Is the Euro doomed?

Just had a very interesting discussion with a business buddy of mine, and his prediction is that the Euro won't be around for more than 6 months.

It's kindof got me thinking.... how many bailouts can they sustain over there? Greece, Ireland, and Spain on the horizon.... so many entitlements, and Germany only has so much to give.

I'd love to hear what the 50 pound brains think on this one.

The Euro can disappear only once in its entire lifetime, so the disappearance of the Euro can be considered a very rare event and most likely this event will be very difficult to trade. So I would not even try to predict the exact time of this event or wait for it because you think you could somehow profit from it.

It happens far more often that the Euro simply decreases (and also increases) its value against the other currencies, this behavior can be observed year after year, month after month. This seems to be much easier to trade and many people are doing it and some of them are even profitable - year after year, month after month, while the Euro doom prophets keep waiting and waiting and waiting (boring strategy) and when it finally happens most of them won't be able to make any profit from it.

If you just ask for opinions exchange I think common sense (read as laws of economics) would win in the end of the day and socialism/liberalism/idealism will lose again. It's not just European south, it's also ex-soviet Baltic countries which are also in deep financial trouble. The problem is since U.S. has been promoting a motto of global economy for a long time we all will be paying for a potential fall of the euro. Maybe a turning point of thinking more about local markets (all aspect of labor, manufacturing and selling).

I doubt. As a mentioned in the euro thread. IMO, we are reaching a point that the decision will have to be made from the political sphere and not from the economic one.

Secondly, not only Germany is putting the money don't forget that. There is a lot of money outside of the EZ members who will be severely affected if one the EZ members default and they are putting a lot of money under the table (i.e. UK, Switzerland), others like China are also playing the Euro game because of the currency war against the dollar and they are/will putting serious money on the Euro side and finally the US cannot afford another financial catastrophe (domino effect) like in 2008. So there is a lot of countries and money involved beyond Germany.

On the other hand, we have seen the selfish national "nature" of the EU members at best since the debt crisis began. My most probable scenario is a solution "a l'europe", last minute with German/French on the head and the British publicly trashing all decisions but under the table putting money and political leverage (sadly they don't have an option) just before the ship sinks (if that level is ever reached)..


Excellent post !!!.

Don't get me wrong or maybe I misunderstood but what planet are you coming from. Local markets? are you for real? labor, manufacturing???. I think you are contradicting yourself. Law of economics will prevail and you imply that is maybe time to come back to cave men world and have societies in complete autharchy? Sorry I strongly disagree with you not only because goes against simple economic laws but it will also threaten innovation, creativity and economic growth.

sisse

The euro isn't going anywhere any time soon. I think the media and the talking heads on CNBC and other financial news media channels have got way ahead of themselves. The euro was not created to the delight of bond speculators, talking heads or fx traders. It was created to enhance intra-European trade and it has worked well so far. European countries are full of companies that do cross-border business and exchange rate fluctuations were an important business risk. Exchange rate fluctuations still play a role in import-export trade, but the amount of business done inside the eurozone itself exceeds that done with the outside world. Since the eurozone still exports more than it imports, the fall in the value of the euro is a short term good at least until the revival of the 'periphery' countries. All the bailout drama and the talk about the mismanagement of public finances is a game of smoke and mirrors. What they're really doing is just saving the French, German, British and US banks that are in risk of losing a significant amount of money in the event of a default. However, if any one country were to default, this doesn't mean that the euro has to go down the drain with it. Eurozone members still need euros to do business with each other. Japan, the US and all the other countries that do business with the EZ still need euros. What we are seeing now is just a change in the value of the euro. There is really nothing to suggest that the eurozone would break up tomorrow or 6 months from now. Furthermore, if a country in default or on the brink of default were to leave the eurozone, wouldn't that make the euro stronger by virtue of removing the weakest link?

I think it is quite misleading to think that the EZ will break up just because the value of the euro is less than it was yesterday. The media and those ignorant talking heads who can't even make money for their clients have been singing the RIP song for the dollar just the same. And yet I haven't seen the dollar breaking up (ie. each state using its own currency). The fate of the dollar and the euro doesn't depend on talking heads, fortunately.

Say what? I live in Estonia and I have a pretty good grasp of what's going on in the region and I can tell you that you're wrong (perhaps you chose a brush too broad for this stroke?). None of the Baltic countries are part of the eurozone yet, which means they are not a liability for the euro (Estonia will join next January) and even bundled together they are nowhere near big enough to have any effect on anything (around $82 billion). All three Baltic countries went through a property bubble, but I caution you to make the conclusion that all three are the same. There are some key differences which I'm not going to go into, but let me just say that the recession ended first in Estonia. However, Latvia and Lithuania are showing signs of life with both of their economies expanding (wage growth is still negative in Lat and Lith, but positive in Est). Estonia, Latvia and Lithuania still have large private debts, but the deliquency rates are improving. The precarious financial situation seems to be turning around (it's not getting worse, and that's a fact). Of the three, Latvia is the only one who has had to ask for help from the IMF & the EC.

Perhaps you should check out the slides depicting the refinancing needs of Ireland, Greece, Portugal, Spain and Italy to get a glimpse into how small the Baltics really are: http://www.spiegel.de/fotostrecke/fo...cke-61775.html

Orest, no hard feelings, I hope. What you wrote was very true some six months back but things have changed since. Maybe you were relying on old info?

A big fat NO. Will it survive in its current form? I doubt it very much.

Here is an interesting article from my favourite UK publication 'MoneyWeek'

Last rites for the euro?
“We know now what e100bn buys you these days,” as Larry Elliott puts it in The Guardian. A relief rally “that lasts a morning”. Last weekend, Ireland bowed to pressure from the rest of Europe and requested financial support from the European Union and the International Monetary Fund. With the threat of a run on its ruined banking sector growing by the day, the country had little choice. Ireland will be offered around e85bn, with Britain chipping in as much as £10bn. The money will be used to fund the government deficit, and also to recapitalise the banks.

The deal was meant to draw a line. It was supposed to prop up confidence in Ireland’s finances, and stop the fear from spreading to other countries in the eurozone periphery (those rudely dubbed the PIIGS). But after the briefest of rallies, the euro resumed its fall and yields on Spanish and Portuguese debt in particular continued to climb.

Part of the problem is political. The aid package depends on the Irish government passing a budget, involving e15bn in further tax hikes and spending cuts over four years, in early December. But the government is close to collapse. If depositors and investors “start to doubt that the bail-out is definitely on the way”, as Peter Thal Larsen points out on Breakingviews.com, “the crisis could quickly escalate”. But more to the point, no one is really convinced that Ireland can pay back all of its debts, even with the latest aid package. This four-year fiscal squeeze amounts to around 10% of GDP, and aims to keep the debt burden from spiraling out of control. Yet it could get even worse. According to Capital Economics, there may need to be a further 10% of GDP’s worth of tightening as the Irish government’s growth forecasts are “far too optimistic”.

The fact is that, for both Ireland and Greece (the eurozone’s first casualty), says Bill Emmott in The Times, “only miraculously rapid economic growth will enable them to reduce their public debts, avoid drastic increases in their debt-servicing costs and dig themselves out of the holes into which they have fallen”. Unfortunately, miracles are not “dependable tools of public policy”. So the bail-outs have merely deferred rather than solved the countries’ problems. “Some sort of debtrestructuring” – a polite term for default – to lower the debt
burdens is likely eventually. And Ireland won’t be the only one.

Also, Spanish banks have the largest exposure to the Portuguese banking system. Portuguese banks are not yet quite as badly affected as in Ireland, but they’re not far off. Although Portugal has so far avoided a property crash, the economy is plagued by poor demographics and one of the largest private-sector debt to GDP ratios of any country. The economy only grew on average by 0.4% a year over the last eight years.
No boom for Portugal has meant no bust. But dismal productivity growth has also meant that living standards have failed to catch up with the rest of Europe. With government debt estimated to hit 82% of GDP for 2010, a private-sector debt load among the biggest in the world, and an inability to generate productivity growth, it’s perhaps no surprise that the two main Portuguese banks’ senior five-year credit default swaps (CDS) have also soared.

The problem for Spanish banks is that, apart from all the problems they have with potential bad loans at home, they are more exposed to Portuguese debt than anyone else. If unsecured bondholders and other lenders to Portugal are to take a haircut, as the German chancellor, Angela Merkel, is increasingly insistent they should, Spanish banks would take an immediate hit. That could force the Spanish government to bail them out.

But that might not be possible. Spanish debt was only 36% of GDP back in 2007. But since then it has rocketed. It was 53% by the end of last year, and with the deficit not far off 10%, will be well above 60% by the end of this year.

So chances are that Spain, like Ireland, could not afford to support its own banks in a Portuguese-led crisis, let alone its own, albeit slower burning, domestic one. Hardly surprising, therefore, that Spanish five-year CDS jumped to a new high after the Irish bail-out news over the weekend as the dominoes continue to fall.

Can this rot be stopped? So far the EU is trying to prevent peripheral countries from defaulting by simply lending these countries the money. But it’s obvious to markets that the heavily indebted countries which are now borrowing off emergency facilities, rather than the private sector, remain just as heavily indebted. The EU is solving a liquidity crisis, when what it is facing is a solvency crisis. If this sounds all too familiar to you, then it should.

Since the summer of 2007, but especially since the Lehman Brothers’ collapse in September 2008, Western central bankers have been stepping in with ‘temporary’ liquidity for banks that had previously relied on wholesale interbank funding from the market. By October 2008 the sharper central bankers, such as our own Mervyn King, started to realise that the banks didn’t just face a shortage of liquidity. The real problem was that they faced a shortage of liquidity brought about by lenders to the banks perceiving ,there was a shortage of capital. Central banks couldn’t withdraw their support, because that would result in another crisis.

Instead, they’ve been forced to pressurise the banks into gradually shrinking lending until bank deposits alone can cover the loan balance.
Something very similar now blights the PIIGS. Solving the near-term liquidity requirements of insolvent states doesn’t make them any more solvent. Pushing dust under the carpet isn’t the same as clearing it up. Overly indebted countries still need to cut spending to sustainable levels, just as their banking systems need to recapitalise while realising hidden
legacy losses. If these goals aren’t met, the dominoes will keep falling right across Europe. The problem is, as Julian Pendock of Senhouse Capital points out below, that the politics of the situation may make it impossible to achieve these aims without a serious crisis in the euro first.

Can the euro survive? Eurosceptics point, correctly, to the fact that “one size does not fit all” when it comes to interest rates. These were set by the European Central Bank (ECB) for the benefit of low-inflation Germany, which – in the early days of the euro – was going through its own deflationary restructuring process. While rates of 3% might have suited the Germans, they were woefully low for the periphery countries – in fact, in many cases rates were negative after taking local inflation into account. For example, Spanish interest rates fell from 12.7% in 1993 to 3.0% in 2005, while Ireland’s fell from 10.5% in 1993 to 3.0% in 2005. This was known as the “convergence trade”, as interest rates converged with those on German bunds.

Ireland, with its low corporation tax rate of 12.5% and an English-speaking workforce, boomed in the 1990s with good reason. But fuelled by low interest rates, housing turned into a bubble. Irish banks’ assets peaked at an amazing 629% of Irish GDP in 2008. You cannot solely blame the euro for this and other countries’ problems. I lived and worked through the Asian crisis; poor banking regulation and overexuberant lending in those countries was down to extravagance, lax regulation and crony capitalism.

However, while many have accused peripheral countries of some or all of these lapses, the euro made all these failings worse through its flawed structure – a single interest rate for all, and no mechanism for supporting ailing members via fiscal transfers from other member states (unlike in the US). This is where the whole story becomes ironic. The euro was designed like this – with no bail-out mechanism and no exit route – so as to keep countries on the ‘straight and narrow’. The situation that these countries find themselves in was designed to be ruinous in order to prevent them falling into it in the first place!

If they can’t devalue their way out of trouble, the only path open to the troubled countries is a painful internal devaluation. This is where economics meets politics, which investors ignore at their peril. First of all, there is the issue of “bail-out fatigue”. The German chancellor, Angela Merkel, should be riding high in the polls. Germany’s economy has fared remarkably well as their supply-side reforms have paid off handsomely. Secondly, the euro is much weaker than a stand-alone deutschmark would be, to the great benefit of Germany’s mighty exporters. However, Merkel’s CDU party is suffering in the polls as German citizens, already exhausted from bailing out east Germany, are livid at having to bail out Greece, where the retirement age is considerably lower than that in Germany.

Yet a more immediate worry is ‘austerity fatigue’. Austerity is not a one-shot deal, but a long, drawn-out process. The danger is that after several rounds of cuts, and with no light at the end of the tunnel, opposition politicians have an easy sell to weary and dispirited nations. They can argue that the country is spending more on servicing debt owned largely by foreigners than the countries are spending on education and health services.

In Ireland, the Greens have already left the coalition and are calling for a fresh general election. The EU believes this is not “particularly helpful”. But the EU’s attempt to prevent sovereign nations from having general elections is understandably being met with incredulity. An early insight into the political mood music can be gleaned from the fact that, according to professor Morgan Kelly at University College Dublin, the ECB oversight team in Dublin is known locally as “The Germans”. Hence the paradox is that the nations funding the bail-outs, in order to sell the bail-outs to their own voters, may impose austerity terms that are too onerous for recipient nations to stomach politically. Certainly, there is a growing feeling that Ireland should have let its banks fail. In Portugal, a general strike suggests the same dynamics are emerging.

One must not forget what is at stake. French and German banks’ exposure to PIIGS amount to e493bn and e463bn respectively, according to figures from the Bank for International Settlements. So it is in neither of those countries’ interests to allow the PIIGS to leave the euro. For the time being, the direct costs of a bail-out (e170bn, assuming write-offs of 8% of periphery GDP), are less than those of breaking up the euro, given this massive exposure that the northern European banks have to the PIIGS. But should Spain be targeted next by bond vigilantes, all bets are off. The EU will not have the financial wherewithal to contain the crisis, the IMF would have to be called in, and the future of the EU in its current guise would be in doubt.

Maybe. Here are the possible outcomes as I see them:
1. All euro members will agree to political union and will therefore be willing to bail out each other. This means that German and French citizens will agree to send their extra tax euros to Spain, Portugal, etc. This is very unlikely if not impossible, and I would expect riots and revolution in Germany and France if their elected officials try to force this solution on them.
2. The bad guys will leave the euro (on their own or shoved out the door) and this will leave the stronger, core members with the euro. Spain, Portugal, etc. will have to issue their own currencies again and therefore be able to manage their own crisis (over time). Of course, the EU will fall apart and most of the benefits of the union will evaporate. More to the point, the core members of the euro will have to manage their economies with a very strong currency, making them even less competitive with China, So America, Japan, and the US. To manage this, these economies will have to slash wages and benefits to become competitive. Once again, the Germans and French are screwed.
3. The whole thing flys apart and the grand experiment called the euro and EU will just go away. Not likely.

For my money, I pick number 2 above.

It was an interesting article, thanks for posting.

Well there is still one gun left in the drawer that has been unused so far and that is guaranteeing debt and lending money American style (the US FED provided trillions' worth of loans and backstops). The ECB has made it very clear that they are not the Federal Reserve, but rather a pan-European central bank closely modeled after BuBa. But considering the already frustrated European taxpayers not only in Germany but all over the EU, the ECB might be pressured into loosening its monetary policy. This would certainly drive down the value of the euro and give talking heads another chance to cry 'inflation', of course. The charts I linked to in my previous post show that the GIIPS* coutries have quite a bit of refinancing to do so I guess we will know where the ECB stands in a few months' time.

*Whoever first thought of calling these countries PIGS/PIIGS is a moron. What a derogative term. How about calling your family STUPID or POOP because your mother's/father's/siblings' first names' letters could be arranged in that order. Use GIPS/GIIPS instead. (bbaker, this is not directed at you)

So not only the Euro but also the EU will fail. I respect your opinion but I think you are going too far with your scenarios. IMO, your views on Europe and in Economics are rather simplistic as you just make it sound that there is only 2 countries (Germany and France) and the majority are a random bunch of very poor, underdeveloped societies that are doom to disappear sooner rather than later. Well I think you are ignoring many economic, social, historical and cultural factors that make the picture a lot more complex than you make it sound. Moreover, I have my serious doubts you can find support for your comments not only with visceral opinions but with proper quantifiable facts.

sisse

Do you believe that core Euro tax payers (eg, Germans and French) will fund the so-called PIIGS countries? Or, you believe that the non-core Euro countries will successfully cut their deficits and force their citizens to live sub-standard lives when compare to the core nations? I know well the many economic, social, historic, and cutlural factors that make the picture a lot more complex. Many in Europe believe these complexities will somehow shield all of Europe from these simple realities in my questions to you. However, as a student of economics and history, I am well aware of these complexities you speak of, given that my country has had to help Europe fight several World Wars, not to mention the Balkins, etc. If I were a betting man, and I am, I would bet that those old demons are still alive and will eventually change the face the the EC, and the Euro. The only questions are: how deep and when? Have a good day my friend. Sorry if I come across sounding a bit rough. I have travelled across Europe many times and have many friends who live there, and I worry for you all.

My 2 cents worth...

The Euro won't disappear, to undo it would be too painful. Worse case scenario the fiscally irresponsible countries will be kicked out of it if that's what is needed to save it.

I see on your profile that you're an America so I don't know if you know this or not but the EU is actually a very undemocratic institution with no respect of the will of the people. We have far less influence on them than the American people do on their senators and congressmen (and I know that that's not much either). When the people of Ireland for example voted no in their referendum on the EU constitution they were simply ordered to vote again until they got the 'right' answer. The European Union is corrupt in a very different way to the United States. American democracy has been corrupted by special interests and virtually unfettered corporate power to the point were the media is little more than a neo-liberal propaganda machine.

Europe has a different problem. The EU is corrupted by an internationalist elite who don't really believe in nation states in the same way that you guys in the US do. Don't want to get into politics because that's not what this forum is for but to answer your question it is important that it's mentioned for you to understand 'the plan'.

You see, the Euro has it's problems because you have a number of different types of economies, different economic cycles, without (much) political union or fiscal union all trying to share the same interest rate and monetary rules. Countries that no longer have the option of devaluing too. Gonna cause a few problems that isn't it? The Euro elites will attempt to see that the Euro's problems are just used as an excuse to tie the Euro zone countries closer together and erode national sovereignty. They'll probably make it so any EU country can draw on the EU's credit rating a whole and say that this means the need for greater centralised control of countries policies. They don't care how much it costs or who suffers, a united Europe is their dream, it's their pet project. The Euro will break down only if they can't hold it together, not because they decide it's just not worth it.

Ireland did everything it could to avoid needed a bailout because of the strings attached, Greece did the same, Portugal will do the same. Even if it;s just EU cash without the IMF Portugal won't want to take the cash unless they have to.

I am too well aware of a civil war fought not so long ago, when even the same minded USA citizens were killing each other, so please, stop saying you know something when you are from a country with a 400 years of history. Your comment on Baltic States situation proved an old ( probably unknown in USA ) saying - don't speak until you know the subject thoroughly. Forgot to add - when your country is in deep Chinese pocket, you should carefully choose your sides

- Travelling through Europe and living in Europe are two very different things.
- Don't forget that the UK taxpayers are also part of the EU even if they are not part of the Euro and they also pay a significant share of Euro taxes.
- You are simply wrong with the statement I highlighted.
- What do the past world wars have to do with the current crisis and also then made you aware of the the complexities within Europe?
- Don't lose any sleep over it... I am sure you won't

Are you seriously suggesting that the Civil War, which united our country and ended slavery in the US, is in any way comparable to WW 1 and 2? Seriously? The rest of your comments just underscore your bias and bigotry against the US.

Let me respond to each of your bullet points:
- That is true
- It sucks being them
- I'll take your word for it
- Two events make a trend (you people tend to settle your arguements with violence).
- I will not.

The last two responses to my post did not answer the two questions I posted. Simply put, its going one way (political union and an end to national pride) or the other (some sort of split and an end to the big dream). YOu last two are just feeling defensive about the reality of this situation. Sorry.

7bit I'm not looking to profit from a collapse... I am a EURUSD trader and this would absolutely screw me if the pair split into a Northern and Southern Euro, or whatever.

You can't help but take note of all the Economics Professors at universities saying that it is just a matter of time before the Euro collapses.

What??? You mean the human race tends to settle arguments with violence. There is no "us and you", we are all the same, regardless of creed, colour, religion or race. I still don't understand what war has to do with the EZ, EU or Euro.

The birth of the EZ was brought about because of globalisation and to compete as a single entity, in economic terms, with the US and the BRIC countries. The EZ will survive as an entity, as will the Euro, but maybe not in its current form. There is no simple solution to the current issues that are being exacerbated by the markets.

To suggest two possible outcomes at the opposite ends of the spectrum without entertaining any other solutions smacks of a very black or white outlook on life. There are many shades of grey in between.

The current situation in the world is grim, not just in the EZ. Remember where the financial crisis started with NINJA loans and selling derivatives packaged with these terrible loans as AAA investments to the rest. Nothing was learned from the Asia crisis in the late 90s and the central banks have a lot to answer for.

You don't sound rough at all but rather raw.

You are taking the nationalistic side of the topic. This is not a discussion on Europe Vs the US or who is better. Therefore your, "given that my country has had to help Europe fight several World Wars, not to mention the Balkins, etc." or the " Europe many times and have many friends who live there, and I worry for you all" are maybe a "good" arguments with your mates in the pub but they don't make any sense in the context of this discussion an even worse when analyzing economic/monetary issues.

You make it sound like France and Germany (I guess you also meant the UK) out of altruism subsidize the other 24 members, so there is not economic relations, trade in goods and services, free movement of labour and capital, new social/common justice and human rights frameworks, political and security interests and more importantly a playing field that has provided peace in a Continent that has been in wars the last 2000 years. I think you are very wrong in that point, u just need to check a couple of simple numbers but if you prefer the beauty magazine argument just in one of your next trips to Europe, let say go to Prague or any "non-core" countries as you misleading said, and just tell me how many multinational UK/French and German companies you can see just from the Airport bus to the city center....

In any case, I am making the mistake of following your line of argument so read also bbakket post above as I 100% agree and if you want to continue with the discussion, lets move back to the Euro, monetary policy and economics because the rest is out of context in this thread.

sisse

I will make this short because in am short the euro at 1.3085 and want to tend to my trades.

The title of this thread is, "Is the Euro Doomed". In my first post, I offered an opinion on this topic and presented three possible outcomes. I will stand by my post and will say again, that the euro is not doomed but that it is likely that the euro will lose several memebers in the not-too-distant future. When this happens, the remaining euro members will have another set of problems to deal with that are way beyond this thread.

There are many other possible outcomes to the current situation, given the complexities of the EC. It is not my job to list them all here so as to incorporate all the "shades of gray" alternatives within this thread. I came up with three. Instead of complaining about my post, perhaps others here could offer an opinion about possible outcomes that have not yet been presented, but please remember what question you are answering.

As for the EC, IMHO, if there is no euro, then the EC concept is marginalized to a great extent. So let's all hope that the euro sticks around. I really enjoy trading it!

Square at 1.3020 and waiting for the next trade.

In future, I suggest that you choose your words more carefully when posting to a world-wide forum, unless you like the back lashing.