What Happens if the Euro Collapses?

A monster topic, summarised in only 500 words. Undoubtedly, the implications of a euro collapse would be many more in quantity than examined here, but this article is simply intended to provide a concise yet useful insight into the problems and changes that may ensue if the currency were to crash.... and they would be significant.

A collapse of the euro would cause disruption on an unprecedented scale. Be the downfall partial or complete, sudden or controlled, the aftershocks would tremor a plethora of variables, making it nearly impossible to accurately and specifically predict the various outcomes. Both national and global macroeconomic, political, technological and social factors will evolve over time, and therefore any conjectures must be considered against a complex, dynamic and uncertain context in the long-term.

In the short-term, ING predicts that were the euro to collapse in 2012 and the drachma to be quickly re-introduced (itself a significant technical challenge), by 2016 Greek currency would depreciate 44.3% against today’s sterling. Such depreciation would allow weaker member’s exports to become more price-competitive, in the long-term strengthening these economies.  This would, however, be balanced against increased imported, and probably, engineered inflation, likely created by using revived monetary independence to implicitly erode real national debts. Notably, low wage growth beside high inflation would lower the standard of living.

In contrast, stronger economies, both in and outside the eurozone, would witness currency inflows much larger than that which stirred the Swiss central bank to peg the Swiss franc at a maximum of 1.20 francs to the euro in September 2011. Scrambles by investors and the population to avoid write-downs on assets due to forced currency conversions in weaker nations would create a need for countries to impose strict capital flow restrictions and/or tariffs to prevent crippling out/inflows of currency depending upon their perceived security, as exemplified by Czechoslovakia in 1993. Such urgent measures may provoke costly lawsuits with aggrieved investors, decrease trade and liquidity and increase political friction, possibly sparking retaliatory currency wars larger than as between China and the USA in 2010 concerning the undervalued renminbi.

Still, a worst-case scenario is that capital controls are ineffective. If a bank run occurs, investor and consumer confidence will plummet, banks will collapse, governments probably default and a European depression almost inevitably ensue. 21% of U.S. and $280 billion of Chinese exports are to the EU (WTO), and thus a European depression would slow most of the advanced world. A global credit crunch less sudden, but of a much greater magnitude, than in 2008 would develop and linger.

Furthermore, as the euro has been the keystone of the post-war European integration project, any member causing a break-up may become a pariah state. In the long-term, increased competitiveness and a decreased interdependence of Eurozone nations may also spur increased tensions and hostilities, jeopardising even the EU and single-market.

In 2011, Portugal’s productivity per hour worked was 45 percent lower than the eurozone average; the Netherlands’ was 37 percent above (ONS). The fiscal and economic disparities between the eurozone’s core and periphery will not disintegrate alongside the euro: they are culturally, socio-economically and even psychologically engrained, at least in the short-term. Scars of a collapse would ultimately heal however, and for the mutual benefits of trade and political convergence, it is likely that eventually, something similar would replace the euro.

A Competitive NHS: Fairer, Fitter, Faster?

Cancer Bed Days by Primary Care Trust
(The darker the blue the better [fewer days])

It's 2011, and although the UK has a National Health Service, there are still huge variations in the quality of healthcare across the nation. However, will the coalition Government's latest plans to increase the competition inside the NHS really lead to a more equal, equitable and efficient NHS?

The main objective of the plan is to restructure the NHS, shifting the weight of power and decision-making from 'Whitehall bureaucrats' to the GPs on the front-line. This is intended to improve the efficiency of resource allocation for each region, as spending decisions will be made much closer to each locality, hopefully increasing the information and understanding on hand when these decisions are made, and hence the success of these decisions. Furthermore, this benefit is intended to occur whilst competition is increasing between smaller decision-making authorities, as patients will be allowed the freedom to choose where they receive treatment, and rationally, will choose the best option available to them. Such competitive pressures are intended to increase equality and improve equity across the country. How?

In classical economic theory, the ideal allocation of healthcare is at a quantity where a 'Pareto optimum' allocation is created. This means that welfare of all individuals linked into the market for healthcare is maximised, and more welfare cannot be given to another patient without directly decreasing the welfare of another. Such an output is said to be an 'allocatively efficient' one; resources are being allocated in a way which is maximising the welfare of all, internal and external to the market - hence it is an efficient allocation of resources.

Competition creates the basis for this to happen for a number of reasons. Many small service providers, all with the same ability to provide an equal service, and the freedom of consumers to switch to the service-provider who will provide them with the best quality service with least risk, will create a strong incentive for hospitals and GPs to increase the quality of their healthcare - if they don't, they will be left without patients and their weaknesses will be exposed.

Furthermore, competition may act to drive down costs in the long-run, after the initial 'bedding-in' costs of the new scheme; especially important to meet surging demand and costs from ageing population and technological change in this time of global austerity. This decrease in costs may be caused by increased competitive pressure to minimise costs - the service providers with the lowest costs will be able to use that saved money elsewhere, to improve the quality of the service, thus gaining a competitive advantage, important in a competitive health system.

However, will such a system be fair?

Not necessarily, without a very stringent operating framework, there could be a strong incentive to discriminate against the weakest or higher-cost patients to get unnecessary costs off the books.

Furthermore, how do inexperienced doctors decide how to spend money? Pay expensive administration and consultancy staff, that's how! Hence, it is possible that the transfer of power from Whitehall to smaller localities could simply transfer costs too, from the public to the private sector.

And, will the reforms create real competition between providers on quality? In reality, patients may not switch to slightly better health-care providers if they value the convenience of the service over the small differentials in the quality. Hence, this could cause competition to only really be effective in small areas of similar health-care providers, once again creating differences in quality across regions: back to square one.

As is being said often across professions and politics, these reforms are a big risk. Will they create real competition, or just conditions for competition to take place, without it actually happening as planned? Will they lead to increased differentials in the NHS for different people and different regions? We wait and see....