Thursday 12 July 2007

The beginning of the end for the Euroe, part one of many

The Dollar/Pound exchange rate is set well above the 2:1 ratio now. A great time for a holiday to the USA where even tourist rates are approaching $2 to the £. This is likely to stay that way for some time. In fact if anything the macroeconomic situation suggests the pound could go to $2.05 or higher. Interest rates in the US are probably staying where they are and ours could be going up; this implies a strengthening pound.

It is a similar story for the Euro too, as shown in the graph below (thanks!):

The Euro, based on Germany's growth and flight from the Dollar, is also strengthening against the Dollar and other major currencies.

An over-valued currency almost always presages the end of a boom and in the same way a weak currency often presages a time of expansion. Anatole Kaletsky put this well in the Times today.

My take on this though is that the major economies of the world are engaged in mercantilist policies as regards their currencies. America's huge external debt means it is happy to devalue this to reduce any internal effects. China is pegging the Yuan to the Dollar to hold up its exports and Japan is still in a nice export growth phase after its very weak period for the Yen.

The result of all this that the countries of Europe are having to put up with currency changes that have no relevance to their economic situation. For us it means that our exports will suffer again and all the associated industries, as well as Tourism. For the Euro area it is much worse, Spain is already in a near-slump and yet its currency is very strong. Italy too is teetering with excessive debt as always; which is now going up in value very quickly. Even France is unhappy at the effects of the high currency on its economy. The Euro was never a single currency area and it seems the economies have not converged with globalisation. So now a single policy across Europe is showing the cracks in the System.

Unless there is a huge macroeconomic change these internal pressures are only going to get worse. A bumpy ride for Europe.

A question for the readership, would the collapse of the Euro be the factor that unwound the wider European 'EU' project?


Jeremy Jacobs said...

"A question for the readership, would the collapse of the Euro be the factor that unwound the wider European 'EU' project"?

Let's hope so.

Anonymous said...

Fingers crossed.

Steven_L said...

I'm gonna read this with the links, and a flick through wikipedia to try and understand what you're saying a bit more, tomorrow when I'm sober.

However, my huch is that Germany will do well over the next 5 - 10 years. If Euro's fall surely German manufacturers have a field day selling nice cars to the yanks?

Old BE said...

You mean like the No votes were the end of the Constitution?

Wolfie said...

In short - No.

Its quite likely that the weaker members will revert to their original currencies. If you read the European press you would know that this is happening in some localities already.

Almost all the economic decisions from Brussels have been bloody stupid, like the ERM for example. This has been confounded by then bending the rules for member states to join the Euro in the first place. An example of putting politics before economics.

The good news is that I think it will force the EU to make some more realistic decisions in future, its reached "middle-age" so its about time it faced some harsh realities.

Death? - be careful what you wish for.

S said...

I imagine the collapse would certainly shelf some of the more ambitious ideas for the EU.

The Euro was always more about political ideology than economic sense.

Anonymous said...

No. There's a deal of ruin in a Union.

CityUnslicker said...

JJ- Can't disagree with that.

Steven-L - Yep, germany is set to do well at the expense of the Club med.

CityUnslicker said...

Ed- er..something like that.

CityUnslicker said...

Wolfie - The currencies you discuss are not real ones, they are more like barter and are not recognised anyway.

I do want the Eu to fail economically for the reasons you state, it keeps making irrational uneconomic choices that are politically motivated.

It needs to fail to show the people that its leader shave been very wrong on the path they have tried to lead us down.

CityUnslicker said...

James - yup, I did my masters thesis on the collapse of the ERM. Political decisions. the oh so clever european leaders think they can buck the markets. The ERM should have taught them otherwise.

At least Gordon Brown seem to remember the lesson, so far.

Crushed said...

Possibly. I think if anyones pulls out, it would be tricky, and Italy could be a likely option, if Berlusconi gets back in.

Newmania said...

I`m with Steven L. I recall you saying you felt sorry for people who didn`t understand economics CU on the baissi they would have no idea why things happened.

Ummmm well I think I got the gist anyway. I can`t see anyhitng derailing the "European Project " now . To many jobs depend on it

pommygranate said...


Watch Italy, Greece and Portugal. Im booking my ring-side seats.

Old BE said...

I read ages ago that interest rates actually vary hugely across the eurozone because lenders are less willing to lend to, say, the Italian government than to the Dutch government. The article I read suggested that if rates diverge too much the whole thing will collapse. Now with France pushing for a further weakening of the Stability Pact isn't the value of the Euro likely to decline?

CityUnslicker said...

CBI - Italy is always thought of as the first one to fall. But Spain is in great difficulty with its housing market and trying to cool domestic demand without a huge recession.

CityUnslicker said...

N - This is where reality hits politico's though. When countries are forced into horrible positions they don't want, even the government's have to give in.

Remember Black Wednesday.

CityUnslicker said...

Pommy - Yup alla re good candidates. Although as I said, Spain is creeping up there nicely.

CityUnslicker said...

Ed - The Euro is rising because of the flight from the dollar and the way in which the Yuan is pegged to the Dollar.

The Euro is also a haven for Oil producing countries who don't want just dollars. The rise is not necuase of a huge turn in the Euro economy, except Germany.

This is why it is so unwelcome for Sarkozy.