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Daily Mail - The battle I warned was bound to come

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On December 13, 2008, I wrote an article predicting that 'the next battle will be over the creditworthiness of governments and the strength of currencies'.

When asked by a BBC interviewer last week whether I was surprised that Italy and Spain were finding their borrowing costs heading towards unsustainable levels, I said I had never hailed the Greek 'bailout' package as the end of the eurozone's problems.

There were three reasons:

• It still left Greece with a level of debt to GDP (or national income) it could not support.

• The statement of EU leaders that the Greek package was a unique solution and would not be applied to other countries left Portugal, Ireland, Italy and Spain exposed to similar problems.

• Despite the torrent of column inches and outpourings of TV pundits about the terms of the package, nowhere had I read any statement about how the Greeks would fundamentally change their economy to prevent a recurrence of the problem. Not that I would have believed it if I had.

America fought wars in Korea and Vietnam over 'the domino theory' that if communist China could engineer regime change there, neighbouring states would also fall to communism, like a line of dominoes, until it had spread to countries such as India. That theory was wrong, but it will apply to eurozone sovereign debt.

A rescue package for Greece has not and will not contain the problem any more than the package for Ireland did, because the euro is fatally flawed. It is impossible to have a single currency without a single budget set by a single authority covering the states in the eurozone to support it. 

The advent of the euro led investors in European government bonds to assume that all euro-denominated government bonds had similar credit risks. This was clearly nonsense without a single issuing authority that was funded by a single European budget.

However, this erroneous assumption led the interest rates at which eurozone countries could borrow to converge toward the lower borrowing costs of the most conservatively run - Germany.

As a result, the economies of the peripheral eurozone countries, the 'PIIGS' - Portugal, Ireland, Italy, Greece and Spain - have been on low-cost debt-fuelled binges.

Unsurprisingly, low interest rates have produced housing bubbles of impressive proportions in some countries such as Ireland and Spain.

Access to unlimited cheap borrowing allowed the governments of these countries to buy votes by running deficits to fund an increasing proportion of their population employed by the public sector, to make increasingly unsupportable commitments to their populations, particularly in the area of pensions, and to combine this in some cases with the national pastime of tax evasion.

None of the piecemeal measures being proposed will solve the eurozone crisis until these massive fundamental problems are addressed.

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Terry Smith 

This is Money