Weakened Euro?
Weakened Euro?
Recently the Euro has been under some pressure resulting from the exposures of the CC, national debt and raises the question of its strength. In order to answer the question of where the euro sits in relation to the world economy and the idea of its potential failure or ultimate success, one has to look at where the euro came from and why. This need not be a huge discourse but perhaps just looking at the prime factors that led up to its creation may be enough to realise that it is necessary for it to be here to stay; or should it collapse, be seen as the forerunning of a future global currency for what it, or something like it, eventually tries to achieve.
Prior to the 1940’s currencies were dominated by the power of trade, those who had the biggest carrot to control ‘value’ largely dictated terms and was I think an illusory thing often wrapped up in the confidence of being able to meet the cost of acquiring or selling things and translating that confidence into an excess return over the cost of fabrication. Such confidence may always rely on a degree of stability – normal human behaviour likes to have some idea stability, of planning for the future however limited and do not put effort into what they might think is terminal malfunctioning of influencing aspects. Two wars in quick secession strained that confidence of productive trade and the expectation of stability and although the wars generated technical and social shifts the rewards were not equitable or evenly spread as raw resources became more in demand. No reason to go into the whole effect of the 2ww, simple to say that afterwards the ‘modern’ world was in a mess particular the state of combatants. And apart from the destruction afterwards, this created trading uncertainty and loss of confidence in the value of trade.
There was a great danger that progressive instability would create continuing tension that would get worse holding back trade between the major economies. To rebuild, a stabilisation plan was required, formulated in the Bretton Wood agreement. With the Bretton Wood agreement and a sort of new Gold standard, created a ‘benchmark’ against which a stable system of currency valuation and trade could be operated giving rise to the IMF and fixing exchange rates to the price of gold and the US dollar. It worked but was not wholly what was required and had an inbuilt limitation which was created linked to increasing value of gold, this arguable was why countries started to amass gold as an hedge against uncertainty (little change there then from previous centuries).
From this agreement came the ECSC, the EC and Euro. Up to the creation of the Euro from the 60s onwards with the increase in trade, a new growing powerful effect was building up, one of market manipulative trading in and on currencies which became a perception game with players chasing rumours and weakness in a countries currency to make a marginal gain. The gold standard was dropped about 1970 in favour of benching just on the dollar as the currency that could always (?) pay its way. As gold was unstable as its price rose and fell it became obvious that more money could be made playing the market than simply holding gold and was one of the reasons that the UK started selling its gold from the mid 80s, as it had oil revenue and a strong pound; that bonus fell apart in Sept 92 with Black Wednesday and later with Brown selling off a large volume of gold to aid the national debt, shortly afterwards seen as at a bad piece of timing and at a low price.
During the boom year of 70-90s you can recall the antics that were played with a range of currency transaction with flushes of buying and selling on the franc, mark, pound, yen, dollar, etc all bouncing up and down on the whim of the market. The ‘market’ became the place to be with billions of currency being traded in London alone, 90% of which had no useful purpose in trade terms other than to make a margin on an overnight deal. Do I need to mention G Soros as an example?
In effect the world entered into a new form of bartering system this time with the value of things attached to what the money market decided as its value (money) it became a commodity and it was alone backed by the confidence of making more money on a gamble, guess, bet – linked to what a country can afford to pay, looking at ‘credit worthiness’, trade balances – interest rate, PSBR/ GDP, assets (like oil & gas) and rumour. Would value go up or down?
Now there is the unresolved effect of the credit crises and the reason why the euro is under pressure now has nothing to do with the concept of the euro or its adoption by 16 states out of the 27. (Austria, Belgium, Cyprus, France, Finland, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Holland, Portugal, Slovakia, Slovenia and Spain).It is under pressure because it has become in the way of how the market is dealing in currencies and how the free trade operates. It is no surprise that the after the shambles of the credit crises which is still rolling along, caused remember by the free market system and lack of administrative control and opaqueness which it ultimately relies on for its existence giving it excessive success for a limited number of participants, that it requires a constant source of opportunities to multiply monetary resources; fast money has to go somewhere to earn its keep and the machine needs to run at a rapid pace switching from one productive yield area to another. Three elements operate in this game, the perceived strength of the economic standing of a country, the trading requirement and the easy flow of money; all of which are virtual commodities to buy or sell subject to market attitudes. It is the money flow that has the most immediate and damaging effect on a countries long term fortune.
Although the euro is a signal currency it fronts a different level of economic strength for each country and this is its greatest strength if all support it, protecting it from the marauding financial band. Its weakness is the different levels of the practical and actual asset/resource strength of each participating countries. The level of debt to GDP is a problem, example currently: Germany v Greece or any mix of the others. This is a long known problem of GDP vs. nation debt (borrowing to spend) and not having the ability to earn a way out of it, a problem that now has to be tackled by a number of countries caught out and complicit in the hyped to burst economy cycle . Despite this there is no intractable reason why the euro should collapse, the best is it will hold its ground, it may require an average revaluation or potentially an unlikely two tier rate but given what it represents and the strength it offers against the market, I do not see it failing.
The money market has become far too powerful, too unregulated for EU governments to allow the euro to collapse –failure is not an option. The impact, should it occur will be a reversal to the past with countries having to be appealing to the market and play a revolving interest competition and heightened trade war to make their trade and currency buoyant. Failure of the Euro will be such a catastrophic development, the ramification of which will make the CC a mere blip in financial non rectitude. In this case no one country without any new constraint imposed on the market traders will be safe, not even the mighty dollar will be immune, It may be seen as a strong currency initially but its deficit can make it a market target, it will be sold in favour of a more credit worthy one, its value will fall, interest rate will be forced high, imports/exports will yoyo and without corrective action to live within its means, even it could face a default. It simply cannot be in America’s interest to see the euro fail, its (dollar) current dominant position is already under stress it could do with a strong euro to act as a buffer against the changing economic power shifts. Nor is it in any countries interest to continue to allow the market to operate useless currency trading ‘hedging and shorting’ and forcing the market value of currency to dictate their economic strategy. Without doubt all western countries will now have to look hard at their fiscal policies and move towards greater control, high debt is no longer a viable option, it ultimately leads to social penury and potential something far worse.
Now the interesting thing is what will happen to the pound, what will it do? It is now thought to be lucky to stay out of the euro and is not faced with the task of supporting it if an EMF (bank) be required to buttress the euro. However the pound has little intrinsic strength and it will get much worse, there is the option of jacking up interest rates to make it attractive to be in the pound or actually openly devaluing it but at what cost? The market may decide that it is too weak to pay its way in the short term (or longer) and do a run on it. Not having the weight of EU behind it, does leave it open to a great deal of manipulation – hostage to subsequent misfortune. When this happens and it is odds on that it will, is it about to become one of the 'piigs' or will it take a leap into the euro before or after it goes to the IMF next year?
© Renot 2010
1220101600
Recently the Euro has been under some pressure resulting from the exposures of the CC, national debt and raises the question of its strength. In order to answer the question of where the euro sits in relation to the world economy and the idea of its potential failure or ultimate success, one has to look at where the euro came from and why. This need not be a huge discourse but perhaps just looking at the prime factors that led up to its creation may be enough to realise that it is necessary for it to be here to stay; or should it collapse, be seen as the forerunning of a future global currency for what it, or something like it, eventually tries to achieve.
Prior to the 1940’s currencies were dominated by the power of trade, those who had the biggest carrot to control ‘value’ largely dictated terms and was I think an illusory thing often wrapped up in the confidence of being able to meet the cost of acquiring or selling things and translating that confidence into an excess return over the cost of fabrication. Such confidence may always rely on a degree of stability – normal human behaviour likes to have some idea stability, of planning for the future however limited and do not put effort into what they might think is terminal malfunctioning of influencing aspects. Two wars in quick secession strained that confidence of productive trade and the expectation of stability and although the wars generated technical and social shifts the rewards were not equitable or evenly spread as raw resources became more in demand. No reason to go into the whole effect of the 2ww, simple to say that afterwards the ‘modern’ world was in a mess particular the state of combatants. And apart from the destruction afterwards, this created trading uncertainty and loss of confidence in the value of trade.
There was a great danger that progressive instability would create continuing tension that would get worse holding back trade between the major economies. To rebuild, a stabilisation plan was required, formulated in the Bretton Wood agreement. With the Bretton Wood agreement and a sort of new Gold standard, created a ‘benchmark’ against which a stable system of currency valuation and trade could be operated giving rise to the IMF and fixing exchange rates to the price of gold and the US dollar. It worked but was not wholly what was required and had an inbuilt limitation which was created linked to increasing value of gold, this arguable was why countries started to amass gold as an hedge against uncertainty (little change there then from previous centuries).
From this agreement came the ECSC, the EC and Euro. Up to the creation of the Euro from the 60s onwards with the increase in trade, a new growing powerful effect was building up, one of market manipulative trading in and on currencies which became a perception game with players chasing rumours and weakness in a countries currency to make a marginal gain. The gold standard was dropped about 1970 in favour of benching just on the dollar as the currency that could always (?) pay its way. As gold was unstable as its price rose and fell it became obvious that more money could be made playing the market than simply holding gold and was one of the reasons that the UK started selling its gold from the mid 80s, as it had oil revenue and a strong pound; that bonus fell apart in Sept 92 with Black Wednesday and later with Brown selling off a large volume of gold to aid the national debt, shortly afterwards seen as at a bad piece of timing and at a low price.
During the boom year of 70-90s you can recall the antics that were played with a range of currency transaction with flushes of buying and selling on the franc, mark, pound, yen, dollar, etc all bouncing up and down on the whim of the market. The ‘market’ became the place to be with billions of currency being traded in London alone, 90% of which had no useful purpose in trade terms other than to make a margin on an overnight deal. Do I need to mention G Soros as an example?
In effect the world entered into a new form of bartering system this time with the value of things attached to what the money market decided as its value (money) it became a commodity and it was alone backed by the confidence of making more money on a gamble, guess, bet – linked to what a country can afford to pay, looking at ‘credit worthiness’, trade balances – interest rate, PSBR/ GDP, assets (like oil & gas) and rumour. Would value go up or down?
Now there is the unresolved effect of the credit crises and the reason why the euro is under pressure now has nothing to do with the concept of the euro or its adoption by 16 states out of the 27. (Austria, Belgium, Cyprus, France, Finland, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Holland, Portugal, Slovakia, Slovenia and Spain).It is under pressure because it has become in the way of how the market is dealing in currencies and how the free trade operates. It is no surprise that the after the shambles of the credit crises which is still rolling along, caused remember by the free market system and lack of administrative control and opaqueness which it ultimately relies on for its existence giving it excessive success for a limited number of participants, that it requires a constant source of opportunities to multiply monetary resources; fast money has to go somewhere to earn its keep and the machine needs to run at a rapid pace switching from one productive yield area to another. Three elements operate in this game, the perceived strength of the economic standing of a country, the trading requirement and the easy flow of money; all of which are virtual commodities to buy or sell subject to market attitudes. It is the money flow that has the most immediate and damaging effect on a countries long term fortune.
Although the euro is a signal currency it fronts a different level of economic strength for each country and this is its greatest strength if all support it, protecting it from the marauding financial band. Its weakness is the different levels of the practical and actual asset/resource strength of each participating countries. The level of debt to GDP is a problem, example currently: Germany v Greece or any mix of the others. This is a long known problem of GDP vs. nation debt (borrowing to spend) and not having the ability to earn a way out of it, a problem that now has to be tackled by a number of countries caught out and complicit in the hyped to burst economy cycle . Despite this there is no intractable reason why the euro should collapse, the best is it will hold its ground, it may require an average revaluation or potentially an unlikely two tier rate but given what it represents and the strength it offers against the market, I do not see it failing.
The money market has become far too powerful, too unregulated for EU governments to allow the euro to collapse –failure is not an option. The impact, should it occur will be a reversal to the past with countries having to be appealing to the market and play a revolving interest competition and heightened trade war to make their trade and currency buoyant. Failure of the Euro will be such a catastrophic development, the ramification of which will make the CC a mere blip in financial non rectitude. In this case no one country without any new constraint imposed on the market traders will be safe, not even the mighty dollar will be immune, It may be seen as a strong currency initially but its deficit can make it a market target, it will be sold in favour of a more credit worthy one, its value will fall, interest rate will be forced high, imports/exports will yoyo and without corrective action to live within its means, even it could face a default. It simply cannot be in America’s interest to see the euro fail, its (dollar) current dominant position is already under stress it could do with a strong euro to act as a buffer against the changing economic power shifts. Nor is it in any countries interest to continue to allow the market to operate useless currency trading ‘hedging and shorting’ and forcing the market value of currency to dictate their economic strategy. Without doubt all western countries will now have to look hard at their fiscal policies and move towards greater control, high debt is no longer a viable option, it ultimately leads to social penury and potential something far worse.
Now the interesting thing is what will happen to the pound, what will it do? It is now thought to be lucky to stay out of the euro and is not faced with the task of supporting it if an EMF (bank) be required to buttress the euro. However the pound has little intrinsic strength and it will get much worse, there is the option of jacking up interest rates to make it attractive to be in the pound or actually openly devaluing it but at what cost? The market may decide that it is too weak to pay its way in the short term (or longer) and do a run on it. Not having the weight of EU behind it, does leave it open to a great deal of manipulation – hostage to subsequent misfortune. When this happens and it is odds on that it will, is it about to become one of the 'piigs' or will it take a leap into the euro before or after it goes to the IMF next year?
© Renot 2010
1220101600
posted by Renot at 5:52 am
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