but this is the genesis of the Greek drama being played out today, with the three other versions (and the Italian if you are feeling uncharitable) looking to follow. What was a whisper a few months ago – the imminent demise or at least slide into oblivion of the euro – is now a mainstream opinion.
Is it RIP the euro, then – 'Eurodemise'? Probably not.
And what's in it for the UAE and its dollar peg? Probably a lot First, the euro is arguably only one small part in a long historical process, the integration of Europe (snigger not – it's actually true).
Shorn of obfuscating rhetoric, the EU was formed to keep the peace in Europe after centuries of intercine conflict. A customs union and a common currency were the next logical steps to stronger integration. In their essentials, these steps were fully the 1800's revisited but this time with the consent of all concerned, rather than enforced by the Napoleonic yoke.
Growing schools of thought throughout the post-Napoleonic 19th and 20th centuries favoured economic integration as a means to political stability. This culminated in the European Coal and Steel Community of the 1950's (formed to regulate these essentials of war), which dovetailed into ERM 1, which culminated in Maastricht, 1992 and later, the euro.
With a rapidly expanding group of euro-using countries and up to half-a-dozen others on the waiting list there is simply too much historical, political, emotional and economic capital invested in the euro by too many countries and too many generations of their politicians.
A few members might drop off somewhere along the way, but it is absolutely an idea whose time has come. Because, also, a decade on, the economic benefits of the euro are very apparent. Inflation has been at historic lows in the zone following the European Central Bank's – at least largely – independent policy decisions.
Some economic inefficiencies, such as inter-currency transaction costs and the pesky five pips for currency conversions, have disappeared altogether; others – such as trade flows purely to take advantage of price arbitrage – have fallen dramatically as prices are equalised far more efficiently.
Many estimates put the increase in inter-zone trade following the changeover at 10 to 20 per cent, and increases in investment flows at well over 20 per cent. All countries in the zone benefit from the liquidity, market depth, stability, and undoubted clout of having the world's second choice reserve currency as their own. Significantly neither France nor Germany, who are most likely to carry the can for Greece (and the others if needed), have even grumbled in public about the euro per se. And in the picket lines in Athens' Syntagma Square, placards demanding Greece's exit from the euro are noticeable for their scarcity.
Eurodemise, therefore, is unlikely, despite the Greek chorus now in full swing. What looks likely, however, is a much chastened euro, at least for the present: the Eurodoldrums. The zone does not have a developed mechanism for ejecting members, else Greece (with an insignificant three per cent of Eurozone GDP), might well have faced the boot, and the relatively small wound, hopefully cauterized.
However, whatever the bailout scheme that the French and Germans think of eventually, the unspoken agenda will inevitably be this – For How Long? Greece will require continued support to wind down the massive $400 billion plus (Dh1.4 trillion) of its public debt.
The French and German voter will start to baulk sooner rather than later as the cost of supporting this small, statistics- fudging, free spending country sinks in. And baulk yet again, as one or two or all three (let's be charitable and leave Italy out) of the others join the handout queue. Bailouts will be left largely to France and Germany – the other countries in the zone either have troubles of their own or are too small to do anything other than join a coalition of the willing. Squabbles, recriminations, pressures on Jean-Claude Trichet, President of the ECB, from the two Big Brothers, brinksmanship, perhaps even a lurch into the unknown – a decision to let one of the offenders default – all look possible. The shadow boxing has already started via Germany's refusal to support Greece outright at the recent emergency EU meeting, and Greece's histrionic indignation: expect many more dramatics from these boards. The Eurodoldrums represent both an opportunity and later, a threat for us in the UAE, linked as we are in many ways to the dollar. Here's why.
Rumbles around the world about supporting the US's $12trn debt were gradually growing into a growl a few months ago. China repeatedly pushed for an alternate reserve currency at multiple world fora throughout 2009. India went ahead and actually made a token purchase of $600 million of IMF gold to signal a start to its reserve diversification process.
Here, officials in the UAE repeatedly denied moves to hold non-dollar reserves and a dilution of the dollar peg, but the very persistence of the rumours was significant.
With a volatile and unstable euro, it's happy days again for the world's current numero uno safe haven currency. Noises from the Bric's and the rest of the world and the Fed's monetary tightening notwithstanding, US borrowing will not have the threat of a flight to euro hanging over it. Obama, in the midst of the his current mess ups, will be spared another headache to deal with, and for a year or a few, will gladly pass up the massive efforts that building a political consensus for meaningful action would have required. And, given a reasonably strong dollar, the urge for the UAE to also do nothing will also be strong. In fact, what is required is exactly the opposite: this period of calm, low inflation and high oil prices is the ideal time to diversify away from mainly-dollar reserves and the peg.
- Writer is a senior executive with the National Bank of Abu Dhabi. The views expressed are his own and not those of his bank. He may be contacted at uday.gupta@nbad.com