Remember a few years back when the chatter was all about the euro usurping the dollar as the world’s reserve currency?
Countries like Iran wanted to re-price commodities – especially oil – in euros.
Athletes wanted their contracts paid in euros.
Well, fast-forward to today and the talk is now of a possible collapse in the euro as a currency.
Rumors that Germany – the biggest country in the eurozone – is leaving the Union are rampant.
Some members are privately calling for a split, where the weaker players like Greece, Portugal, Spain, Ireland and Italy form one bloc and the rest form another.
There’s even speculation that the Greeks will be the first ones kicked out of the Union before it has even reached adolescence.
Allow me to set the record straight…
Is the Euro Doomed?
For starters, the euro will never be the world’s reserve currency. It may not even exist in its current form a decade from now.
While the euro’s total extinction is unlikely, the idea remains in the realm of possibility, as the stronger euro nations face nothing but dilution and taxation to cover the losses of the weaker countries.
The problem here is a lack of cultural unity.
Unlike the United States, the European Union has little in the way of binding ties besides a common currency and a trading union.
Cultural differences between countries are miles apart.
Views on taxation, retirement, work ethic and entitlement could not be more different among member countries.
This is a monetary union… a trade union… but it’s not a Federal Union.
With that in mind, one solution would be to create a “United States of Europe.” But don’t expect that to ever happen…
Europeans are just as likely to give up their sovereignty as Americans are to give up football, which puts the Union in a precarious position.
You see, the stronger countries – and there are only a few of those left – will be forced to rescue the poorer countries.
The aid will come through a series of measures, ranging from debt guarantees to the actual physical purchase of the poorer nations’ sovereign debt.
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The latter will likely be done through the issuance and sale of a “Euro Bond” to investors.
How’s the bond work?
It’s simple, really… Countries like Germany and France, The Netherlands, Austria, Belgium and Finland will back the bond using their better credit ratings, and loan that money to the weaker nations.
The key here is the capacity to hold “toxic” Sovereign Debt for a long period of time, and at a rate low enough that the weaker nations can afford to pay the debt back without defaulting.
In effect, it’s a “TARP” for Europe – except it’s for countries, not banks.
But since it would mean printing more euros or raising taxes, the plan is seeing some stiff resistance.
Bailing out fiscally irresponsible countries is something that voters in countries like Germany absolutely loathe to do from a cultural perspective. Nonetheless, expect it to happen.
What’s the Final Word?
Indeed, the euro is doomed as a currency, but it’s not going to go to zero. There’s too much at stake… and even the Germans, who regret that fateful day when the deutsche mark died, have no choice but to play along.
For now, the euro is still worth something.
Last week, the Swiss Central Bank imposed a ceiling on the Swiss franc for the first time in three decades at $1.20 Swiss francs per euro. And the Norwegians are getting close to setting their own ceiling.
However, in order to maintain these caps, countries with stalwart balance sheets have to actually buy euros and sell their own stronger currencies.
Understand that Norway and Switzerland aren’t making such moves out of benevolence to the euro nations, but rather, for self-preservation.
As the euro depreciates, their currencies appreciate, causing economic hardship as their exports are priced out of the market.
Bottom line, the euro’s long-term trajectory is down… but for now, it’s worth at least $1.20CHF (Swiss franc).
Ahead of the tape,