Dark Night of the Euro

6 posts / 0 new
Last post
machinehead's picture
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Dark Night of the Euro

Bloomberg has published a remarkably bearish article on the euro. This is the first time in years that I can recall a major global currency being questioned on a structural basis. Are they getting us ready for something dramatic this weekend?

What was conceived as a club for Europe’s strongest economies was expanded for political reasons, leaving the currency union with minimal powers to police deficit spending and no safety net for dealing with countries, like Greece, that veer toward default.

Today’s euro is far from what economists like Nobel laureate Robert Mundell call an “optimum currency area.” Gross domestic product per person ranges from 69,300 euros in Luxembourg to 18,100 euros in Slovakia, debt from 14.5 percent of GDP in Luxembourg to 115.8 percent in Italy, and unemployment from 4.1 percent in the Netherlands to 19.1 percent in Spain.

Europe’s multi-state structure leaves it without a U.S.- style federal tax and financial-transfer system to smooth discrepancies between richer and poorer regions. The EU’s budget, mostly for farm aid and infrastructure projects, represents barely 1 percent of the bloc’s GDP, compared with European national budgets that average 47 percent of GDP.

Markets have rendered a mixed verdict on the euro’s resistance to the crisis. The currency’s decline below $1.25 from a record high of $1.60 in July 2008 still leaves it above the 1999 starting rate of $1.17. The euro is about 11 percent overvalued against the dollar, data compiled by Bloomberg of purchasing power parities show.

The global economic boom of the late 1990s enabled Greece to meet the targets for deficits, debt, inflation, interest rates and currency stability. Greece joined the monetary union in 2001 and a year later, banknotes featuring generic architectural symbols and embossed with Greek lettering went into Europe-wide circulation.


Note the last paragraph describing how the Bubble I boom of the late Nineties allowed Greece to meet the deficit target to join the euro. Here in the U.S., the surge in capital gains revenues actually produced budget surpluses, on a cash basis. The world's most brilliant man -- I'm talkin' about Greenspan, not Einstein -- prophesied that endless surpluses would wipe out the supply of Treasurys, leaving the Fed with no raw material to create fiat dollars. Greenspan was kicked out of Mensa for this rash remark.

But you see the problem. Classical economics works with straight lines. If GDP growth has averaged 2.5% for the past 30 years, then you project a straight line sloping up at 2.5% for the next 30 years. But economies are cyclical. Choose the peak of a Bubble to take a snapshot, and you get a completely unrealistic rosy-toned picture. Similarly, if you project future deficits without incorporating a harsh recession every five years or so, then a highly realistic budgetary stress test is being omitted.

One can sympathise with economists' dilemma -- modeling dynamic, cyclical economies is an order of magnitude more complex than the rectilinear certainties of supply-demand charts and straight-line projections.  But it's also necessary. Because as we see in the case of Europe, the most elementary errors were made in misunderstanding the profound distortions imposed by cyclicality.

And, as alluded to in the Greenspan reference above, central bankers are the worst offenders in misusing their primitive understanding of economics. No one is even talking about putting Europe back on a classical gold standard, which would reintroduce the problem of the international balance of payments. But balance of payments lending -- the original function of the IMF, and one which could be undertaken by a repurposed ECB -- might be a lot less complicated than the fiscal centralisation of Europe.

There are other options -- a currency board, for instance. Everything is on the table now. Exciting times! Got gold?




leweke1's picture
Status: Silver Member (Offline)
Joined: Dec 18 2008
Posts: 101
Re: Dark Night of the Euro

I was amazed to see this "kick 'em while they're down" documentary article on Bloomberg this morning as well.  Perfect timing if you want to make a "spook" into a "stampede", but who could possibly want to do that? Wink

JAG's picture
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Re: Dark Night of the Euro

Nice Dig MH,

From a contrarian perspective, this could be significant.

st9v's picture
Status: Member (Offline)
Joined: May 5 2010
Posts: 5
Re: Dark Night of the Euro

Hi, I'm Dutch and living and working in Germany. Probably the best thing for Germany would be to go back to the DM ASAP.

The following link is to a website, in Dutch, but most of the links in the article lead to articles written in English. The website itself is a bit like a right-wing oriented tabloid that focusses on unvieling politicians and the gouvernment lying to the people and gouvernment corruption and some popular news-items, mostly written in a provocative stile.

But the links themself are pretty good. I just give this link to save me some time, otherwise I would have to post all links here and write a short comment for each link.

If U have the time they give an nice overview of why we got the Euro in the first place and what mistakes were made at the start and how things got worse over time.

(The French wanted more control over the European monetary system and Germany played the main role there and Germany gave in to those wishes becaus they wanted to reunite with East-Germany) and after that why the strickt initial rules were more and more softened.


machinehead's picture
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: Dark Night of the Euro

It seems that German buying is a major factor which propelled gold briefly over 1,000 euros yesterday:

The telephone has not stopped ringing at the Rand refinery in South Africa this week. Panicking German dealers and banks have been desperate to get their hands on krugerrands, the world’s most popular gold coin.

“We have some extraordinary sales to German customers,” says Deborah Thomson, the Rand treasurer. The refinery, which usually sells 2,000 coins to each customer at a time, says that last week it received an order from one German bank for 30,000 coins. Another bank requested 15,000 coins. Frank Ziegler, head of precious metals at BayernLB, one of Germany’s largest wholesale suppliers of gold, says: “People are buying krugerrands like crazy.”

The European Central Bank says its government bond purchases will be “sterilised” by operations to remove inflation risks. But Martin Siegel, manager of Westgold, a dealer of gold in Frankfurt, says people “are not as dumb as economists. They believe there is going to be inflation and are buying gold to protect themselves.”

German investors are notoriously wary about inflation. While few are old enough to remember the hyperinflation that wrecked Germany during the Weimar Republic in the 1920s, the episode remains etched into the national psyche: archive film from the period has been running on the news in recent days.

The appetite for coins has been so intense that shortages are developing. “In the European market there is a shortage of krugerrands,” says Mr Ziegler. As a result, the premium paid for krugerrands in the secondary market has risen from about 2 per cent to 6-8 per cent.


A run on Krugerrands, while archival film of the Weimar inflation of 1923 plays on the news?

Man, this brings back memories of 1979 in the U.S., when money market funds paid 19% interest, gold dealers and coin dealers advertised on local TV news, and mimeographed 'hard money' newsletters warned of currency controls and dollar collapse.

Fortunately, our well-regulated Mainstream Media isn't going to panic the American people by showing archival footage of such scary nonsense.

I, too, support the strong dollar! SmileInnocentKiss




dryam2000's picture
Status: Gold Member (Offline)
Joined: Sep 6 2009
Posts: 293
Re: Dark Night of the Euro

Seems like Russian & Brazil are starting to call BS on the USD & Euro.........


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments