The Euro Under Attack 13 comments
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Avi Tiomkin has a provocative article in the latest Forbes on "the demise of the euro." His thesis is not only that the euro will fall against the dollar, but that the entire currency will fall apart, and that Europe will go back to francs and lire and marks.
There's no doubt that tensions are running high in euroland.
What will undo the euro: the mounting tension between the inflation-obsessed German bloc (including Austria, Luxembourg and the Netherlands) and the Latin bloc of France, Italy and Spain...
Spain's worsening real estate slump dramatically illustrates the problem faced by the Latin bloc. For years Spanish home building and buying outstripped that of Germany, Italy and France combined. Now that the boom has turned to bust, the Spanish central bank cannot lower interest rates. Nor can the treasury devalue the currency. Bound to the euro, Spain can only complain to the ECB, while watching its economy circle the drain.
European heads of state and the European business press are making their discontent public in stark language. "We cannot continue to cope with the autism of some bankers who do not understand that the priority is not fighting inflation, which is nonexistent, but fighting for more growth," declared French President Nicolas Sarkozy last year. In October, in response to German Finance Minister Peer Steinbrueck's comment that he "loves a strong euro," leading Italian business newspaper Il Sole ran a headline labeling the remark "a declaration of war." "Italy has lost the ability to grow," the Italian finance minister, himself one of the founding members of the ECB, admitted recently.
I think that Tiomkin overstates his case, however. I don't know when exactly Sarkozy made his "autism" remark, but I suspect it was while he was campaigning for the presidency rather than after he had won it. And there are many reasons why Italy isn't growing; frankly the strong euro is far from being the greatest of that country's problems. Tiomkin also fails to recognise that exiting the euro would be economically and financially disastrous for Italy, which would probably be forced to default on its debt at the same time.
It's weird too that Tiomkin advises investors to short the euro, since the departure of a Latin state or two from the eurozone would only serve to reinforce the ECB's ability to fight inflation and maintain a strong currency. Tiomkin seems to think there's a zero probability that Italy or Spain could leave the euro without the whole currency being abandoned and Germany going back to the Deutschmark. But that's far from obvious.
Still, the base case is for no exits from the euro, and a continued hawkish stance from the ECB. The central bank might be unpopular, but that doesn't mean it's going to be abolished. After all, it's worth remembering that the ridiculously high interest rate everyone's complaining about is actually set at just 4%: What's considered high in Germany would be considered low in Italy. So really there's no sense in Italy leaving the euro.
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This article has 13 comments:
The Euro has inertia, but most of the weaker countries regret ever signing on. Euroland's menacing shadow is the US, who can produce just about everything that Euroland does. Siemens vs. GE, Airbus vs. Boeing, etc. Dollars are cheaper, thus US goods are cheaper. It's a problem.
Please note that the article by Avi Tiomkin is dated 04.21.08
A future article eh?
But if you think China and Russia are running responsible fiscal policies, you should go there and learn first hand how the governments can screw over private citizens. If you think the US is bad, you AINT SEEN NOTHING YET!
that being said, the euro is certainly very vulnerbale when europe enters into a severe economic downturn becuase the euro is an artficial political construct. the expansion into eastern europe is ill-fated and will only add to the problems. however, never underestimate the power of banks and politi´cians so rumours about tzhe death of the euro might be a tad early, to say the least
in the end, there is just one sound currency in the world that can not be printed at will and this is gold and hard assets like real estate. both can be taxed and/or declared illegal, however, so unfortunately, for the common man who is not able to set up an offshore-trust with some million there are little avenues to escape the govt#s confiscation in the long run
All this for all those who think that the drop of the $ is a good thing; it is like a weak credit score.
As for the social aspect of Europe, they spend less on healthcare, unemployment benefits and other social programs than the US spend in its war on anything but they have all the benefits.
I am the first to admit that they can afford to do that thanks to the USAF umbrella. However, I think US should realign its priorities and its budgets because the actual trend doesn't bring a lot of good things for the people here.
Whatever squabbles some euro-zone states have with each other about the direction of monetary policy and the banks continued reluctance to lend, they don't have the spector of an additional 1.5 to 2 million homeowners defaulting in the next 1 to 2 years and the attended consequences to their economies it could bring.