BEGGAR THY NEIGHBOUR
2 September 2010 by Cullen Roche
11 Comments
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Comments
TPC, Niels appears to think the Euro can, and is worthy of, being saved. I believe you have written that the sooner the EU realizes it has been an failed experiment the better. Any thoughts?
I have said for the last year that the best way to save the Euro is for Germany to leave and re-establish the Mark. That way the remaining EMU countries can competitively devalue the Euro to par with the Dollar or maybe even lower. No tourism is killing Europe, and Germany can still be part of the Eurozone without being part of the EMU. It’s the best for all involved IMO.
Why would they though? They’d be taking a substantial risk – that their economic growth suffers while the rest of Europe strengthens. The current set-up is actually great for Germany so it’s hard to imagine them agreeing to do that (although I agree with you that it would solve a lot of problems).
If Germany reestablishes the Mark it will go through the roof. They’ll have to deal with awful demographics and an overvalued currency at the same time. When the Euro is overvalued at least Germany is still in the same boat as the surrounding Euro nations. If they’ve reestablished the Mark they’ll be overvalued against everyone. This would certainly help address the global imbalances by killing the German trade surplus, but why would the Germans voluntarily put themselves through it? Then they’ll get the pleasure of dealing with the same headaches that are keeping Swiss and Japanese CBs up all night trying to devise new ways to shout scary warnings at naughty FX traders. Germany can shout dire warnings about Europe all they want, but they’re the greatest beneficiary of the current environment.
Yes. They just won’t do it….
Agreed, and as the Euro falls German surpluses will abound, unemployment will remain low, and the governments tax coffers will keep filling…
SD – My argument all along is basically this: the Euro should be at least partially dissolved to remove the extremely weak trade deficit nations. However, this is unlikely because there is so much political will invested in the Euro that they will do anything they can to make it succeed. Unfortunately, I think they will do just that and the Euro will survive in some form similar to what it currently is. This will slowly eat at the region and at some point force real change. Either full unity, debt restructurings or dissolution (likely partial). At some point the Euro will break them. It will give them two choices really – full unity or partial/full dissolution. If they unify they become the United States of Europe. Not likely in my opinion.
Hey TPC a question,
He mentions the US as one of the players in the global current account balance. How does a current account balance affect the US as adversely as EU countries when we’re in a different monetary system?
There’s a lot of moving parts here and people largely disagree on this, but I don’t really view the trade deficit as a huge negative like a lot of people do. In a nutshell, domestic savings is too low compared to domestic investment. So we import savings from abroad. There are many reasons for this (exchange rates, taxes, etc). But at the end of the day we are sending the Chinese pieces of paper in exchange for real goods. It’s a good trade if you ask me.
The problem in Europe is that the countries have a single currency system so the trade deficit nations are forced to beggary thy neighbor to make up for the shortfall. See here for more: http://pragcap.com/why-the-euro-is-doomed
We don’t have that same problem because we are a sovereign issuer of our currency. It would be great to see the govt change our focus to ignite domestic savings and investment. Lower tax rates would be one good way to do this, but everyone is overly concerned with the idea that we are bankrupt and that we need China to fund our deficits – sheer nonsense if you ask me.
“But at the end of the day we are sending the Chinese pieces of paper in exchange for real goods. It’s a good trade if you ask me.”
Another view is that we are giving them future claims on real U.S. assets in exchange for non-durable consumables (i.e. cheap crap) Not a good long-term financing mechanism, if you ask me. You are selling your balance sheet to buy hedonic improvements.
Now, if you think those future claims will be denied (devaluation of the dollar through U.S. inflation or yuan strengthening, protectionism, or default) then perhaps it is a good trade, but at what long-term expense?
The discussion in the US about a euro break apart is neglecting a realistic perspective and reminds me more of Glenn Becks TV Shows than pragmatic capitalism.
1. If for any Eurozone Member the euro is stronger than the prior local currency -what incentive would there be to give up the euro? Has anyone ever bothered to look at the data -even at its best times, the DM was worth less than 0,74 USD.
Several Polls show 54% of Greece Population support the lawnmower strategy on spending. Anybody every consider how much people have profited from the Euros spending power? All other currency’s were worth less than the DM. So the big questioning of the Euro by any European state is unprobable before the euro crashes BELOW such levels. This would be somwhere around 1USD = 0,70 Euro. And that would still represent the best times before the Euro for each national currency. How likely is that drop givven it would put export thrusters outside the EU on full which they already are by only a 25 % drop?
2. Another falls perspective from the US is that Europe is a divided economy. It is devided politicaly, the EU within the Eurozone is as complete as it gets with a common market, common job market, common currency, common regulation and increasingly common taxation like sales tax. And the political unity for the currency is there to. As long as the EU Superstate doesnt mix up private economy to much like in china the market will function as any market. Europe isnt in trouble as long it has a trade surplus to non EU countries. Saying so is like saying its a big Problem that North Dakota has a Deficit with California.
So what. The North Dakotans get real value in exchange for there bucks just as Greece gets real values in exchange for there euros. Macro economics doesnt put the goods and services on the balance sheet like a company would do. Thats not looking at the big picture.
3. A simple question for perspective -why would someone give up a currency that is stronger than the dollar? Wouldnt that imply that the US should be thinking about giving up the Dollar?
The realism on EUR Crash is very low. In my opinion the worst case scenario would be a shredding of the Greece and maybe Portugal or Irland Branches. Your not even at 10 % of the EU GDP then, even that wouldnt threaten anything -on contrary it would fix alot.
So the Euro is “doomed” for success no matter how you turn it. I wouldnt put my money on its downfall.