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How Long Before The Emu Is Abandoned?


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A couple of years ago, when in Hamburg, I spent an evening trying to persuade my German friends that the euro would not last beyond 2010.

In view of recent developments, I am almost prepared to revise my argument and propose that European Monetary Union will not outlast 2009.

I have heard that already euro notes printed in, for example, Italy (identifiable by numbers on the note, etc) are already trading at a discount with, e.g., German-printed notes. Unofficial local currencies are also springing up (esp. in Germany).

Anybody confirm? Any other tidbits?

Also, which country will break first? Many Germans dream of the New Deutschmark and don't want to subsidise the weaklings any longer; France would love to devalue by 30%, no?

Or will Italy beat them to it back to the Lira?

Euro Crunch 2008 will be a great spectator sport, to compensate for the absence of England in the footie championships I think.

And, of course, what effect will this have on house prices? :P

In the meantime an ecumenical letter from St Ambrose in the Telegraph today, to be read from all pulpits of this parish (apols if already posted, but germane to this thread):

Euro at risk from Europe's economic storm

By Ambrose Evans-Pritchard

One begins to glimpse the distant end of America's financial crisis.

A mood of capitulation is sweeping Wall Street, the time-honoured moment of black darkness before dawn. Losses are coming into focus.

We know that rates on $1,500bn in adjustable mortgages will jump by 300 basis points over 18 months.

House prices may fall by 15pc from peak to trough. S&P has raised the default forecast on 2006 sub-prime debt from 14pc to 19pc. "The US housing market slump may last far longer than previously expected," it said. The phase of denial is over.

Goldman Sachs and Merrill Lynch expect recession. "The perfect storm took time to brew, but it hit hard and fast - much harder and faster than we expected," said Bank of America.

Few still insist that the real economy can shrug off an implosion of credit. Fund managers are adapting to the new consensus. A fifth now expected a global slump.

Citigroup is coming clean on write-offs with abject confessions: a further $18.1bn last week. Merrill swallowed $16.7bn.

The apparatus of the US government is now in rescue mode.

The Federal Home Loan Bank system has quietly slipped mortgage banks $750bn since the crunch. It injected $210bn in November alone, with taxpayer guarantees. Citigroup gobbled $95bn. God bless socialism.

The Fed will cut rates a half point to 3.75pc by month's end, if not more.

Ben Bernanke is "exceptionally alert" after unemployment jumped from 4.7pc to 5pc in December, the sharpest rise in a quarter century.

"It is patently obvious that the Fed has thrown its inflation worries to the wind," said Stephen Stanley, from RDB Greenwich Capital. Quite right too.

Oil has broken below $90 a barrel. The Baltic Dry Index is in free fall. Shipping shares are crashing. Will anybody care about US inflation in six months?

The White House is crafting the Bush bail-out, an instant helicopter drop worth 1pc of GDP. Congress is not going to get in the way. "Everyone should put their ideological baggage aside and try to pump money into the economy to get things going," said Charles Schumer, Senate Banking chairman.

Spending is no cure. It will add to imbalances that have already degraded the US economy from top creditor to top debtor in a generation.

But a double-shot of fiscal and monetary stimulus, laced with moral hazard, can stabilise credit. Note that the US commercial paper market finally stopped disintegrating last week. It added $35bn.

Yet if the storm is peaking in the US, it has hardly begun in Europe. Bernard Connolly, global strategist at Banque AIG, says euro-losses may surpass the US debacle.

"The next really big shock to financial markets is likely to be the risk of collapse in the EMU credit bubble: the private sector credit consequences are likely to be catastrophic," he said.

Budget deficits must stay below 3pc of GDP, on pain of fines. Germany once breached this with impunity, but that was before Angela Merkel appeared. Virtuous again, Germany now demands rigour.

Since France and Italy are already nearing the 3pc buffer, they may have to tighten into a downturn.

Monetary bail-outs are not allowed either, at least not until the German bloc gives a green light to the European Central Bank.

We are a decade into EMU. The outcome is what Bundesbank sceptics feared. Interest rates have been far too low for Club Med and Ireland, fuelling property booms.

These have burst, are bursting, or will burst. The victims are beached with current account deficits of 10pc of GDP in Spain, 13pc in Greece. The "Nordics" have surpluses, at Club Med expense.

Italy and Spain have lost 30pc in labour competitiveness against Germany under EMU. France has lost 20pc. An attempt to deflate these countries back to balance will run into revolt.

Hedge funds are already circling.

One has set up a Euro Divergence Fund. BNP Paribas said spreads on Club Med debt will soar this year to levels never seen in the euro-zone. "The markets are going to punish wrongdoing," said Hans Redeker, the bank's currency chief. "The politicians in Italy and Spain do not seem to realise how deep-rooted their problems are. They may have to cut real wages," he said.

"While tensions can be camouflaged during economic upswings, they surface during downswings. All failed currency unions were abandoned during times of economic stress," said the bank.

We are nearing the moment when the ECB must decide whether it is a bank or the political guardian of the EU Project. It cannot be both.

The monetary crunch needed to restrain German wage deals after the rail workers won 11pc will crucify Spain.

Over 40,000 estate agents closed doors in Spain last year. Property prices are dropping in Madrid, Barcelona, and Seville.

Spanish banks are issuing mortgage bonds to use as collateral at the ECB's window, without even trying to sell them on the open market. La Gaceta said this "abuse" has reached €40bn.

The ECB has taken the political pulse of Latin Europe and concluded that rigour is now too dangerous. It will face a hostile troika of Paris, Madrid and Rome if it persists, risking EMU schism. Trumped by politics, the Germanic hawks have climbed down.

The euro fell hard last week. It is the start of a long slide to levels that reflect a sluggish, half-reformed bloc in demographic decline.

The euro must be weak, or it will break.

Whatever happens, it is already too late to avoid the Latin Crisis of 2008.

(http://www.telegraph.co.uk/money/main.jhtml;jsessionid=Z2MLKSD24HESVQFIQMGCFFWAVCBQUIV0?xml=/money/2008/01/21/ccview121.xml)

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I always enjoy Mark Gilbert's view of the world. Italy could be the euro's undoing.

http://www.bloomberg.com/apps/news?pid=206...id=azPSdUhrKZ8g

Italy Backslides to Pre-Euro Economic Malfeasance: Mark Gilbert

Commentary by Mark Gilbert

Jan. 18 (Bloomberg) -- Ever since the birth of the euro in 1999, I've been convinced that Italy would eventually tire of the strict economic diet demanded of participants and quit the common currency. I'm starting to think the government might, instead, remain in the fraternity, though stop paying its dues.

And if Italy reneges on its commitments, some of its peers might also be tempted to use the deteriorating global outlook as an excuse to loosen their economic belts -- threatening to undermine investor confidence in the euro, which has gained about 14 percent against the dollar in the past year.

Members of the euro club are obliged to restrain borrowing and spending, with a promise to limit budget deficits to 3 percent of gross domestic product and a pledge to keep trimming shortfalls by 0.5 percentage point per year.

Italy's deficit probably declined to about 2.4 percent of GDP in 2007, down from 4.4 percent a year earlier. That would mean the nation met the 3 percent target for the first time since qualifying to join the euro with a series of accounting tricks that might at best be described as creative.

Italy, though, has been lucky rather than good in recent years. A much-touted revival of its luxury-goods sales owes more to a robust global economy enriching label-obsessed bling buyers in Russia and China than to any restructuring efforts to make the textile, shoe, sofa and handbag industries more competitive.

Global Recession

That luck is about to run out. A Merrill Lynch & Co. January survey of 195 investment firms managing $671 billion showed that almost one in five see a global recession as ``likely'' or ``very likely'' in the coming year. At home, the Bank of Italy this week slashed its 2008 growth forecast to just 1 percent, down from the 1.7 percent expansion predicted by the central bank in July.

Italian business confidence is at its lowest level in two years, according to a December survey by the Rome-based Isae Institute. Figures this week showed that industrial production slumped 0.9 percent in November, its third consecutive decline and weaker than the 0.3 percent increase expected by economists in a Bloomberg News survey.

That report prompted Chiara Corsa, an economist at Unicredito Italiano SpA in Milan, to cut her Italian growth forecast for the final three months of 2007 to zero, from 0.2 percent previously, and warn of a possible contraction.

``The overall trend remains weak as business confidence indicators keep trending lower,'' Corsa wrote in a research report. ``Industrial production will definitely disappoint for the fourth quarter, and so will gross domestic product. Risks of a negative reading are looming.''

Rascal's Tactic

As Prime Minister Romano Prodi struggles to keep his fragile government coalition together -- a majority of just two in the Senate has meant 31 confidence votes since his second stint as the head of the government began in May 2006 -- he's succumbing to the rascal's tactic of vowing to cut the electorate's tax bills without a credible plan to pay for the largess.

Tax evaders cost the nation about 100 billion euros ($148 billion) per year. While Italy succeeded in clawing back about 20 billion euros in both 2006 and 2007, the law of diminishing returns is kicking in, adding a hollow ring to claims from Finance Minister Tommaso Padoa-Schioppa that restoring such lost revenue will pay for Prodi's promises.

Expressing Doubts

With the Italian lira no longer available, investors are turning to the debt and derivatives markets to cast doubt on the nation's creditworthiness. Italy currently pays about 37 basis points more than Germany to borrow for 10 years in the bond market, up from an average of 26 basis points in 2007 and 22 basis points in the first half of last year.

The debt of other countries has also suffered as the global credit crunch makes investors more risk-averse. Spreads on 10- year Spanish bonds have widened to 18 basis points more than German debt, from a 9-basis-point average in 2007. Greece's spread has increased to 34 basis points from 27 last year.

Because Italy is Europe's biggest sovereign debtor, though, any rise in its borrowing costs hurts its finances more than those of its peers. The nation spends 5 percent of its GDP servicing debt, half of which is in foreign hands.

The cost of guarding Italian debt against a decline in creditworthiness has jumped to 32 basis points from as low as 6 basis points in mid-2007, based on credit-default swap prices. That has driven the spread to default swaps on German debt to 26 basis points from less than 5 basis points a year ago. A basis point on a credit-default swap contract protecting $10 million of debt for five years is equivalent to $1,000 a year.

European Central Bank President Jean-Claude Trichet has warned repeatedly in recent years that European governments should make the most of good times by boosting capital investments rather than frittering money away on current expenditure, the central bank version of saving for a rainy day.

When the heavens open -- and economists are increasingly coming round to the view that the darkening storm clouds are about to burst -- Italy may get drenched.

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I have heard that already euro notes printed in, for example, Italy (identifiable by numbers on the note, etc) are already trading at a discount with, e.g., German-printed notes. Unofficial local currencies are also springing up (esp. in Germany).

If you are looking for evidence that the euro area is in trouble, I would start with interest rates on German versus Italian government paper. The break-up of the euro will start there. If there is any doubt that Italy will keep the euro, then their rates will rise (since it is a near certainty that they would devalue after an exit). Rates will measure the expectation of a breakup.

Alice

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I have always stated that the Euro would never survive its first recession. The only way it will survive is by force.

I agree, and this is what I find most worrying. Our European masters are not going to want to give up currency union, however much circumstances dictate that this is the necessary course. So how are they going to preserve it? Spreading fear of something worse could bring the population on board. But to hold a crumbling monetary union together, the EU would have to take on even more power than has been given by the Lisbon Treaty (Constitution in disguise) which WILL be ratified and imposed on a reluctant European electorate. Much as I believe EMU SHOULD blow apart, and much as I'd like to see it do so, I believe that it will be held together by terrifying the European electorate into believing that either they accede to a full-blown European Government or their individual countries will end up like hyperinflationary Germany. Force imposed through engendering fear is just as potent as the force of arms.

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Italy looks to be falling apart at the moment anyway. I'm not sure their government will last much longer. When you throw civil unrest and the mafia into the melting pot anything could happen.

If these people had any sense they would revert back to a 3 part Euro.

A Nordic Euro, Central Euro (inc. Germany) and a Southern (Med) Euro, for Ireland, Spain, Italy, Greece and so on.

What I suspect they will do is run it into the ground with force of arms and police batton charges before that happens.

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Italy looks to be falling apart at the moment anyway. I'm not sure their government will last much longer. When you throw civil unrest and the mafia into the melting pot anything could happen.

If these people had any sense they would revert back to a 3 part Euro.

A Nordic Euro, Central Euro (inc. Germany) and a Southern (Med) Euro, for Ireland, Spain, Italy, Greece and so on.

What I suspect they will do is run it into the ground with force of arms and police batton charges before that happens.

And thats just the good guys

Wait till the Goodfellas get collecting!

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And thats just the good guys

Wait till the Goodfellas get collecting!

Sooner rather than later we will see social unrest in Italy.

As an italian I Know my people, their hot blood is second to none , we might not have a sense of state (that`s why probably we do not perform well in war)but when it comes to our house it takes days to fill places and roads with hundreds of thousands of angry citizens - and most of the times these manifestation are everything but peaceful-

Anyway good riddance to the euro and this born dead project.

We never had such good times when we had the lira, on the paper we were poor in reality we were not.

A very high inflation, sometimes around 20% meant higer costs for imported goods but the cost has always been largely compensated from the massive benefits from the tourism industry.

As italians going abroad is something that we do only for curiosity because the last thing we need is sunshine, good food, art, and friendly atmosphere, so for us has always been very easy to give up travels and foreign holidays, foreign clothes or food.

Cost of petrol going up? We can easily use a moped, wine and beer are produced in Italy so the cost is not affected from higer cost of import.

The same could be said for Spain and probably Greece.

Yes when I came in UK in 1995 my beautiful 100000 lira were worth some 28 pounds but we were much better off, now everybody is poorer the government if squeezing us with the same inflation trick used here and our purchasing power is becoming smaller and smaller, the tourism is comatose because everybody found cheaper travelling to USA India or southern America because they are cheaper exactely like Italy was at the times of Hig inflation.

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Sooner rather than later we will see social unrest in Italy.

As an italian I Know my people, their hot blood is second to none , we might not have a sense of state (that`s why probably we do not perform well in war)but when it comes to our house it takes days to fill places and roads with hundreds of thousands of angry citizens - and most of the times these manifestation are everything but peaceful-

Anyway good riddance to the euro and this born dead project.

We never had such good times when we had the lira, on the paper we were poor in reality we were not.

A very high inflation, sometimes around 20% meant higer costs for imported goods but the cost has always been largely compensated from the massive benefits from the tourism industry.

As italians going abroad is something that we do only for curiosity because the last thing we need is sunshine, good food, art, and friendly atmosphere, so for us has always been very easy to give up travels and foreign holidays, foreign clothes or food.

Cost of petrol going up? We can easily use a moped, wine and beer are produced in Italy so the cost is not affected from higer cost of import.

The same could be said for Spain and probably Greece.

Yes when I came in UK in 1995 my beautiful 100000 lira were worth some 28 pounds but we were much better off, now everybody is poorer the government if squeezing us with the same inflation trick used here and our purchasing power is becoming smaller and smaller, the tourism is comatose because everybody found cheaper travelling to USA India or southern America because they are cheaper exactely like Italy was at the times of Hig inflation.

Tragedy. If only we could be bothered here also. But we bin bought off, and if we do protest, the law is on us like a ton of bricks.

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Let's hope the Germans don't want it then - I'm not fighting them on the beaches for no frigin' Emu...

Did the Germans impose a common currency on their conquests in World War II ?

I have a feeling that they left local currencies in place.

On edit.

They did but fixed the exchange rate to their advantage.

http://en.wikipedia.org/wiki/German_reichsmark

Edited by up2nogood
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Sooner rather than later we will see social unrest in Italy.

As an italian I Know my people, their hot blood is second to none , we might not have a sense of state (that`s why probably we do not perform well in war)but when it comes to our house it takes days to fill places and roads with hundreds of thousands of angry citizens - and most of the times these manifestation are everything but peaceful-

Anyway good riddance to the euro and this born dead project.

We never had such good times when we had the lira, on the paper we were poor in reality we were not.

A very high inflation, sometimes around 20% meant higer costs for imported goods but the cost has always been largely compensated from the massive benefits from the tourism industry.

As italians going abroad is something that we do only for curiosity because the last thing we need is sunshine, good food, art, and friendly atmosphere, so for us has always been very easy to give up travels and foreign holidays, foreign clothes or food.

Cost of petrol going up? We can easily use a moped, wine and beer are produced in Italy so the cost is not affected from higer cost of import.

The same could be said for Spain and probably Greece.

Yes when I came in UK in 1995 my beautiful 100000 lira were worth some 28 pounds but we were much better off, now everybody is poorer the government if squeezing us with the same inflation trick used here and our purchasing power is becoming smaller and smaller, the tourism is comatose because everybody found cheaper travelling to USA India or southern America because they are cheaper exactely like Italy was at the times of Hig inflation.

Pasquino, you are 100% correct when you say Italians were paper poor but in reality you were not. The Lira was Italian good or bad - but it was Italian. About 15 years ago in the US you would always see lots of Italian Olive oil, wine, cheese, etc. Now, you have a hard time finding a bottle of Chianti anymore. Italian machinery from the North was cheap and high quality - not anymore - quality was sacrificed to save money so they could remain competitive, Now the machines are expensive and lower quality. The fashion industry has been decimated also. I remember visiting a huge shoe factory near Milan about 15 years ago. All the shoes were designed and made in the same building - it is now as warehouse for imported electrical goods.

The Euro has been a disaster for Italy. The Euro has eroded Italian culture and pride. It is now a puppet of Brussels - it can't even dump its rubbish anymore without them sticking their noses in.

Italy still has its gold, so returning to the Lira is the best thing that could happen there. Sure, the EU will try and crush the Lira which will be like the old days, but exports and tourism will flourish and Vespas will be all the fashion.

Edited by Pluto
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Did the Germans impose a common currency on their conquests in World War II ?

Yes, they used a new form of Government-backed security that they exchanged for lots of gold and rare works of art.

It was known as the Blitzkrieg...

I have a feeling that they left local currencies in place.

On edit.

They did but fixed the exchange rate to their advantage.

Oh, so that's where that habit started...nothing changes.

(And they still don't like it up 'em...)

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If we do have a world recession and every one is skint the last thing people are goona want to see it billions being wasted on fick all which is what the EU does best.

If there arew big job loses then the tax take will be hit hard and superficial sh1t like mini roundabouts, speed bumps and the EU will be first to go.

I personaly think far higher of speed humps than the EU at least they do something

Edited by Nelly
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