Is it the end of the road for the Euro?

[Oscaresque]

I was recently the silent observer in an argument about whether the Euro is likely to be wound down in the coming months/years and the prospects of Germany pulling out of the single currency. It seemed unlikely to me as I understood that it takes years to launch a new currency but the argument seemed to suggest we are in the final 12 months of the Euro. When the prospect of bartering for trade was raised I lost interest as this just seems far fetched.

Is it likely that the Euro will be replaced by individual states own currencies? Is it likely that Germany will pull out of it? Am I being naive by thinking that smarter people then me and the two arguing will come up with a magical economics plan to fix it all?

 

[tiger]

I think a very interesting (but with hindsight, inevitable) scenario has developed:
- the euro was launched on an upswing. Generally the EU individually & collectively were doing ok to well politically & economically.
- It created a single currency, and a European central bank, but other financial aspects like regulation & taxation were left to individual countries.
- for the euro to function in tougher times, I think we'll need closer harmonization of taxes & regulations.
- this would not have been accepted by countries 10 years ago, at launch time, however we're now too far down the road, and some individual economies are too weak to be able to do any different.

Or put another way, if you expect to be bailed out by the Germans, the Germans will expect you to play by their rules...

 

[OakesP]

David Williams seems to think that leaving the euro should not be a long term big deal for Ireland. Just google him and all his articles in this area will flow to you.

 

[Strathspey]

Or put another way, if you expect to be bailed out by the Germans, the Germans will expect you to play by their rules...

I couldn't agree with you more. There isn't enough appreciation for the Germanic way of business or governance in this country. Instead all you hear is this 'Irish Sun', 'Daily Star' mentality that, 'of course Germany should bail others out following on from WW2'

 

[OakesP]

I couldn't agree with you more. There isn't enough appreciation for the Germanic way of business or governance in this country. Instead all you hear is this 'Irish Sun', 'Daily Star' mentality that, 'of course Germany should bail others out following on from WW2'

Let's way and see if Greece can meet the yet to be imposed strict conditions that Merkel keeps saying will be attached as a condition precedent to the Greek bailout. Things will become a lot clearer to all of us then. And remeber how Ireland rebuked Germany a number of years ago when Germany questioned the fundamentals of the Irish economy? The Germans are having the last laught now, unles of course they get dragged into the blackhole consuming some other EU members.

I don't know what Germany will have to lose to decide to exit the Euro. But to leave the EU would not appear to be an option for it. May be some economist out there might comment?

 

[Chris]

Let's way and see if Greece can meet the yet to be imposed strict conditions that Merkel keeps saying will be attached as a condition precedent to the Greek bailout. Things will become a lot clearer to all of us then. And remeber how Ireland rebuked Germany a number of years ago when Germany questioned the fundamentals of the Irish economy? The Germans are having the last laught now, unles of course they get dragged into the blackhole consuming some other EU members.

I don't know what Germany will have to lose to decide to exit the Euro. But to leave the EU would not appear to be an option for it. May be some economist out there might comment?

Very good point here. The way the media and politicians are covering the Greek bailout, is as if it actually has happened. All that is in place a framework under which conditions must be met for it to go ahead. The most important condition is that all Euro members have to agree to it, and it is not 100% certain that Germany will. The bailout is extremely unpopular in Germany and there is an important state election in North Rhein Westfalia to contend as well.

I believe that Germany should veto the bailout, as it is a rediculously short sighted plan, that will encourage the other member states that are in a slef-made financial mess to not sort out their finances. If Greece is bailed out it will be the beginning of the end for the Euro.

 

[fto]

i have read a few articles saying that the euros days are numbered , David Blanchflower the X BoE member have been quoted to say that there is the theoretical possibility of Germany leaving Euro to re-form the D-Mark.

And with Greece being in so much trouble i would have thought their days within the EU are numbered

 

[steviel]

I am originally from England and still read the English press (which should of course be read in the context of them all having a Eurosceptic agenda). They are currently wheeling out ageing economists and old columns written in the early 1990's when the Euro project was first being discussed, in which they argued (as did the Conservative government) that the Euro would be inherently unstable.

Their main argument was that there was no way that the Mediterranean Countries would restrain themselves and not take advantage of the low interests rates (driven by the requirements of the German and French economies) to borrow beyond their capacity, introducing instability, defaulting and eventually bringing the Euro down. The EU countered this argument by saying that they would impose and enforce debt and borrowing limits. These were of course not enforced, and in any case some countries lied to get around them.

So now we are in the situation predicted by the British press 15 years ago, and who knows what will happen!

I do not believe for one moment that there are not teams of people in the EU and ECB working on fallback mechanisms to enable countries to leave or get kicked out. The powers that be might say in public that there are no mechanisms in place to allow a country to leave, but I do not believe for a second that there is no plan B

The Greece situation seems just like Anglo. A bail out seems like a fine idea to those politicians who are emotionally invested in the EU project, but it seems to me that should a bail out happen, Greece will prove to be an Anglo style bottomless pit. It will need to be supported by Germany in perpetuity, or allowed to default, in the same way as Anglo was either taken on by the state or allowed to default. I think the Germans are finally realising this. Bailing out Greece would only delay the inevitable and make the problems worse

At the end of the day it is unchartered territory. I am not saying that I think the Euro will break up, but anyone who says with 100% certainty that it will not is just engaged in wishful thinking, as they simply cannot know.

 

[Chris]

The EU countered this argument by saying that they would impose and enforce debt and borrowing limits. These were of course not enforced, and in any case some countries lied to get around them.

I think this is exactly what it comes down to. The growth and stability pact gave the impression that the currency would be strong and stable. I was one of the people that was duped by this pact, as there was neither a method of enforcement nor the will (other than Germany) to actually enforce it.

Today Merkel announced that the bailout could go ahead within days, if Greece accepts terms set by the IMF to sort out finances and restrict expenditure for a three year period. This will open the floodgates, especially if Spain come knocking on the door for money.

 

[csirl]

No. Euro will continue. Its one of those things where once introduced, it can never be withdrawn. The people and businesses of Europe simply wont tolerate a return to having to change currencies and incur exchange rate fees/risks.

People also forget that a currency is NOT and economy. Changing currency will not change underlying poor economic choices or structures in some countries.

 

[steviel]

That is true for the core countries in the Euro. But I have no doubt that a mechanism is being put in place behind closed doors in Brussels and Frankfurt for peripheral countries to devalue if necessary. If Greece cannot implement its austerity measures due to riots on the streets, or the effect of the measures is to cause an ecomic crash and dramatic fall in revenue, then the core Euro countries have two choices.

1: Fund Greece indefinately leading to larger taxes on their own population. As of this morning, the short term markets are effectively closed to Greece as the short term interest rate has hit 14%, due to Merkel's reluctance to provide effectively unlimited support. As this penny drops with the German electorate it is becoming clear how politically unpalatable that is.

2: Allow Greece to leave and devalue. This will have an impact in the creditworthiness of all the other peripheral countries, and could cause a knock on effect.

I dont see that there is a 3rd way. maybe someone could point out a 3rd way. It all comes down to Greece's ability to enforce the pay cuts etc without crippling their economy further. The lead in the Economist is worth reading, and not positive (interestingly they no longer quote Ireland as one of the countries at risk from the Greek situation)

 

[csirl]

The USA has a single currency. It often has scenarios where some States are close to going bust while others are doing well. These States all have their own individual public services, taxes and laws. They seem to work around things ok with none having to leave the dollar, so there is no reason why the EU cant do likewise. A lot of whats in the UK based press is just anti-EU media hype with no basis in reality.

Its not as if Greece is a huge country. However bad it becomes for the Greeks, a crash there has minimal impact on the rest of the EU. People in Athens may riot on the streets, but its not going to pay their bills. No doubt there'll be upset, no doubt they'll take it out on the government, but in the end of the day they'll implement the austerity measures because there is no other option.

 

[Chris]

No. Euro will continue. Its one of those things where once introduced, it can never be withdrawn. The people and businesses of Europe simply wont tolerate a return to having to change currencies and incur exchange rate fees/risks.

A collapse of a currency does not mean that it doesn't continue to exist. The Zimbabwean Dollar still exists, but on the world market it buys bugger all. I don't believe that the Euro is heading the same way as the Zimbabwean Dollar (at least not in the near term), but allowing members to break the growth and stability pact and then bailing them out is seriously undermining the credibility of the Euro currency.
The question is not whether the currency is withdrawn from the world market, but whether the world market will decrease it's demand for Euros, which is currently happening. While there is an inconvenience to trade if the Euro were no longer used, I believe that this is a minor inconvenience, and businesses will quickly adapt to practices they used for decades, especially if they are trading in a stable/strong currency.

People also forget that a currency is NOT and economy. Changing currency will not change underlying poor economic choices or structures in some countries.

Absolutely correct. Leaving the Euro and devaluing the new currency to solve your problems is flawed with infinite stupidity. However, leaving the Euro to switch to a stronger more stable currency is certainly something being discussed behing the scenes in Germany, and the German economy would greatly benefit from this.

 

[csirl]

However, leaving the Euro to switch to a stronger more stable currency is certainly something being discussed behing the scenes in Germany, and the German economy would greatly benefit from this.

I have my doubts that the German Mark would be stronger that the Euro even if the 2 co-existed. German industry would lose a lot of business. In times like now, when costs are an issue, even a 2-3% exchange rate fee and 5-6% exchange rate risk premium would put German business at a significant disadvantage. Yes, there are a load of eastern European businesses operating competitively without the Euro, but they all have much lower costs/wages than Germany. UK industry has suffered by exclusion from the Euro, German industry will also.

To be honest, there is absolutely no danger of the Euro breaking up - all we get is a series of tabloid headlines with no substance behind them. While you may get the odd gripe from the tabloid press and certain political groups in Germany, there is no appetite among the ordinary German punter to leave the Euro.

 

[steviel]

csirl, you are quite right based on the balance of probabilities of possible outcomes. But at the same time I am not as dismissive as you of those who take the view that the stability and future of the Euro is at risk. And they are not all English! There are some that write in the Irish and international press. And there is a risk to Euro stability.

We were collectively quick to dismiss back in 2006 those handful of economists that predicted that the housing markets in Ireland, UK, US, Spain etc would fall by 50% or more, and that there would be a banking crisis needing government intervention. Who was right?

That is not the basis for an argument about the fundamentals, but I am just pointing out that history would suggest that the pessimistic commentators shouldnt be just dismissed completely.

 

[Chris]

I have my doubts that the German Mark would be stronger that the Euro even if the 2 co-existed. German industry would lose a lot of business. In times like now, when costs are an issue, even a 2-3% exchange rate fee and 5-6% exchange rate risk premium would put German business at a significant disadvantage. Yes, there are a load of eastern European businesses operating competitively without the Euro, but they all have much lower costs/wages than Germany. UK industry has suffered by exclusion from the Euro, German industry will also.

Your comment is deeply flawed here. If you observe the EUR/USD FX rate at times of German economic news releases you will see that it significantly impacts the rate, so what happens Germany hugely influences the exchange rate.
Considering the global economic difficulties (to put it mildly), the German economy, especially exports, is doing very well. This resulted in the strengthening of the Euro in the months up to the time when Greek debt problems fully emerged. Now, if Germany left the Euro, the Euro would no longer be propped up by German industry and fiscal frugality, thus making the Euro much weaker, and a D-Mark stronger. Add to that the fact that the German central bank would take it's currency reserves with it, which make up 33% of Euro gold reserves, and the D-Mark would be much much stronger than the Euro.
German industry wouldn't suffer much, as German products come at a premium anyway. Consumers don't buy German made products because they are cheap or cost competitive, but rather for their perceived higher quality. Any loss to the German export industry would be a gain to the import industry, especially oil and gas.

To be honest, there is absolutely no danger of the Euro breaking up - all we get is a series of tabloid headlines with no substance behind them. While you may get the odd gripe from the tabloid press and certain political groups in Germany, there is no appetite among the ordinary German punter to leave the Euro.

I agree that the way the British media has covered the possible collapse of the Euro is sensational, and all they are trying to do is make sterling, which is a lot lot weaker than the Euro, look better to the public. However, just because they do not adequately back up their claims, does not mean that there are no good reasons.
While the Euro gained popularity in Germany, it initially was very unpopular. Stating that there would be no public appetite in the German public to leave the Euro is unfounded, and it won't take long to **** the German taxpayer off enough, if the other PIIGS countries come looking for money too.

 

[Slim]

I am increasingly worried about the possibility that Greece might be forced out of the single currency. If that happens, how will we be affected, viz, the value of the Euro, Sterling and the cost of commodities such as gold. I hold most of our savings in Irish based € deposits.

Is there anything I can do to avoid the fallout if Greece defaults/exits Euro? Should I buy sterling, gold, lodge money with a German bank? Can I do that from here? Should I pay off the mortgage? What can I do?

Slim

 

[fto]

While the Euro gained popularity in Germany, it initially was very unpopular. Stating that there would be no public appetite in the German public to leave the Euro is unfounded, and it won't take long to **** the German taxpayer off enough, if the other PIIGS countries come looking for money too.

I completely agree, with Portugal and Spain having their credit rating downgrading there is a real risk that it could come to a point that they will be others putting their hand out and asking for loans.

If Greece or Germany for that matter leave the Euro it is likely that others will follow and the Euro will collapse.

 

[Chris]

I am increasingly worried about the possibility that Greece might be forced out of the single currency. If that happens, how will we be affected, viz, the value of the Euro, Sterling and the cost of commodities such as gold. I hold most of our savings in Irish based € deposits.

I've said this before on other threads, buying sterling is like jumping from the frying pan into the fire.

Is there anything I can do to avoid the fallout if Greece defaults/exits Euro? Should I buy sterling, gold, lodge money with a German bank? Can I do that from here? Should I pay off the mortgage? What can I do?

Slim

You need to do your own homework, but here are some observations. If you have all your money in euro then you are putti git all at risk of the euro losing value or worst case scenario, a collapse.
If the value of the euro plummets then this will be good for your debts, but bad for your savings. Your options are (1) stable, commodity backed currencies like Canadian and Austrial Dollar, or Swiss Franc (2) gold (3) foreign equities including emerging markets (4) non-cyclical defensive German equities, i.e. producers of goods that are little affected by booms and recessions, like food and pharmaceutical.

Bottom line, do your homework, decide for yourself how much your savings are at risk, and how much you want to diversify. There is endless information available covering everything from doomsday scenarios to "the fundamentals of the economy are sold" type reports. Read up on both sides of the argument and then decide for yourself.

 

[Oscaresque]

Just getting a chance to catch up on this thread now. Thanks for your responses/debate. It's an interesting one that will run and run I think.