Thursday, Dec 11, 2008
The Euro Bubble
Telegraph: The eurozones weakest link starts to crack
Been refusing to buy Euros with Sterling for 3 months now. Looks like a bubble that will never bust.
Posted by bellwether @ 03:40 PM (1052 views) Add Comment
11 Comments
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1. uncle tom said...
I have to confess that Greek affairs have rarely crossed my radar, but some of the numbers quoted in this piece look pretty critical.
If the Greek population blame the current disturbances on the over-valuation of their currency, then they really are the euro's weakest link.
As I have said many times before, the creation of the euro as a means to economic convergence instead of it being the consequence of convergence was a critically flawed strategy.
Sooner or later a country will leave the euro. If forced to do so for fiscal reasons it will so spook the money markets that a domino effect would be highly likely.
Who on earth would want to lend cash to Greece now - other than at extortionate rates of interest that they cannot possibly afford..
2. stillthinking said...
Nice post but entering the euro seems a bit like a one way trip to me. For Greece, there is this suggestion that their very high level of debt needs a devaluation of their currency, but they can't because they are on the euro. But how can you force the Greeks into abandoning their euro when they already know that they will get a replacement currency which will immediately start to lose value?
Which Greeks will exchange their Euros? I can't see that anybody will.
3. plato said...
From the article:
"I am a little surpised that the riot phase of this long politico-economic drama known as EMU has kicked off so soon, and that it has done so first in Greece where the post-bubble hangover has barely begun."
I have spoken personally with other Greeks. The reality is that having progressed to a reasonable standard of living there are no jobs for well educated youngsters. The gap between rich and poor is larger than it ever was. Traditional village farming communities have been decimated.(Food is even a problem) The cost of living has rocketed. Interest rates on inflated property values are crippling those that bought at the height. They simply cannot pay the debt (sound familiar?) and corruption is blatant. They say the currency is killing them,but they have no alternative now.
In countries like this there is no anonymity. Someone knows you or your family,where you live and what you get up to. There is no hiding behind position if you do not keep those happy all the way down the ladder. Peoples' justice will eventually prevail whether right or wrong and this is the very essence of Mediterranean life........ You are always considered as reachable and this is what is happening.
4. Dibble Dibble said...
There are a lot of things wrong with the EU, but Monetary Union is not one of them. How long have people been predicting the end of the Euro now? I've heard this talk of the collapse of the Euro since it effectively became a reality in 2000. Back in 2000 the Pound was worth around Euro 1.65. Today the Pound buys 1.13. It's the Pound that has collapsed this decade, not the Euro. The doubters were wrong, get over it. Round 1 to the Euro.
Who knows what the next decade will bring, the game is changing rapidly. Maybe Sterling win round 2 but it would be a brave man that were to short the Euro with Sterling right now. One day, perhaps even before Evans Pritchard is long retired, something will bad might happen to the Euro and Ambrose Evans-Pritchard will be there no doubt be delighted to claim "I told you so!".
5. Earth said...
I thought rioting on the streets was expected by 2007. That makes it a years late.
6. uncle tom said...
The practical mechanics of leaving the currency involve the re-denomination of all sovereign debt, state payrolls, benefits, (plus all loans and bank deposits in banks domiciled in the country concerned) into a new national currency that is intially pegged to the euro. National banknotes and coins are produced, and some price controls are imposed relating to the price of staple foodstuffs.
The currency peg is then removed, and market forces push down the value of the new currency.
To avoid currency flight, a government taking these measures would probably feel compelled to rush through the change using emergency legislation, probably brought in over a weekend, so when it happens, don't blink!
7. uncle tom said...
PS
In the initial phase, the country's banks would have to limit the withdrawal of funds in cash until new notes could be printed - the only part of the process that is really problematic.
8. fjcruiser said...
Currency pegs dont work and never will. It amounts to saying that the greek economy=german economy. Does it ?
9. stillthinking said...
In other words, you can't leave the Euro in an orderly way. You have to leave by confiscating all the existing deposits before replacing them with the new currency. Or to put it another way, if there is a consensus of opinion that Greece is leaving the euro, then there will be a run on all Greek banks.
So according to you Uncle Tom, the first step would be to freeze bank deposits, which seems like the only way to exit.
10. uncle tom said...
fjcruiser,
On a permanent basis you are correct, but around the world, temporary pegs are frequently (and usefully) used
stillthinking,
The words 'confiscate' and 'freeze' are emotive terms - the reality is that the process merely reverses what was done when the euro replaced the Greek Drachma.
I don't recall the Greek people being balloted about the adoption of the euro, so their government would have the same amount of legitimacy if they decided it was best for Greece to get out of it.
11. drewster said...
Uncle Tom:
You're right, there is no orderly way to leave the Euro. It would have to be announced without warning, preferably as you say over a weekend so that banks have time to put systems in place by Monday morning.
Interesting to see AE-P's comments about various cities being "powder kegs". I know we've had similar problems before in the UK with the 2001 race riots in Oldham / Bradford / Burnley. If the economy goes downhill, there will be a lot of unemployed young people with time on their hands and no doubt a sense of grievance towards others. How bad might it get?