Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 24
THE GLOBAL WARMING CLIMATE CHANGE MEGA-TREND IS THE INFLATION MEGA-TREND! - 3rd May 24
Banxe Reviews: Revolutionising Financial Transactions with Innovative Solutions - 3rd May 24
MRNA - The beginning of the end of cancer? - 3rd May 24
The Future of Gaming: What's Coming Next? - 3rd May 24
What is A Split Capital Investment Trust? - 3rd May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Eurozone Faces Meltdown Under Sovereign Debt Crisis 2010

Economics / Euro-Zone Jan 12, 2010 - 02:01 AM GMT

By: John_Browne

Economics

Best Financial Markets Analysis ArticleAs fears of a dollar meltdown have loomed ever larger in recent years, major investors, including central banks, have moved significant portions of their cash reserves into the euro, the currency of the European Union (EU). And while it is true that the euro offers some shelter from the American economic catastrophe, the currency does come with baggage that investors should not ignore.


Introduced as an accounting medium in 1990, the euro became an actual currency in 1992. It is currently issued by 16 of the 27 EU member countries, representing some 329 million people. With almost $1 trillion in circulation, it is the world's largest physical currency.

The birth of the euro was a stunning example of putting the cart before the horse. When it was first issued as a physical currency in 1999, the major states that participated were not yet united. Many believe that this premature introduction was done to hasten the political union. In hindsight, the strategy was successful. The single currency removed a key psychological barrier towards unification.

As soon as it made its debut, the euro quickly became the second largest currency held in the official foreign reserves of central banks. Major corporations and investors followed suit. By September 2007, former Fed chairman Alan Greenspan said it would be "absolutely conceivable that the euro will replace the dollar as the dominant foreign reserve currency, or will be traded as an equally important reserve currency."

However, the structural problems that were so heavily debated at the birth of the EU remain unresolved. These uncertainties may undermine the euro as a viable dollar-alternative. Should recent economic strains continue unchecked, investors, institutions, and central banks may move heavily into gold as an ultimate "safe haven."

In the U.S., monetary union depends upon political union. When California faces a crushing debt burden, it can neither print its own highly inflationary currency to ease the pressure (though its "IOU's" are a haphazard attempt) nor leave the union to avoid this constraint. Thus, crises in U.S. states tend to push states toward the central government as they seek assistance from Uncle Sam. EU member states similarly lack their own printing presses and are therefore unable to monetize their problems. But in Europe, the emergency exit is always open - states can leave if they believe their interests are not being considered.

The EU does not have a common fiscal policy, so countries are free to bankrupt themselves according to their own decree. But when they do, there is no formal option of seeking a bailout from the pan-European government. Even if such a road were available under the EU treaties, the European Central Bank, modeled on the famously inflation-wary German Bundesbank, would be unwilling to monetize the additional spending.

Partially because of this stringent monetary policy, the euro has risen by some 40 percent against the dollar since its launch. This has severely hurt eurozone export economies like Spain, Portugal and Italy, who have long relied on currency devaluation to subsidize their manufacturers.

While countries like Germany, the world's largest exporter, have been successful in utilizing the benefits of a strong currency to continue selling products at a real profit, others have failed. Indeed, both Italy and Greece now have government debts in excess of GDP (115% and 113%, respectively). Furthermore, Greece, with a budget deficit of some 12.7 percent of GDP, is now threatened with default.

Although the EU, by and large, currently spurns talk of a bailout for Greece, the debate will intensify if the economy deteriorates further. If, in order to preserve union, the EU does decide to bail out an individual member state, what precedent would that set?

Germany, the strongest EU economy, found it a Herculean task to bail out just 17 million people in the former East Germany. Could it even contemplate bailing out not one, but several other EU member states, without attendant political control?

There seems little room to move forward under the status quo. Though the Lisbon Treaty (read: EU constitution) just came into effect, it was passed without the mandate of citizen referenda. The member states remain culturally distinct, the citizens have little allegiance to the behemoth in Brussels, and, therefore, it seems far-fetched that the EU would go to war to compel one of its members to remain in the club. With little to glue it together, investors are questioning whether the eurozone is strong enough to withstand the shocks that would accompany a dollar collapse.

As the credibility of the U.S. dollar has eroded and that of the euro is now suspect, it is likely that investors will continue their quiet rush into gold. If so, silver is likely to become a store of value for smaller investors and the small change of the rich. In such a world, the price of silver could rise even faster than that of gold.

For a more in-depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar, read Peter Schiff's 2008 bestseller "The Little Book of Bull Moves in Bear Markets" and his newest release "Crash Proof 2.0: How to Profit from the Economic Collapse." Click here to learn more.

By John Browne
Euro Pacific Capital
http://www.europac.net/

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc.  Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with."  A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

John_Browne Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in