Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Sovereign Debt Crisis Could Cripple the Euro During 2010

Currencies / Euro Jan 02, 2010 - 12:35 PM GMT

By: Bryan_Rich

Currencies

Best Financial Markets Analysis ArticleFor the better part of 2009 the U.S. dollar was the world’s most hated currency. But it’s looking increasingly likely the tables could turn in 2010. And the euro could take over that unenviable title.


In recent weeks we’ve seen a surge in scrutiny over sovereign debt. First, it was announced that Dubai would be “restructuring” its debt (i.e. default). And then the focus quickly turned toward the Eurozone’s weakest link — namely Greece.

This type of scrutiny can snowball quickly. Now other weak spots in the Eurozone, such as Spain, Italy, Ireland and Portugal are getting more attention. All of these countries are running massive budget deficits, many have huge debt burdens and all have muted prospects for growth.

That’s a recipe of trouble. Consequently, yields on government bonds in these countries have surged in recent weeks, reflecting the rising uncertainty surrounding their ability to meet debt obligations.

Weak spots could threaten the Eurozone’s stability.
Weak spots could threaten the Eurozone’s stability.

Investors are concerned about a spillover of debt defaults that could escalate into in a sovereign debt crisis. That is, debt defaults that spread throughout emerging market countries, perhaps even the industrialized world.

These problems aren’t new. And they’re occurring in the same European countries that have been vulnerable from the outset of the global financial crisis.

But the attention for much of 2009 has been squarely on the U.S. And because of that, these weak countries have gotten a free pass for quite a while.

Flaws of the Euro …

Countries that have joined the euro currency have unique challenges when economic times are tough. And we’ll likely find that the range of problems within the Eurozone will present a major threat to the euro’s lifespan.

The monetary union in Europe consists of a common currency and a common monetary policy. But fiscal policy is determined by each individual country. And to patrol those fiscal decisions, the European Union established its Growth and Stability Pact that, among other things, sets two criteria for member countries:

1) Deficit spending by its member countries cannot exceed three percent of GDP, and

2) Total government debt cannot exceed 60 percent of GDP.

As you can see in my table below, those limitations have been completely ignored by the countries that are having the biggest financial problems, exposing the structural flaws of the monetary union …

Budget Deficit

In short, the euro member countries are in trouble for all of the reasons Milton Friedman, one of the most influential economists of the 20th century, cited prior to the euro’s inception 10 years ago.

I’ll paraphrase four of Friedman’s statements and follow each with how it’s playing out:

  • A one-size fits all monetary policy doesn’t give the member countries the flexibility needed to stimulate their economies.

The European Central Bank’s mandate is inflation targeting, not growth. A premature exit from easy money policies could drive weaker European countries further into recession.

  • A fractured fiscal policy forced to adhere to rigid EU rules doesn’t enable member governments to navigate their country-specific problems, such as deficit spending and public works projects.
    Milton Friedman offered an insightful look at the flaws of a single currency.
    Milton Friedman offered an insightful look at the flaws of a single currency.

A majority of the sixteen countries in the monetary union have completely disregarded the EU’s Stability and Growth Pact by running excessive deficits.

  • Nationalism will emerge. Healthier countries will not see fit to spend their hard earned money to bail out their less responsible neighbors.

The cornerstone of the euro, Germany, has rejected the notion of big spending to bail-out troubled countries. And German citizens are in a protectionist mode.

  • A common currency can act as handcuffs in perilous times. Exchange rates can be used as a tool to revalue debt and improve competitiveness of one’s economy.

Under the euro, weak member countries are helpless. Italy has a history of competitive devaluations of the lira during sour times. Now, in the euro regime, its economy is left flapping in the wind.

Today, the most challenging issue facing the euro might be addressed in this statement by Friedman:

“Political unity can pave the way for monetary unity. Monetary unity imposed under unfavorable conditions will prove a barrier to the achievement of political unity.”

Milton Friedman saw the vulnerability of this single currency concept coming and predicted the euro’s demise within a decade. While the euro has outlasted that prediction, if a sovereign debt crisis defines 2010, look for the viability of the euro to come under attack again.

Regards,

Bryan

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

JPvB
22 Mar 10, 06:43
Bad fiscal behaviour

So basically you say:

Countries like italy, greece etc. have a history of bad fiscal behaviour and reneging on their commitment through devaluation, thereby punishing any sap having assets denominated in their currency, mostly their own citizens.

Unfortunately this easy avenue of robbery is closed and that is a bad thing? How horrible that countries should behave accountably?

Seems to me that that is a new definition of "Bad"


Post Comment

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