[KidBaize]

Interesting article in Forbes by Avi Tiomkin, who suggests the Euro will not last another three years. There is mutiny in the ranks of the EMU, with the Latin countries, led by France's Sarkozy, pushing for looser monetary policy as their economies slow while the German bloc, who currently head the ECB, continue to fight off the hyper-inflationary ghosts of the Reichsbank.

Good, short article. Personally, I agree with the author. I just thought it would take 10-20 years. The fact that France assumes the EU presidency this summer virtually guarantees we'll see the ECB begin to cut rates by fall causing Germany to walk away from the EU experiment, along with their juggernaut economy.

Just imagine the implications for the US dollar. I suppose it's still too early to question its hegemony.


Anyway, gotta go. Here's the full article.

http://www.forbes.com/forbes/2008/0421/034.html

The Demise of the Euro
Avi Tiomkin 04.21.08, 12:00 AM ET

Tensions between inflation-obsessed Germany and growth-hungry Latin countries will spell its end.

It is only a matter of time, probably less than three years, until the euro experiment meets its end. The financial crisis in the U.S. is hastening the process, as investors flee the dollar, pushing the euro to a price of $1.59. But it will not stay high for long. Countries like Spain and Italy will withdraw and return to their old currencies. Once that happens, get ready for the return of the deutsche mark and the French franc.

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. The Germans, saddled with memories of the hyperinflation that brought the Nazi Party into power, remain singularly focused on fiscal and monetary discipline. Despite core inflation in the euro zone of only 2.4% and a slowing global economy, the Germans insist that the European Central Bank maintain a tight monetary policy. In direct opposition to Germany, the Latin bloc, joined by Ireland, wants the ECB to lower interest rates.

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.

The euro has long had detractors, who question the viability of political and monetary union in Europe. Haunted by World War II, the generation of leaders that included Helmut Kohl and François Mitterrand was willing to give up sovereign powers and national interests to create a common currency. But with no shared language, customs, culture or political system, the euro zone has never existed except as a construct in the minds of bureaucrats and politicians.

Now, as the divisions increase, insiders are beginning to take a dim view of the prospects for continued monetary union. "We believe the euro will not survive in the long run in the absence of some kind of political support," the president of BusinessEurope, a pan-European business association, stated in early March.

Along with the steep selloff that will precede the disintegration of the high-flying euro, other markets will be shaken. Look for much higher interest rates for prospective euro deserters like Spain and Italy as spreads for benchmark German bonds widen.

What should investors do? Gradually start to hoard dollars and short the euro. Another strategy is to sell investments in Italy and Spain and buy German fixed-income assets.

The political situation in Europe is likely to accelerate the euro's demise. Now that the Spanish elections are over, politicians there no longer feel the need to remain silent about mounting economic woes. If, as Italian polls predict, Silvio Berlusconi becomes that country's prime minister, the man who criticized the euro as "a disaster" would join a common front ready to take action by the time Sarkozy's France assumes the European Union presidency this summer.

The tight-money Germans will not push to preserve the euro. A poll released at the end of 2007 by Dresdner Bank showed that 62% of Germans support reinstating the deutsche mark as the country's currency. It appears that their wish will come true.

[Zankou]

Tres interesting. It seems that the desire of central governments to inflate their currency just can't be denied.

[Salbass]

If Spain and Italy withdraw, their currencies are going to get whacked a lot more than they'd like.

By the way, I didn't know that France, Spain and Italy were referred to as the Latin bloc. Is that a common usage? I don't think I've seen it before.

[Baseline]

With Iran switching to the Euro for oil, and so many other things going off the dollar and onto the Euro in the international market, I doubt it.

If anything, the dollar won't last.

[vogues157]

This would again present opportunites for investors like Soros to make huge amounts of money. It would be a process that would take a while to unravel, and most like the ECB would face speculators continually driving down the euro until it was complete.

[Zankou]

Neither of those posts made any sense to me. The exchange value of all of these currencies is floating. It's not propped up by some artificial hedge. You can already buy oil with Euros, or any other currency. I swear it. Yes, the price is denominated in dollars, but that doesn't mean it's paid in dollars, and the price simply fluctuates if the dollar loses value. Go try it. Similarly, if the Euro split, it doesn't mean that it is overvalued and therefore vulnerable to currency arbitrage. It would just split at the prevailing exchange rate. The only thing that would happen is that there would be a de-coupling of the regional currencies going forward from that point. The German currency bloc would probably be better as a hedge against inflation, but its exchange value will reflect a price premium for that expectation.

[RemoWilliams]

Forgive me for being Naive. But I thought in all my economics courses both in High School and College was that paper currency is only as good as the governments gold reserves to back it?

Or is that too 1989/1996?

[BadassHo]

the US left the Gold Standard under the nixon administration. its been floating ever since.

[Zankou]

Originally Posted by RemoWilliams

Forgive me for being Naive. But I thought in all my economics courses both in High School and College was that paper currency is only as good as the governments gold reserves to back it?

Or is that too 1989/1996?

There's nothing magical about gold. You were misinformed. Paper currency nowadays is primarily fiat currency, and even if it was backed by gold, gold is also essentially an arbitrary store of value, established by a social consensus and expectation.

Also "paper currency" doesn't mean much. Coins are also fiat currency, as is the primary type of currency in existence -- debt obligations, sitting on computers.

[vogues157]

Originally Posted by Zankou

Neither of those posts made any sense to me. The exchange value of all of these currencies is floating. It's not propped up by some artificial hedge. You can already buy oil with Euros, or any other currency. I swear it. Yes, the price is denominated in dollars, but that doesn't mean it's paid in dollars, and the price simply fluctuates if the dollar loses value. Go try it. Similarly, if the Euro split, it doesn't mean that it is overvalued and therefore vulnerable to currency arbitrage. It would just split at the prevailing exchange rate. The only thing that would happen is that there would be a de-coupling of the regional currencies going forward from that point. The German currency bloc would probably be better as a hedge against inflation, but its exchange value will reflect a price premium for that expectation.

Maybe it wouldn't happen in the reverse, but there was price fixing and arbitrage when the Euro was formed. That is exactly how Soros made a billion dollars off the Bank of England. The point was that this process is not going to happen overnight. Everyone will know that Euro is breaking up into separate currencies. That being said, there is no reason to buy the Euro only reasons to sell.