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The Euro Wont Survive This Depression


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Ho hum,

Another day, another "Euro set to fail" post, funny thing is you never see these stories in Europe, only in the UK (usually in pompus articles in The Times).

Last year I spent a year in Germany and no one seemed to be checking their notes for X's or any other letters, and working in a large company staffed by people from all over Europe I had the chance to ask the Italian, Greek, and Spanish guys whether they would like to pull out of the Euro, and overwelmingly the response was "WHAT? you really think we want the lira/drachma/peseta back!!!".

If I had a choice at the moment I would far rather be holding Euro's than Sterling.

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Ho hum,

Another day, another "Euro set to fail" post, funny thing is you never see these stories in Europe, only in the UK (usually in pompus articles in The Times).

Last year I spent a year in Germany and no one seemed to be checking their notes for X's or any other letters, and working in a large company staffed by people from all over Europe I had the chance to ask the Italian, Greek, and Spanish guys whether they would like to pull out of the Euro, and overwelmingly the response was "WHAT? you really think we want the lira/drachma/peseta back!!!".

If I had a choice at the moment I would far rather be holding Euro's than Sterling.

Correct. This is a non-story which became fetish fantasy, on which certain segment of British press and crackpots who aren't in short supply in this forum, became more and more fixated over years. The same people keep predicting Euro failure year after year after year. It sorts of remind me of Peak Oil, Peak anything, MMGW, etc debates. Too much wishful thinking and too little facts and opinions backed by actual experience.

Edited by xaxa
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Ho hum,

Another day, another "Euro set to fail" post, funny thing is you never see these stories in Europe, only in the UK (usually in pompus articles in The Times).

Last year I spent a year in Germany and no one seemed to be checking their notes for X's or any other letters, and working in a large company staffed by people from all over Europe I had the chance to ask the Italian, Greek, and Spanish guys whether they would like to pull out of the Euro, and overwelmingly the response was "WHAT? you really think we want the lira/drachma/peseta back!!!".

If I had a choice at the moment I would far rather be holding Euro's than Sterling.

That's exactly the point - they joined the Euro so they could go on an uncontrolled spending binge while protected from the markets by Euro membership.

And when the SHTF the German tax payers would bail them out.

The big question is will the German PEOPLE - not politicians - PEOPLE - be prepared to cough up the money

And what will the PEOPLE of Ireland who have taken the pain think about the Greeks being bailed out because they might riot and bring down the Euro?

:blink:

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Ho hum,

Another day, another "Euro set to fail" post, funny thing is you never see these stories in Europe, only in the UK (usually in pompus articles in The Times).

Last year I spent a year in Germany and no one seemed to be checking their notes for X's or any other letters, and working in a large company staffed by people from all over Europe I had the chance to ask the Italian, Greek, and Spanish guys whether they would like to pull out of the Euro, and overwelmingly the response was "WHAT? you really think we want the lira/drachma/peseta back!!!".

If I had a choice at the moment I would far rather be holding Euro's than Sterling.

What people generally also don't realise is that 5-10 years is a very short period of time in historical terms, the effects of the current economic depression for instance could take 15-20 years to fully unwind IMO.

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That's exactly the point - they joined the Euro so they could go on an uncontrolled spending binge while protected from the markets by Euro membership.

And when the SHTF the German tax payers would bail them out.

The big question is will the German PEOPLE - not politicians - PEOPLE - be prepared to cough up the money

This question is one of the things that makes the article linked in this thread so interesting ... the tension between Germany's geopolitical and economic needs (1) to be tied into a robust European bloc and (2) not to be forced to endlessly subsidise the less efficient members of the bloc in order to make it work.

In part, the European Union and NATO are attempts by Germany’s neighbors to grant Germany security on the theory that if everyone in the immediate neighborhood is part of the same club, Germany won’t need a Wehrmacht.
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In the context of a single currency not working:

Why isn't, say, California arguing that a single currency for all the US states is a daft idea which could never work?

It's a single currency across multiple political and cultural/linguistic regions that's problematic, because these boundaries block the stress-relieving mechanisms that are needed within a currency union (mechanisms such as labour-mobility and fiscal transfers/subsidies to poorer or less efficient regions)

The eurocrats tell you that it's okay as long as the economies have converged, but that's a side-issue: East and West Germany just went for it, they didn't wait for convergence. But they had enough of the real pre-requisites going for them. Basically they felt like they were the same folk.

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Was just looking at German reunification after making the post above ... this could be interesting to those who like to place events in a historical context (from Wikipedia):

In October 2009, France released its archives from 1989-90 relating to the process of German reunification.[12] It was revealed that President Mitterand agreed to German unification in exchange for a commitment from Chancellor Kohl to the European Economic and Monetary Union.[12]
Edited by huw
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It's a single currency across multiple political and cultural/linguistic regions that's problematic, because these boundaries block the stress-relieving mechanisms that are needed within a currency union (mechanisms such as labour-mobility and fiscal transfers/subsidies to poorer or less efficient regions)

The eurocrats tell you that it's okay as long as the economies have converged, but that's a side-issue: East and West Germany just went for it, they didn't wait for convergence. But they had enough of the real pre-requisites going for them. Basically they felt like they were the same folk.

One of the greatest advantages [of the pound, staying out of the Euro) I hear spouted by politicians and economists is that we can devalue our currency.

Isn't the ability to devalue actually a disadvantage, in so far as what that actually means in practice is stripping savers and pensioners of their funds and income - e.g. it is advantageous to the population that our politicians cannot run up huge debts to get and remain elected, and then 1. default on them by stealth stealing from our creditors and 2. rob the population?

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One of the greatest advantages [of the pound, staying out of the Euro) I hear spouted by politicians and economists is that we can devalue our currency.

Isn't the ability to devalue actually a disadvantage, in so far as what that actually means in practice is stripping savers and pensioners of their funds and income - e.g. it is advantageous to the population that our politicians cannot run up huge debts to get and remain elected, and then 1. default on them by stealth stealing from our creditors and 2. rob the population?

That's not the only circumstance where you might want to devalue, but yes it would be better not to have the huge debts run up in the first place. (But let's not forget that the people, on the whole, were eager participants and electors, sucking at the dependency-teat that Gordon bared for them).

I don't know if you remember the bind the UK economy was in during the early 90s, when we were in precisely the situation of not being able to devalue (due to having to stay within our ERM bands). The basic problem was that we went into ERM at too high a level, which made our products too expensive and our workers uncompetitive. The result was failing companies, rising unemployment, and people who couldn't service their debt (including mortgages of course).

An economy in that position must either devalue its currency, or shed activity/jobs ... we shrank through the 90s recession until sterling was booted out of ERM, after which it fell to a more competitive level and the economy bounced back.

You could argue that we should have gone in at a different rate, however unless we managed to lock our skills-base, capital-investment and productivity-growth to Germany's, the same tensions would have gradually arisen again as we fell behind. Well, I don't think we're going to achieve the above unless we invite the Germans over here to run things, which leaves us with only one option to remain competitive: work for less money. That can be achieved by devaluation, or by taking an actual pay cut. But the latter option has horrendous deflationary consequences. Being able to devalue by 10% is much less painful and disruptive than taking home 10% fewer pounds.

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:blink:

Meaning?

As it happens it's probably the Germans that should leave the Euro, then it could devalue.

After all, they're the odd one out, wanting to work hard, save, maintain fiscal discipline, fight inflation etc. Everyone else wants to spend and devalue.

Good point.

It is going to be interesting to see how this pans out. but the Euro looks to be on a long slide I wonder if it will go sub dollar. It's credibilty has gone.

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That's not the only circumstance where you might want to devalue, but yes it would be better not to have the huge debts run up in the first place. (But let's not forget that the people, on the whole, were eager participants and electors, sucking at the dependency-teat that Gordon bared for them).

I don't know if you remember the bind the UK economy was in during the early 90s, when we were in precisely the situation of not being able to devalue (due to having to stay within our ERM bands). The basic problem was that we went into ERM at too high a level, which made our products too expensive and our workers uncompetitive. The result was failing companies, rising unemployment, and people who couldn't service their debt (including mortgages of course).

An economy in that position must either devalue its currency, or shed activity/jobs ... we shrank through the 90s recession until sterling was booted out of ERM, after which it fell to a more competitive level and the economy bounced back.

You could argue that we should have gone in at a different rate, however unless we managed to lock our skills-base, capital-investment and productivity-growth to Germany's, the same tensions would have gradually arisen again as we fell behind. Well, I don't think we're going to achieve the above unless we invite the Germans over here to run things, which leaves us with only one option to remain competitive: work for less money. That can be achieved by devaluation, or by taking an actual pay cut. But the latter option has horrendous deflationary consequences. Being able to devalue by 10% is much less painful and disruptive than taking home 10% fewer pounds.

I do remember the ERM debacle - reading Tom Bower's book "Gordon Brown" it's fascinating to review it all from an inside perspective - at one point the Labour politicians are watching Lamont on TV emerging to deliver the news of the ERM ejection and then going to look out of the window to see if it really was happening just across the street, as if it were some work of fiction smile.gif

However - with globalisation and the changing nature of our imports: if we devalue by 10% and the price of imports then rises 10% (OK, I know it's not that simple, but for the sake of debate) then given that we import most of the stuff we need (as opposed to the stuff we simply want) doesn't that simply suck potential spending out of the economy in the same manner?

e.g. I see no reason why, even if we had deflation, the actual price of food, fuel and energy would fall. And if we had rising mortgage rates at the same time...

Edited by DTMark
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Guest absolutezero

Not posted for a while but just wanted to repeat what I was saying last year

that the Euro won't survive this depression IMO.

When I said this last year I was handbagged by most of the people who replied

Some even claiming that the pound would join the Euro by Xmas :lol:

And that the Euro would soon replace the Dollar as the World's reserve currency :lol::lol:

In 10 years time the strongest currency in the World will be the Dollar - followed by the Deutsche Mark

The Euro has got at the most 5 -10 years IMO.

:blink:

I agree with this.

The only way it can survivie is if they start bailing each other out and letting individal countries set their own interest rates. Sort of defeats the point of having a single currency...

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Euro Area Headed for ‘Break-Up,’ SocGen Says

Feb. 12 (Bloomberg) -- Southern European countries are trapped in an overvalued currency and suffocated by low competitiveness, a situation that will lead to the break-up of the euro bloc, according to Societe Generale SA strategist Albert Edwards.

The problem for countries including Portugal, Spain and Greece “is that years of inappropriately low interest rates resulted in overheating and rapid inflation,” London-based Edwards wrote in a report today. Even if governments “could slash their fiscal deficits, the lack of competitiveness within the euro zone needs years of relative (and probably given the outlook elsewhere, absolute) deflation. Any help given to Greece merely delays the inevitable break-up of the euro zone.”

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Absolutely. Me included.

Of course if the Euro breaks up, conversely its value will rise and it will strengthen and have greater credibility. i.e the opposite of what most people assume.

You may wish to buy Euro's on the prospect of a break up, if that is what you think will happen.

I don't think it will break up in the next 12 months. Beyond that, who knows?

IMO a post-breakup Euro would only strenghten if the countries left in it were those preceived by the market a being the solid core (Germany et al), as opposed to the profilgate PIIGS.

Would Germany have any interest in a "solid core" Euro?

Would they not be better off just reinstating the good old DEM?

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Interesting article

I had never realised that Euro notes were identifiable in this way until seeing it mentioned on newsnight

And if it is unimportant why has this been done?

The notes could all be printed in one place with consecutive numbers, so why are they printed by each central bank with a recognisable identification code?

If we reverse the scenario and Greece defaulted then what would happen to Greek Euro notes - presumably they would no longer be accepted as legal tender in all other Euro states and they would be identified by the country code.

My guess would be that 99% of the Euro's in circulation in Germany would have the X code and any that didn't could be exchanged by German citizens at banks in the event of a failure of monetary union

So German's will only accept the Euro if they have the 'X' printed on them.

If the Greeks have any sense, they will only accept Euro's from now on if they have the 'X' printed on them.

If Greece were forced to leave the Eurozone, I can imagine a rush to remove all cash from the banking system there. None of them are going to want Drachma's. That would be the mother of all bank runs. Will the ECB oblige and print to stop the panic?

But if there is a huge run in Greece, then there are going to be huge runs everywhere else in Europe. Portugal, Ireland, Spain etc, will see the writing on the wall, and they will be forced to go for a run as well. Remember, if there is a run on the bank, you need to be at the front of the queue, even if you have to fight to get there. It is an unstable situation a bank run, thats for sure. Bank runs can only be stopped by a credible central bank, that shows willingness to print a note for every pound owed to a depositor. Only when you are totally sure that you will get your money, will you not bother to get your money.

But if you are leaving the Eurozone, and your government cant print, then you had better get your run on, and run quick.

Even the Germans are going to have to go for a run. With all these PIIGS, running around withdrawing cash left right and centre, that is going to bring down the banking system in the whole of the Eurozone. Think that the German banks can stay upright through this chaos? Think again. Better get to the front of that queue and check all of the notes to make sure that there is an X on the front.

In a bank run, you had better be first. If I were Angela Merkel, I would be telling my ministers that the first one in that queue, and to get out of the Euro and back to the Deutsche Mark pronto.

Buy Gold.

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Basically the German people realise that they are bailing out all the feckless, useless people in Europe and vote in a government with a mandate to bring back the Deutsche Mark.

Then the French people decide if the Germans aren't paying then they certainly aren't going to and they restore the Franc.

Game Over

Sounds like what I'm doing for my feckless countrymen who have binged on debt. Let's judge ourselves before we judge others. We're in a pretty bad place and we're still under Labour.

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I do remember the ERM debacle - reading Tom Bower's book "Gordon Brown" it's fascinating to review it all from an inside perspective - at one point the Labour politicians are watching Lamont on TV emerging to deliver the news of the ERM ejection and then going to look out of the window to see if it really was happening just across the street, as if it were some work of fiction smile.gif

However - with globalisation and the changing nature of our imports: if we devalue by 10% and the price of imports then rises 10% (OK, I know it's not that simple, but for the sake of debate) then given that we import most of the stuff we need (as opposed to the stuff we simply want) doesn't that simply suck potential spending out of the economy in the same manner?

e.g. I see no reason why, even if we had deflation, the actual price of food, fuel and energy would fall. And if we had rising mortgage rates at the same time...

Wants would be sacrificed before needs (and "need" is a flexible term when it comes down to it). We'd see import-replacement (= job repatriation) as it became economically feasible to satisfy wants and needs domestically. Living standards would fall along with sterling, but we wouldn't see mass unemployment or debt-deflation; nominally things would keep chugging along. Imported energy and goods would get more expensive to those who could not command foreign exchange, which in itself would provide a signal about the kind of economic activity people should be doing. Our export markets would find us cheaper in terms of their own currency.

Perhaps most significantly, one of the things that cripples us -- high land costs -- would be corrected in a relatively painless (i.e. not bank-destroying) way, because UK land is denominated in sterling. So if I make a $10 widget of which $5 goes directly or indirectly on land costs, a 50% devaluation would reduce those costs to $2.50 and I could sell the widget for $7.50 while paying precisely the same rents and wages in sterling terms. Note that the fall in sterling doesn't impact the share of energy costs in my $10 widget, since my customer pays me US$. (My widget gets more expensive in pounds though -- i.e. UK consumption falls which is what needs to happen).

About "sucking potential spending out of the economy" -- it needs to happen IMO, we're consuming beyond our ability to pay, that means we must rebalance away from wealth-consumption and toward wealth-production.

I'm not claiming that devaluation is an easy fix, rather that it's an easier one than the deflationary alternative, which destroys jobs and/or sends them overseas. Whatever we do I can't see UK living standards being maintained at current levels.

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So German's will only accept the Euro if they have the 'X' printed on them.

If the Greeks have any sense, they will only accept Euro's from now on if they have the 'X' printed on them.

If Greece were forced to leave the Eurozone, I can imagine a rush to remove all cash from the banking system there. None of them are going to want Drachma's. That would be the mother of all bank runs. Will the ECB oblige and print to stop the panic?

You'd see an overnight switch-over, or maybe something like the Argentinian Corralito. No way would they pre-announce the change and leave people free to withdraw their euro deposits, it would be madness.

But if you are leaving the Eurozone, and your government cant print, then you had better get your run on, and run quick.

Better be a TFH-er and get out while it's only a suspicion that they're leaving.

In a bank run, you had better be first. If I were Angela Merkel, I would be telling my ministers that the first one in that queue, and to get out of the Euro and back to the Deutsche Mark pronto.

Only if she believes the authorities will provide the opportunity for a run, by not implementing measure similar to the Argentinian ones I linked above.

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Which is my point, Say Greece or Ireland wants to leaves, they print a new currency but they wont be able to print enough wont because they have hyperinflation before they even start as people dont want the new currency?  The weak countries cannot leave because they are weak.  Can someone lay out a step by step guide to the break up of the euro?

There is only one way you stop that,you go onto the gold standard when you leave.It was always madness to think the likes of Spain and Greece could survive a big downturn when locked into a currency based on German industrial might.

The euro cant survive unless each country gives up its government and economic policy over to a super-state.The germans have a choice,bail out weak countries for 50 years+ or let the euro fail.

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There is only one way you stop that,you go onto the gold standard when you leave.It was always madness to think the likes of Spain and Greece could survive a big downturn when locked into a currency based on German industrial might.

The euro cant survive unless each country gives up its government and economic policy over to a super-state.The germans have a choice,bail out weak countries for 50 years+ or let the euro fail.

Given that the cost of bringing East Germany up to western standards is already imposing massive burdens on the German tax payer I wonder which option they will choose?

Ireland, Spain, Portugal, Greece and Italy are irrelevant to Germany's strategic interests so personally I can't see them crippling their own economy for decades in order to bail out these economies

Can anyone else and if so why?

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Given that the cost of bringing East Germany up to western standards is already imposing massive burdens on the German tax payer I wonder which option they will choose?

Ireland, Spain, Portugal, Greece and Italy are irrelevant to Germany's strategic interests so personally I can't see them crippling their own economy for decades in order to bail out these economies

Can anyone else and if so why?

Germany can't afford to let this run it's course.

"The future of the euro is dark because there are such strong incentives for reckless fiscal behavior, not only for Greece but also for other countries. Some of them are in situations similar Greece's. In Spain, official unemployment is approaching 20% and public deficit is 11.4% of GDP. Portugal announced a plan to privatize national assets as its deficit is at 9.3% of GDP. Ireland's housing bubble burst with a deficit of 11.5% of GDP.

The incentives for irresponsible behavior for these and other countries are clear. Why pay for your expenditures by raising unpopular taxes? Why not issue bonds that will be purchased by the creation of new money, even if it finally increases prices in the whole eurozone? Why not externalize the costs of the government expenditures that are so vital to securing political power?

In our monetary system, property rights in money are not adequately defined or defended, giving rise to inflationary credit expansion. Our fiat fractional-reserve banking system produces a tragedy of the commons, leading to an overexploitation of resources.

A typical example of a tragedy of the commons is overfishing in the ocean. As fish swarms are not the property of anyone, the costs of fishing are externalized on all other fishers. If I do not fish as many fishes as fast as I possibly can, my competitor will fish them.

Similarly, the property rights in bank deposits are not clearly defined. Banks have the incentive to expand credit and externalize the costs onto society.

For the member states in the eurozone, the costs of reckless fiscal behavior can also, to some extent, be externalized. Any government whose bonds are accepted as collateral by the ECB can use this printing press to finance its expenditures.[2] The costs of this strategy are partly externalized to other countries when the newly created money bids up prices throughout the monetary union.

Each government has an incentive to accumulate higher deficits than the rest of the eurozone, because its costs can be externalized. Consequently, in the Eurosystem there is an inbuilt tendency toward continual losses in purchasing power. This overexploitation may finally result in the collapse of the euro."

http://www.marketoracle.co.uk/Article17177.html

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There is only one way you stop that,you go onto the gold standard when you leave.It was always madness to think the likes of Spain and Greece could survive a big downturn when locked into a currency based on German industrial might.

The euro cant survive unless each country gives up its government and economic policy over to a super-state.The germans have a choice,bail out weak countries for 50 years+ or let the euro fail.

AH HA!

Hmmmmmm . . . .

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