Sorry to link Clive so much in one day, but a) he's brilliant and b) I've got a lot of backed up posts on non-Asian topics from my travels. He writes, about Barry Eichengreen's take on the euro:
Barry Eichengreen has a post on Voxeu about how difficult it would be for a country to make an orderly exit from the euro. (The column draws on a longer NBER working paper.) The strength of the euro is squeezing Europe, and especially Italy, very hard. There is some talk of pulling out of the euro system. If only. Italy would surely benefit if it could. But, as Eichengreen explains, it literally cannot without precipitating a really fearsome financial crisis. . . .A cynic's instinct would be to say that scholarly articles explaining why the euro system cannot break up mark the beginning of the end--but Eichengreen's logic seems impeccable. Italy would surely have been better off if it had never joined the system (an isssue Eichengreen does not go into here), but it is too late for regrets now. The title of the column is the only mistake I can see. "The euro: love it or leave it?" That surely ought to be: "The euro: like it or lump it [no question mark]."
Italy, for those who haven't been following along at home, has been badly squeezed by the euro for several reasons: first, it used to depend on serial devaluation to keep its manufactures competitive in the export market; and second, its economy is not quite in sync with the other two big economies (Germany and France), which means that the central monetary policy does not quite fit with what's happening in the local economy. (Ireland has the same problem, in other direction: its government is laboring mighty hard to keep growth under control).
I'm inclined to be more pessimistic than Messrs Crook and Eichengreen, but this may only be my youth speaking. I look at places like Argentina, which couldn't exit its dollar peg without a horrendous financial crisis, but eventually had to anyway, because the consequences of staying were worse. Italy's government is currently coping with permanent low growth and a creeping budget gap, but any number of nasty surprises could make its position untenable over long years. Moreover, once the first country exits the euro, the credibility of the currency takes a blow, which makes successive exits more likely.
Overall, I'd place the odds on the survival of the euro at about 50%, which makes me definitely a euro-skeptic. Europe is not an optimal currency zone. America isn't either, but we have a lot of things that make it tenable: high labor mobility (so depressed regions depopulate rather than stagnating), high capital mobility, and automatic fiscal stabilizers that transfer federal money, in the form of things like unemployment benefits, to depressed areas. These are no panacea, but they make the dislocations of central monetary policy bearable. Europe, on the other hand, is full of people who stay where they are no matter what the economy does, and the EU government does not, broadly speaking, transfer money by local need. At some point, I find it easy to imagine that the costs of exit could be outweighed by the costs of staying, particularly as euro-enthusiasm wanes.
"full of people who stay where they are no matter what the economy does"
Not from where I'm looking, honey. Also, the current generation of people at the start of their working age have a lot of people who speak at least one foreign language. As ever, the UK lags behind culturally and educationally, but for the moment we're a destination.
"the EU government does not, broadly speaking, transfer money by local need"
On what basis do you say this? It spends huge sums on a variety of "funds" that exist to transfer wealth to the poorer parts of the EU. That it does so ineffectually is a separate matter.
Germany and France have themselves at times been out-of-step with growth and inflation patterns in Europe as a whole. This is not a problem that, averaged over the entire business cycle, hits Itally especially hard.
What does hit Italy hard is that its old serial devaluation method isn't available anymore. But that has an upside: because it enforces fiscal disipline, Italy has been able to borrow at much lower rates than in the past, and its budget is much better balanced than in the past. It is far from clear that "Italy would surely have been better off if it had never joined the system".
M. Tustin: The EU stabilization fund is actually managed rather well, but it is utterly miniscule. EU transfers are, to a good approximation, entirely about farm subsidies.
I don't understand this implied trendline. If the impetus to exit is due to the Euro being too strong, how would a weakening due to a credibility crisis give even more impetus (for the marginal players, esp new eurozone members in the east) to exit?
There is good degree of labour mobility in Europe as a whole. There are a few countries where factors such as unemployment insurance, social support, housing cause people to sit and wait it out. My own observation is that the Irish and the Poles will move to the other side of the world with little provocation. The new Eastern European entrants to the EU have highly mobile work forces. I live in North America at the moment and I do not see higher labour mobility here than in Europe.
The new Eastern European entrants to the EU have highly mobile work forces.
This is an excellent point. Though many richer EU governments consider this a problem, rather than a solution.
Overall, I'd place the odds on the survival of the euro at about 50%, which makes me definitely a euro-skeptic.
I should think that makes one decidely agnostic on the Euro.
I would argue the other way, and that Europeans have worked so long and hard toward creating the currency, that they will do whatever it takes to maintain its stability.
Then too, there is an abundance of capital in the world and nobody really wants to park all that money in dollars; thus it behooves Europe to make sure that the euro's status holds. There was an article this week in the WSJ about Chinese businesses increasingly listing on exchanges there (namely Germany's) and feeling like a tighter connection with Europe will help jumpstart their branding and sales. (A very loose paraphrase of the article).
So while certain internal relationships between the constituent nations might be stretched, I think Europe would modify the conditions of the arrangement before allowing anyone nation to sabotage the whole thing.
I guess I would call myself an optimist on the euro, though I would rather see it fall apart. I think we might be on the verge of some worldwide economic systemic changes that might not benefit the U.S. and that worries me.
Eichengreen has a number of straw man arguments. The physical problems of withdrawal can be handled by retaining the physical size of the euro notes and coins in the new national currency, and keeping it pegged 1:1 to the Euro during the initial period. Using Italy as the likely example, Italy would not re-introduce the lira but create an "italo-euro" initially at the same value. So contracts, accounts, etc. would not have to change; however, purely national transactions entered into pre-withdrawal would be assumed to be in italo-euros unless specifically changed to old euros by mutually agreed amendments.
Of course people holding old euro liquid assets (e.g., Euro-denominated bank accounts in Italy) would seek to keep them in old Euros, Swiss francs, or even dollars -- betting that the dollar has bottomed out by now. But Italians with any real degree of savings always did that. I assume that Italy would remain a free country and people would still have the right to maintain euro, franc, or dollar accounts. And of course this would put downward pressure on the italo-euro -- eventually the Italian authorities would have to go off the peg and let it float free -- but that's the point of withdrawal, after all. It wouldn't be nearly as dramatic as the plunge in the Eastern European currencies after convertability arrived in the early 90s.
And the Italian government could continue to issue old-euro denominated bonds (or franc or dollar-denominated bonds) if it wished to continue to enjoy lower interest rates.
There's a fairly good example of a nation leaving a wider currency area, via the intermediate step of a peg, in such a manner, in Europe, and not too long ago. This was Ireland, which adopted an "Irish pound", or punt, after idependence, but kept it pegged to sterling for a long time afterwards. Eventually they floated it, and it became a successful currency until they went back into a wider currency area (although they have a much smaller percentage of seats in the legislature in the EU than they did in the UK. Go figure.) Maybe they, rather than Italy, will be the first to go out of the Euro. After all, they've done something like that once before.
What is George Soros up to these days? Remeber how stressed currncies were when he attacked the pound?
The old opportunist can't be too far from making a move.
I would imagine that Soros has no interest in a Euro move right now. It isn't out of wack at all, if you look at what a likely path of future rate cuts in the US must be to counteract the subprime crisis. Reflexivity isn't coming into play with this one. If anything, he is long the Euro v the Dollar, not the other way around. He likes to play on situations where the fundementals are so compelling that there is nothing that can be done to prevent the situation from occurring, for example a asset based credit crisis that must result in a long term currency devaluation.
and 50% Euro survival rate? Come on. France, Spain and Germany will not leave the Euro for the next 50 years at least, and there are countries literally begging to be part of the Eurozone. Begging is probably an understatement. Didn't you hear that about the OPEC open microphone blunder, about how they want to start pricing Euros, because they want to be paid in a strong currency? Price oil in Euros, and its not up that much, only about 50% as much as it is in dollars.
The Euro will be here for as long as the US dollar. It has been planned for 50 years and it is going to be here for at least that long.
@mickslam
It seems to me that if you really want to break the backs of world economies then the way to go is to start pricing oil in Euros. That 50% increase would probably be the impetus needed to open up ANWR
(10.4 billion barrels to 30 billion barrels of oil) and jump start Oil-Shale extraction and Coal Liquification projects. Since the US has over 1,000,000,000,000 barrels of gas locked up in coal and a few billion additional barrels of crude of comparable grade to Venezuela's Orinocco fields Oil Shale, you are probably locking at oil in the $30.00 a barrel range again. Think that wont crash some OPEC economies? (Especially Venezuela).
The Chinese are already being squeezed by a growing middle class demanding higher wages and the weak dollar isn't helping their economic status. At some point it becomes more expensive to maintain a dollar peg than to allow the currency to appreciate. They could switch the peg to Euro's but that would just hurt European manufacturing jobs even more.
Not a good case for a strong Euro at least in my non-economist opinion.
David Wright: It depends what you mean by well-managed. There may be little to no pilferage, but there are a lot of projects funded by a variety of funds that make no sense, such as the highways that are built in Spain, along which no-one drives.
That the CAP has some regional transfer aspects is true, but as I'm sure everyone has spotted, it funds wasted labour.
This is largely a case of the 'grass being greener'.
Two factors play out in currency exchange:
A)the psychological
B)the actual production of currency
For case B) the monetary policices of the euro and the usd are completely different. The euro is on a strict monetary policy, versus the US, which uses monetary supply to control inflation(domestically). The value of America is not decreasing, the amount of dollars in supply is increasing, relative to the Euro.
For case A)the belief that the euro is a stronger currency, based upon the idea that it is better off than a month ago has its limits. European growth is not something to bank upon, and the european market growth is consistently lower than the US. Introduce a chance to make better returns, and european investors will flood the currency market, hoping that the wave keeps rising.
Without any regard for inflation in europe, the euro is undergoing global inflation worldwide. A point will occur where the US will seek out non-european suppliers, european money will flood the us to take advantage of the exchange rates, and us travel to europe will decline markedly.
for europe-manufacturing will dry up, currency will be invested outside the eu zone(with the exception of eastern europe), tourism(their number one 'import') will fall, and people holding the euro will panick. The panick will strike when the dollar reaches its low, and then begins to climb back, like a dotcom bubble bursting, but instead of multiple companies, it will be based on the failure of one thing-the euro.
So long as us (domestic)inflation remains tame, the exchange rate means very little.
The europeans are the ones who are beginning to panick.
"Will Europe impose exchange controls to head off disaster?" by Ambrose Evans-Pritchard on 23 Nov 2007:
The die is now cast. As the euro brushes $1.50 against the dollar, it is already too late to stop the eurozone hurtling into a full-fledged economic and political crisis. We now have to start asking whether the EU itself will survive in its current form. ...
As Airbus chief Thomas Enders warned in a speech to the Hamburg workers last night, Europe's champion plane-maker - the symbol of European unification, in the words or ex-French president Jacques Chirac -- is now facing a "life-threatening" crisis. Mr Enders said the company's business model is "no longer viable", and "massive losses" are on the horizon. ...
The sudden rocketing in sovereign bond spreads this week between core German Bunds and Club Med debt - Italian, French, Spanish, Portuguese, Greek, as well as Irish, Belgian and Slovenian - is a clear sign that markets are starting to price in a break-up risk for the single currency, however remote. Italian spreads have risen beyond the danger point of 40 basis points. This is less than the 100bp or so seen in Quebec (viz Ontario debt) when it looked as if the separatists might prevail. ...
One thing is sure, President Nicolas Sarkozy will not let Airbus go bankrupt, nor see decimation of the French industrial core, without an almighty fight against those countries deemed to be engaging in a beggar-thy-neighbor strategy of currency devaluation - benign neglect in Washington, less benign in Beijing.
He will have allies soon enough, once the housing bubbles collapse in Spain and across the Med. Mr Zapatero will not be in power for long in Madrid. Mr Prodi is on borrowed time in Rome. A new political order will soon take hold in much of Europe, bringing in a new wave of prickly national populists. So, how will they fight? Will Mr Sarkozy and his allies resort to 1970s-style exchange controls to stem the rise of the euro?
They certainly have the power to do so. ... "Should extremely disturbing capital movements endanger the operation of economic and monetary union, Article 59 EC provides for the possibility to adopt restrictive measures for a period not exceeding six months," ... It would be renewable each six months, so the policy would in fact become permanent.
Any decision would be taken by EU finance ministers under qualified majority voting. Britain would have no veto, even though the effects of such a move on the City of London would be catastrophic - and trigger the certain withdrawal of Britain from the EU (and good riddance, some might say in Paris).
This "disturbing" capital movement is occurring right now. Portfolio inflows into the eurozone reached a record EUR46.2bn in September. ... Confidence has cratered in Germany, and the Netherlands, not to mention Belgium - which has not had a government for 165 days, and is now sliding towards disintegration. Since Belgium is a metaphor for the EU - an arranged marriage of squabbling tribes, speaking different languages, who do not love each other, and never did - this in itself amounts to a tremor for the EU system. EU industrial orders fell 1.6% in September. Spanish, French, South Italian, and Irish house prices are already all falling. ...
Is this a currency bloc that should be now be deemed the ultimate safe-haven, the repository of trust in a dangerous economic world? This hodge-podge of disputatious clans, lacking a central Treasury, government, debt union, and guiding philosophy - let alone the sacred solidarity of a nation? ...