The Euro – A Currency for Dodos?

Today’s survey of Economists in today’s Telegraph makes bleak reading for fans of Europe’s single currency. Only 8 out of 25 City economists believe the Euro will survive without shedding members.

Douglas McWilliams of the Centre for Economics and Business Research said the single currency “may not even survive the next week”, while David Blanchflower, professor at Dartmouth College and former Bank of England policymaker, added: “The political implications [of euro disintegration] are likely to be far-reaching – Germans are opposed to paying for others and may well quit.”

Peter Warburton of consultancy Economic Perspectives said: “Possibly Germany will leave. Possibly other central and eastern European countries – plus Denmark – will have joined. Possibly, there will be a multi-tier membership of the EU and a mechanism for entering and leaving the single currency. I think the project will survive, but not in its current form.”

Tim Congdon of International Monetary Research said: “The eurozone will lose three or four members – Portugal, maybe Ireland – and could break up altogether because of the growing friction between France and Germany.”

http://www.telegraph.co.uk/finance/financetopics/budget/7806064/Euro-will-be-dead-in-five-years.html

Despite the Euro’s travails, it has strengthened against Sterling over the last year or two. Of course, this strengthening lies at the heart of the problems dogging the Eurozone’s least efficient economies – the so called PI(I)GS – Portugal, Ireland, (Italy), Greece and Spain. If these countries had their own currencies they could have devalued them – as the pound has been devalued – to render their products and services cheaper, helping, for example, their tourism industries; the prices of holidays to the Mediterranean would be cheaper, driving increased demand.

Some commentators, such as John Mauldin, foresee both the Euro and Pound declining over the coming months until they are valued at one American dollar. Mauldin writes:

There are only two ways to grow an economy: you can grow your population or you can increase productivity. That’s it. The Club Med countries are not growing their populations appreciably, as their birth rates are low. And you increase productivity by investing private capital into businesses, the way the Germans have done, which is why their labor unit costs are so low compared to their competition.

At the end of the day, Greece will just have more debt. Perhaps Spain and Portugal can work through their problems, but that will be very difficult and will involve considerable economic pain. Italy can succeed if it decides to.

All this does is bridge to the middle of the decade, when the truly massive health and pension promises made all over Europe must be dealt with. The US has the option of raising taxes, reducing benefits, and means testing, should we so choose to do so to meet the demands of entitlement problems. Europe already has tax rates that are high and growth-inhibiting. The entitlement problems in many countries are more onerous, and their working populations are not growing.

This is just the beginning of their woes. They have a long way to go and a short time to get there. Can it be done? Yes, of course. But it is going to require a great deal of change. I hope they pull it off, I really do. I have been to most of Europe and love every bit I have seen. The world is better off with a united Europe.

That being said, I have my doubts that the European Union in its current form will exist in 5-7 years. I hope I am wrong.

One implication. The euro is on its way to parity with the dollar. So is the pound. That is going to help their exports vis-a-vis the US. Watch the yen fall rather sharply over the next few years. Senators Schumer and Graham gripe about China. What are they going to say about Europe, Britain, and Japan, all of which are on course to premeditated devaluation? This is going to be just one more challenge for businesses in countries with the world’s stronger currencies.

http://www.frontlinethoughts.com/article.asp?id=mwo051510

If Mauldin is right it would be prudent to take any Euro and Sterling denominated savings and buy American dollars with them. Other commentators, however, believe irresponsible governments throughout the west will continue to debase their currencies through high borrowing, irresponsible spending and printing money. They argue that gold provides investors with a store of value to protect against the actions of irresponsible governments:

Since before humans could write, gold has been used as a store of value. It doesn’t rust and the gold of the Ancient Egyptians looks as beautiful to us as it no doubt did to them. In times of economic crisis, the value of gold rises relative to other assets because it is perceived to be safe. In a time when central banks have decided they can solve economic problems simply by printing money (quantitative easing) the attractiveness of gold rises.

http://www.investingator.org/investing-in-commodities/

The economic landscape for Britons who have made their homes in Europe remains uncertain. Financial decisions taken by individuals today may have far reaching effects. For example, if inflation takes off there will be opposite effects on savers and borrowers.

Charlie Bean, Deputy Governor of the Bank of England, has tried to reassure savers this week that inflation will not be allowed take hold.

Some people have suggested that a bit of extra inflation might be a good thing. After all, wouldn’t it help to get the economy going by reducing the real value of public and private debt? This is misguided. Aside from the dubious morality of redistributing wealth from savers to borrowers, past experience shows that a bit of inflation has a nasty habit of turning into a lot of inflation.

We should expect the same sentiments to govern the Eurozone provided the Germans remain part of the Euro. But, as Peter Warburton asks, will they?