Maximus

Will the Euro Survive?

Agreed.

Of course no weak country (read: PIGS+Ireland, Austria, etc.) wants to leave the euro, but that is beside the point.

The point is that economic reality might force them to leave.

Argentina did not want to breaks it currency board that ensured a 1:1 backing of every peso in circulation with dollars since it overcame its historic inflation problem.

The rigid exchange rate regime though stifled domestic manufacturing as local manufacturing became too expensive. Public sector borrowing crowded out the private sector and interest rates soared as investors demanded higher and higher rates on the country's sovereign debt.

A similar situation is brewing in Spain, whose unemployment rate is skyrocketing and economy has skidded to a halt. Euro membership has made labor quite expensive and Spanish exports are uncompetitive. The country is running an appallingly high trade deficit and the government will have to spend well beyond the 3% budget deficit limit for euro membership. Inflation has been higher than in other European countries and the last decade's low interest rate environment (the result of euro membership) funneled money away from more productive investments and into a housing boom. Spain's complicated macroeconomic picture has caused spreads on Spanish sovereign debt rise with respect to German bonds.

I can conceive a day after years of deflation and no growth when a country like Spain might suspend its membership in the euro when it can no longer tolerate the high price it must pay.

The only way unproductive countries can compete is through currency devaluations.

On Mar 03 01:09 AM tmorris007 wrote:

> No homework required, this is an open book test and the text has
> nothing to do with quantitative analysis and everything to do with
> political and national, self interest. Stop looking for facts and
> figures to explain it's fate. It will be determined by the realities
> of each sovereign's assessment of what is in the best interests
> of their individual economies. A union this divided will ultimately
> unravel..
>
> Mar 02 09:52 AM American in Paris wrote: