The future of the EMU...

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Ivanovich

Unfortunately, I think that it is rare to have intelligent, thought provoking commentary on this forum anymore. I don't know if it's a problem with ego, or that it's just easier to take pot shots at each other because we're all safe behind our own screen. Regardless, please keep all the "you suck" commentary out of this thread. I'm really, genuinely, interested in hearing the ideas and ponderings of some of you on this topic.

This morning, as the EUR/USD shot to new highs, and Sarkozy in France fired yet another shot across the bow of the ECB, I resurrected an older belief that I once had - that the European Monetary Union simply cannot last forever in it's current state. Whether this is because of nationalist interest, or because of the inability of one central bank to impose one monetary policy over such a diverse group of member states under a varying degree of financial landscapes, something has got to give.

Then I saw this an hour or so ago from Peter Wadkins at Thompson:


EUR/USD: Reaches New Highs, Cracks Appear In The Facade
Wednesday, July 11, 2007 11:33:00 AM

New York, July 11. With the single currency making new highs over the past 24-hrs and rumours of growing options exposure from 1.3800 (exotics with large pay outs) to 1.4000 plain vanillas, it seems the world's money traders have finally been able to separate the value of currencies from the economic realities that have constrained currency movements since the end of Bretton Woods. In a well timed article released today, AFX news wrote a piece initially released in French chronicling recent political differences between German Chancellor Angela Merkel and the new French President Nicolas Sarkozy.

Adding weight to the obvious differences, Euro Group President Jean-Claude Juncker opined that the strength of the Euro reflects the "dynamism of the Euro zone" and that countries that complain about the currency's strength should "make their national systems more competitive by introducing structural reform".

Part of the "sticking point" is the mounting concerns at Airbus, the joint German French venture. Last year there were rumours that Airbus was "worried" about a 1.3600 Euro. With the new highs, and 1.40 in sight, you can bet your boots they are probably more than worried.

At the centre of the debate is that Germany has for thirty years outperformed all the other countries as an exporter, in fact back before the launch of the Euro in 1999 one British politician recounted the fact that Germany had lowered unit labour costs 1% over 10 years and in the same period Italy's had increased 38.7%. Now that devaluation cannot be used to normalize economic differences, Italy's credit worthiness has diminished in the investment community. Italy cannot compete with Germany in the export arena, and nor can France, but the Euro parities are written in stone. Critics have long wondered how long this could last, eight years is a long time without a deval, and something has to give. Either Germany has to listen closer to its fellow member states, or the cracks will start to show.
More...

I've also been starting to browse this very well written blog:

http://www.euro-area.org/blog/?m=200707

So I ask you...can this go on forever in it's current state?
 
Probably not. The euro-currency came about during the late- 1990's. A time of confidence and prosperity. Against that backdrop, people and nations have a greater tendency to unite and come together. During recessions and bear markets, people are more likely to become divided, fractured and combative. If something "bad" happens in Europe, it'll be interesting to see if the EEU can hold together or splinter apart. Is Germany better off keeping it together or would the other nations have more control of their destiny by "going-it-alone"? Airbus, itself a european union of different countries, would have its fortunes ebb and flow with the overall market. Take it all with a grain of salt.
 
Nazz, I'm going to disagree with you here.

The EMU/Euro is the culmination of the currency bands that supported the old ECU (the crustier of us will remember that) and the development of the regional free trade zone of the Eurozone.

First off, we all can probably agree that the ECB is basically just the Bundesbank in different clothing. After all, it was modeled after it.

Second, consider the pre-euro status of the european currencies. When they converted to the Euro, that relationship (to my knowledge) was basically fixed. So, countries with stronger currencies at the time of conversion enjoyed a stronger conversion to the Euro. It will come as no surprise that the DMK was the #1 currency in Europe at that time, with the GBP a second and the FFR (french franc) a distant third. So, the conversions were thusly made. There is no doubt that this has rankled the French to no end.

Third, there is tremendous advantage to an aging europe by bringing new members into the union with their national currency relatively weakened. It makes the "strong" euros already held by the Germans, etc... worth more against the poorer new members who have their rate set artificially low. This is a tremendous benefit to an aging european population which is largely going to need to live off of savings and high value-added services vs. the more junior members, who put their national assets on sale by entering the union. Not that it may not make sense to do so, but call it for what it is.

Fourth, Szarkozy is taking a page from the british and using the 2005 constitutional referendum rejection to renegotiate his country's status. See #2.

Fifth, this is just a step in the process towards a real european union, much like the USA where you have multiple states, each with their own laws, overridden by federal law. The election of someone like Merkel in Germany makes that abundantly clear.
There may be renegotiations along the way, but I suspect such changes will be minor and largely for the purposes of gaining minor advantage between regional economies.

The only way that I could see failure of the Euro is by dollar instability and global depression triggering a implosion. That's it. And that's simply not likely.

By the way, if you do a little digging on Merkel, her last paper that she published as a 'scientist' before she became a politician is about the environmental benefits of a service-based economy over an industrial one. Interesting read.
 
It's hard to agree with a comparison linking the EU with the US (and it's many states) because of nationalism. Each country still has it's own political backdrop (which is far more distinct than state govt.), language, tax laws (again, far more developed than state tax differences), jobless rates, militaries, etc.

I can easily see Italy pulling the trigger on secession. I laugh whenever I hear about some state like Vermont talking about it.

Nationalism plays a huge part in the dissent of the EU. Yes, especially in the French. But the more the ECB is perceived as benefiting Germany and placing everyone else second, the more you'll see folks like Sakozy and that Italian-whats-his-name from two years ago throwing egg.
 
In relation to the uprise in the EUR/USD and the EMU discussion, I read this from Jack Crooks at Black Swan Capital in today's issue of Currency Currents...

A scenario that could invalidate the consensus might go something like this: We all hate the dollar. We all keep selling the dollar. And in its place, we all keep buying the key dollar alternative, the euro. But sooner or later we witness some type of debacle on the derivatives front. And in this scenario, this debacle leads to much lower global growth, maybe even recession. And in this environment it becomes painfully apparent that European finance, thanks to the still live and well welfare state, comes unglued as a common currency they have, but synchronized fiscal policies they have not.
More...

....Europe on the other hand already has relatively high savings rates, at least compared to the US. But European governments have no place to hide in the face of declining money flow which supports spending to support the welfare state. New entrants to the EU will want their fair share, and in this environment, out of control spending countries such as Italy, who have mooched off the excellent EU credit rating, may be in store for real trouble. Things have a way of coming out in the wash over
time.
More...

Mr. Crooks surmised, yesterday, that while the subprime concerns seem to be pinned on the US at the moment, it may just be that the US is "Ground Zero". And that fallout later will begin to influence the EMU.

Just some more thoughts to add to this discussion.




http://www.blackswantrading.com/home.php
 
Ivanovich,
There is an excellent book entitled "The Rotten Heart of Europe; the dirty war for Europe's money" by Bernard Connolly. He was a British state economist and was sacked for publishing an expose' on the machinations of the politicians and bankers who pushed the Euro into existence. If you are interested in a copy google the title, there are several available. You will find Central Banking at its finest and the real behind the scenes deal making in European governance.

I agree with you that things can't continue, but I think the the Germans may be the ones to pull the plug. They are the real economy in Europe and are weary of carrying the weak (irresponsible) sisters in the Union. The rationale for that line of thought is well detailed in the book.
 
Joachim Fels, in an article for Morgan Stanley in 2003 or 2004 (it was titled "The Euro: Coming of Age or Coming Apart?". Can't find it online at Morgan Stanley anymore), outlined the mechanisms for breaking up the euro. He said it would be easier than a lot of people would think, since actual issuance of currency was left to the old central banks. The main problem would be contracts written for payment in euros would of course have to be dealt with in some way. No doubt, as I recall, he said creditors would demand payment in euros or at the least payment in the new national currencies at a rate that would pay them the equivalent of what they would have gotten under the euro. Somewhat similar to the abrogation of the "gold clause" in contracts when the US went off gold in the Depression, when you think about it.
Anyway, I did find the below article from 2005 while searching for that old Joachim Fels piece: as you can see, the idea of the euro breaking apart is taken quite seriously in the capitals of Europe, more so than you would believe looking at what happens on the surface:

<a href="http://findarticles.com/p/articles/mi_qn4156/is_20050605/ai_n14656368/pg_1" target="$">Secret Meeting in Germany</a>
 
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