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The Euro Dilemma
Jan. 14th, 2009 11:54 amCurrency unions frequently fail. This is, perhaps understandably, not a point on which anyone in the EU hierarchy likes to dwell. In particular you don't see many EU officials talking loudly about the Latin Monetary Union of France, Belgium, Italy, and Switzerland in 1865 (officially disbanded 1927). Another point that is not mentioned very loudly is that the ostensible fiscal aims of monetary union are and always have been subservient to political aims. That this is the case can be seen most clearly by the fact that, whenever economic reality has impinged on financial "rules" imposed by the EU on member countries (to ensure that the single currency functions properly) then the rules have been changed. The permitted level of fiscal deficits is the clearest example of this.
However, one problem with changing the rules is that economic reality eventually prevails. Credit-default spreads linked to the debts of Spain, Ireland, Portugal and Greece have soared. Tyese countries are going to have to issue bonds, lots of bonds, into a buyers' market, with a product on offer that any sane financial dealer would say "not at any price". If the free market has its way, Greece and Ireland could default and the euro would be in tatters.
This is one of the major drivers of recent euro weakness against the dollar, now down to near $1.30 from its high of $1.60. The dollar is strong not because there is any optimism at the medium-term validity of the currrency, but because dollars have been repatriated and not many foreign offerings look too attractive at the moment.
But there's one obvious get out for the euro -- buy the bonds of the weaker country in order to strengthen the euro as a whole. The French have a history of this kind of thing, virtually strong-arming Groupama into buying the debt of embattled SCOR at a time when no sane private investor would have subscribed at the rights issue level requested.
That, in the medium-term, is euro-strong. It's also a powerful argument for Britain getting in while the going looks bad -- for a start, we could negotiate better terms. With the dollar looking to me set to strengthen further (12% to 15% against sterling, 10% to 12% against the euro) the UK would gain a lot of credence if it chose to support the euro zone now and would also benefit from the good deal that it could demand for years, if not decades, to come. The pound might be a basket case, but its bonds are still better than the majority of those offered by euro-member countries. Germany (definitely) and France (reluctantly) would be happy to have the sterling area on board, after years of looking at shit like Latvia, Ireland and Greece.
The Latin Monetary Union, based as it was in the halcyon days of Silver and Gold actually being in money, throws up some interesting historical points. One is that at the time 5 Italian lire and 5 Spanish pesetas euqlled 5 French francs. Anyone who thinks that currencies tend to vary around a historical mean would do well to take that point on board. Indeed, at one point in the 19th century one yen equalled one US dollar. The guy who bought the yen on City Index that day is having a long wait to get back even.
++++++++
My teeth are hurting, a factor only slightly mitigated by the fact that it's confirmed that the whole, two years and six months by the time it is over, course of treatment is now fully paid for. I'll still have to lump out for the veneers, which I've decided to have, but it should soon all be over. Still, having bought a car, getting the kitchen done, paying an arm and a leg and a mouth for what must be one of the longest teeth-fixing procedures in the history of orthodontics (it's not as if they were that dreadful in the first place) I feel that I am doing more than my bit to keep the UK economy going. Thanks god this one-man economic stumulus is suported by bad poker players on the continent.
+++++++++
I decided last night to catch up on some TV that I had transferred to DVD, but not yet watched. Doctor Who, I said to myself, idly putting in a DVD. Nope, I haven't seen this one. Let's try the DVD before. Hmm, no I haven't seen this one either.
And so it carried on. I got back to March 2007 (Family of Blood pair of episodes) before I got to the last (i.e., first) that I hadn't yet watched. I really do look at so little TV these days that a 90-minute relaxation in front of a non-computer screen seemed like a week-long rest.
Not that I'm any less knackered today.
____________
However, one problem with changing the rules is that economic reality eventually prevails. Credit-default spreads linked to the debts of Spain, Ireland, Portugal and Greece have soared. Tyese countries are going to have to issue bonds, lots of bonds, into a buyers' market, with a product on offer that any sane financial dealer would say "not at any price". If the free market has its way, Greece and Ireland could default and the euro would be in tatters.
This is one of the major drivers of recent euro weakness against the dollar, now down to near $1.30 from its high of $1.60. The dollar is strong not because there is any optimism at the medium-term validity of the currrency, but because dollars have been repatriated and not many foreign offerings look too attractive at the moment.
But there's one obvious get out for the euro -- buy the bonds of the weaker country in order to strengthen the euro as a whole. The French have a history of this kind of thing, virtually strong-arming Groupama into buying the debt of embattled SCOR at a time when no sane private investor would have subscribed at the rights issue level requested.
That, in the medium-term, is euro-strong. It's also a powerful argument for Britain getting in while the going looks bad -- for a start, we could negotiate better terms. With the dollar looking to me set to strengthen further (12% to 15% against sterling, 10% to 12% against the euro) the UK would gain a lot of credence if it chose to support the euro zone now and would also benefit from the good deal that it could demand for years, if not decades, to come. The pound might be a basket case, but its bonds are still better than the majority of those offered by euro-member countries. Germany (definitely) and France (reluctantly) would be happy to have the sterling area on board, after years of looking at shit like Latvia, Ireland and Greece.
The Latin Monetary Union, based as it was in the halcyon days of Silver and Gold actually being in money, throws up some interesting historical points. One is that at the time 5 Italian lire and 5 Spanish pesetas euqlled 5 French francs. Anyone who thinks that currencies tend to vary around a historical mean would do well to take that point on board. Indeed, at one point in the 19th century one yen equalled one US dollar. The guy who bought the yen on City Index that day is having a long wait to get back even.
++++++++
My teeth are hurting, a factor only slightly mitigated by the fact that it's confirmed that the whole, two years and six months by the time it is over, course of treatment is now fully paid for. I'll still have to lump out for the veneers, which I've decided to have, but it should soon all be over. Still, having bought a car, getting the kitchen done, paying an arm and a leg and a mouth for what must be one of the longest teeth-fixing procedures in the history of orthodontics (it's not as if they were that dreadful in the first place) I feel that I am doing more than my bit to keep the UK economy going. Thanks god this one-man economic stumulus is suported by bad poker players on the continent.
+++++++++
I decided last night to catch up on some TV that I had transferred to DVD, but not yet watched. Doctor Who, I said to myself, idly putting in a DVD. Nope, I haven't seen this one. Let's try the DVD before. Hmm, no I haven't seen this one either.
And so it carried on. I got back to March 2007 (Family of Blood pair of episodes) before I got to the last (i.e., first) that I hadn't yet watched. I really do look at so little TV these days that a 90-minute relaxation in front of a non-computer screen seemed like a week-long rest.
Not that I'm any less knackered today.
____________
