Tim Congdon on the Eurozone

Allow me to welcome a guest blogger to our 'umble abode. Tim Congdon, economist, businessman and of course, member of UKIP, on the eurozone:

American capitalism had a terrible shock last week. But Americans are right to believe their bank deposits are safe and that over the long run their financial institutions will deliver good investment returns to savers. The USA is a single nation with a single Federal government, and clear lines of responsibility from its central bank and official agencies to the private sector banking system. That is why the Federal rescue will work.

Compare that with Europe and the single currency ‘area’. Yes, ‘area’. The Eurozone is not a nation with one government and one central bank. Instead it is an ‘area’, which can vary in size as countries join (and leave, as Italy has threatened to do), which has 12 governments, 12 inferior national central banks, one superior central bank based in Frankfurt, and countless regulatory agencies with conflicting agendas. What would happen if a truly ‘European bank’ – a bank with shareholders in Germany, a headquarters in Paris, loans in Spain and deposits from all 12 member countries – were to face the sort of troubles that have affected Bear Sterns and Lehman Brothers in the last few months. Which government would be responsible for helping it? And under which nation’s laws? And does anyone know whether the taxpayer, the national central banks or the Frankfurt-based ECB itself would organize the rescue attempt?

The European single currency experiment – and it is still an experiment – may be about to face its biggest test.

Tim Congdon CBE.