Imagine this…

Sometime in 2012 when we go for a trip to Europe we have to start buying German Marks, French Francs and Dutch Guilders like we used to. If that comes to pass then the Aussie dollar will be well above parity with the USD, of that you can be sure. We have already had Iceland,  Greece and Ireland fail. This is tragic enough. What if the dominoes keep falling?

What if the medicine for Ireland does not work.  Public sector wages have already been cut 20% and property prices have fallen 30% but things are still getting worse. Small business can not get loans,  multinationals are threatening to leave if company tax rises above its current 12.5% and they are “silently” withdrawing their money from the banks*. Wouldn’t you if you could not be sure your bank will survive?  Or if your government says one day it cannot cope.Then the next it needs a bailout. Emigration to Australia’s mining sector is looking most appealing.

The next domino looks to be Portugal, one of the poorest nations in Europe. It has gone ahead leaps and bounds since joining the EU and the Euro, with high speed trains and national highways all with borrowed money which was plentiful when times were good.  But basically Portugal is still an agrarian nation making great port, half the world’s cork and great olives, plus it’s a tourist mecca, but what else does it offer? Smart investors will be selling up in Europe and buying property in Australia (or China if the authorities would let them). Even if the property does not go up in value and it more than likely will, the  AUD is almost certain to rise more.

It would be tragic if Portugal also needed a bailout because this beautiful country deserves better. It got to its precarious situation because an over zealous EU threw money at it  knowing it had no real prospect of being able to pay it back.  Public debt is 80% of GDP. Unemployment is 10%.The average wage is only about (equivalent) AUD250 per week. Worse still it has a bloated public service and corruption is a big problem.  Its prospects are not much better than Ireland.

Other  countries on the watch list using the Euro such as Spain and Italy are much bigger and it is unlikely the EU could afford to bail them out. Besides,  the stiff medicine that has to be taken along with the bailout will be unpalatable to the voters.  The whole world was able to see how strongly the French resisted a rise in the pensionable age by two years to 67. There were massive demonstrations and rioters included young people 40 years from retirement.

Of course, there will be winners and losers out of this turmoil. Europe’s woes will push up the AUD

*The Australian 23/11/2010

Our service sector, already suffering, will hurt even more. Our tourism and education industry will contract. Selling manufactured goods overseas will become well nigh impossible.  We desperately need productivity improvement to give our exports an edge.  The price of our resources, such as coal, iron ore, gold,  aluminum, copper,  uranium and many others are all expressed  in USD, so it means that extraction costs of capital and labour rise. Fortunately most of our mines are very efficient and low cost so we should be able to stay competitive.  Dividends are expressed in USD so investors wear the loss if they are in Australia.

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