The Demise of the Euro

Discussion in 'Wall St. News' started by Ivanovich, Apr 18, 2008.

  1. I've written about this in several posts over the last few years, describing what I thought, in theory, to be a divergence of belief in monetary policy between the various EZ countries. I'll just let the article in Forbes speak for itself, and if anyone wants to jump into the discussion, I'll present all my thoughts...

    The Demise of the Euro
    Avi Tiomkin 04.18.08, 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 (other-otc: DRSDY.PK - news - people ) showed that 62% of Germans support reinstating the deutsche mark as the country's currency. It appears that their wish will come true.
  2. Despite the presented facts, I hardly see this happening..

    Let us hear your thought's , Ivan..
  3. 1) 62% is a "Fibonacci Mandate" number.
    2) Countries unify during times of prosperity & confidence (Late-1990's).
    3) Countries splinter apart during times of recession & pessimism (Now).
    4) We'll see if Germany can continue to impose the euro on the rest of Europe. :cool:
  4. Allen3


    wow interesting article. Didn't think of it until just now but makes some sense. We would have loved Italy to be with the Lire still. Going this summer and it's going to be a completely different trip than before the Euro. A sandwich that used to cost 6000 Lire(at the time about $4 usd) went directly to 6 Euro (at the time $6 usd) now will cost $9.50 usd. It's a different place now at that level. Some of it's our problems (US monetary policy) some of it is problems with just flipping a switch to the Euro. A lot of the Italians in knew were pissed. My friends just went to France and had a good time but it really cost them, they won't be going back for a long time...... Although we're going for a family retirement trip for one of the dads we won't be going back anytime soon if at all. Maybe this choice is happening on a wider scale. In the areas I was in The Turist was the reason for the local economy. Who knows maybe a country who is doing better will take over. Anyway interesting view.
  5. Atlantic


    hmmm - don't you think that this is just wishful thinking of some americans - now that the usd is going to hell?

    even if italy would go back to their crappy lira (now that those fools voted for b. once gain) - it wouldn't matter. italy is completely unimportant.

    but that is not going to happen anyway. no country will go back to its old currency - even if people would like to. politicians wouldn't let it happen eventually. those people in italy or germany or wherever who think or say they want to have their old currency back have no clue about the consequences or about the true advantages and meaning of the euro.

    the euro is a good thing after all. usa (or some people there) still has to realize that the dollar will never again be what it used to be (at least not as long as your country acts like it did the last few decades...)

    your way of doing business failed - we see this now - and you pay the price.
  6. I don't think it's a matter of Americans "hoping" for anything. It's a simple matter of different cultures, languages, national priorities, etc. The Germans remember - stongly and rightfully - how hyperinflation got out of control and the essential result was the Nazi party coming to power.

    Italy and Spain prefer to devalue their currencies to protect export power. Real estate in Spain, Ireland, collapsing. Germany is doing relatively well. There's just a massive dichotomy of differences in economics in the various nations within the EuroZone. This is likely to intensify when Poland, the Czech republic, etc, all go on the Euro. More so when nations like Turkey are added (of course, assuming they are).

    One central bank simply cannot control the monetary policy of such divergent nations. It's really that simple.

    You could - perhaps - draw a parallel between the EZ and the US in that the areas of our country are split by Fed centers...that is Fed New York, Fed San Fran, Fed Atlanta, Fed KC...etc. But we're united by a common language, culture, political center (we have one President whereas the EU has multiple political parties across a broad range of the political spectrum).

    So it's not really a parallel at all. And it certainly doesn't make me feel better as an America to see the Euro fail. I still think, however, that it will.

    There is a great site that looks at the problems in the's down at the moment because of a host problem. It's called the Euro Monitor. Written by Europeans, and they have mentioned many times the possibility of a EZ breakup over divergent monetary policy issues.
  7. zdreg


    both scenarios are likely.
    the demise of the euro has been predicted by jim rogers.
    the dollar will also demise
  8. Atlantic


    well - some good ideas on the one hand. but nevertheless - it's not going to happen. despite all differences between eu countries - after all anyone with a brain knows what this is all about.

    i think the problems in the us at the moment and in the future are far bigger than in the eu - no doubt.

    different languages and cultures are not really a problem - eu proves again and again that it is able to find solutions. spain and ireland are also rather unimportant - turkey will not be part of the eu.

    different cultures and languages maybe will soon be a big problem in the us as well - maybe even more than here in europe...
  9. PaulRon


    I agree that the Euro is a very flawed currency and will not work as the world's reserve currency. But a USD/Euro hybrid won't work either. Who's going to step up?
  10. Excellent Excellent Commentary and Article

    I 1000% agree that blanketing several sovereign countries by a singular globalization concept called a more singular currency, will not disguise the underlying problems of each country.

    A simple way to view this would be to say there would be only one soccer team in the league. In order to have a league, there must be several teams in order to have competition.

    Albeit the singular currency is logical, it is about as practical as the concept of true globalization.

    All countries will always have continual problems of some sort or the other.

    Let the games begin.
    #10     Apr 18, 2008