The euro is under attack like never before, as the promises on which it was based turn out to be lies. Hedge funds are speculating against Greek debt, while euro-zone politicians work behind the scenes to cobble together rescue packages. But fundamental flaws in the monetary union need to be fixed if Europe’s common currency is to survive.
[blockquote]The notion that the European common currency is based on nothing but a series of lies is now taking its toll. All of the founders of the euro knew that the new currency could only be stable if all member states committed themselves to sound financial policy and, in the long run, spent only as much as they collected in tax revenue. But many ignored this principle right from the start.[/blockquote]
Gee this sounds familiar. While we may have to tax more (or at least raise revenue) and spend less, our history shows that we tax more and spend more so that we never get anywhere (but the politicians get elected for there largess.) And the solution? I am not sure their is one. The Greek voters don’t like the austerity programs one bit and will vote for those politicians who will tax less and give them more largess. Same with us.
Somehow we need to restore the mind set of linking spending to revenue and not overspending, notwithstanding that the political dynamics work against it.
It really is a good article, and the authors touch on two key points: that the initial launch of the currency was based on significant lies regarding members’ financial condition; and that European banks are at the centre of many problems because their internal “carry trade” is unwinding.
The closest American analogy might be that California had completely hidden its retiree pension obligations and that in order to meet those (hidden) costs had sold California bonds at an extremely attractive interest rate. Many banks, able to borrow from the Fed at very low interest, had borrowed hundreds of Billions to “invest” in California bonds because the spreads were so profitable.
Now that California’s lies are public, the banks and everyone else want out. California remains trapped by its intransigent public sector unions, and eventually the Japanese, Europeans, Brits, and a bunch of others realise that the US Dollar is jeopardised by the profound weakness of one or more states, and they decide simply to avoid additional risk by getting out of dollars.
The idea that “hedge funds” are at the root of the Euro’s decline is patently silly. At worst speculation [i]reveals[/i] weakness. It does not [i]cause[/i] weakness. You throw your rocks into the soggiest paper bag you can find, and hope the bottom falls out.
World currency trade is around $5 Trillion per [i]day[/i], of which the Euro accounts for almost $2 Trillion. Over 20% of these transactions — $400 Billion — are on the spot market, and it is very difficult to manipulate a market of that magnitude. The spot market [i]reveals[/i] value, and speculators merely play that trend.
Taylor and Clark’s immense hedge fund mentioned in the article has $30 Billion invested. Even if they used every bit of it to bet against the Euro it comes to less than 2% of the daily Euro trade. What are they gonna do tomorrow? And Friday, and next week?
Right now people are generally heading towards the USD because it’s the least worst of any alternatives. The California example is largely accurate, but presently risk aversion is moving people away from Euros because they believe the problems are more imminent and the economies there less resilient than in the US. That could change.
The real problem, however, is paper currencies and the politicians who use them to mortgage a nation’s future in an attempt to secure their own tenure in office. The [i]denouement[/i] of that problem is a chapter still to be written.
[blockquote]All of the founders of the euro knew that the new currency could only be stable if all member states committed themselves to sound financial policy and, in the long run, spent only as much as they collected in tax revenue.[/blockquote]
I agree with No. 1. This quote just about says it all. I would only add that common markets work in the long term only as long as member states/regions see no better alternative for their own self interest. Pooling your resources into a common market currency is great when economic times are good; thus, it would be in the local state’s best interest. It’s like having Dear Old Dad sign off as a guarantor of your loan.
However, when crises like that of Greece of late begin to force Dear Old Dad states with good credit to rethink whether its in Dad’s best interest to sign onto another loan, especially if Junior is poor with money decisions and has little to no income. There comes a time when its best to force Junior sink or swim on his own and bail him out again. Worse case scenario for Dear Old Dad is to go back to his old system and have his own currency something he at least can completely control himself, and can pacify Dear Old Mom, the voters.
I bet the Brits are glad they stuck with the Pound.
Evan, yes and no. We are glad to have sovereignty over our own currency. Our economists even tell us that it is a good thing that the pound has sunk so low because it shows our flexibility against competitors ie we are not pricing ourselves out of export markets and also we are able to attract inward flows of ‘hot’ money. But oh dear when we go on vacation suddenly we are The New Poor, and that applies to when we visit the Eurozone also, because the pound has also sunk against the Euro, incredible as that may seem. You can expect a whole lot fewer gawking Brits to visit the US this summer. And ahoy you folks out there in Peoria! It’s time you took that English vacation you have always promised yourselves. We need those dollars …
The “The Fundamental Flaw of Europe’s Common Currency” is the same flaw common to all currencies today. The Euro is simply a bunch of colored pieces of paper with numbers on them that can be mass produced at will. They mean nothing and are backed by nothing.
Once upon a time we had a term for those who tried to print money that was not backed by anything. We called it “counterfeiting” and we sent people to jail for it.
AO, if we are going to blame pieces of paper, the ones that present the problem are called “cheques” and “bonds”.
What struck me about the mess is its parallel to the Current Crisis, where EU=Anglican Communion and Greece=ECUSA.
Re #7
CW,
Cheques (thank you for the correct spelling) and bonds don’t bother me as long as they are payable with real money, and you actually have the money of course.
[blockquote] What struck me about the mess is its parallel to the Current Crisis, where EU=Anglican Communion and Greece=ECUSA. [/blockquote]
UGGG. Greece=ECUSA. Couldn’t you have found some other fiscally lunatic nation for that analogy instead of even satirically linking millions of Orthodox Christians with liturgical unitarianism?;-)
True, dear Ad Orientem, but then you yourself have chosen a Latin soubriquet rather than a Greek one. Shurely shome mishtake?
Re #9
Terry Tee,
Latin is the mother tongue of Western Civilization (I am Orthodox but my culture and family are Western). And besides, how many people would recognize Î Ïος την ανατολή for an SN?