Wednesday, May 19, 2010

Can the Euro Be Saved?

Since its introduction back in January 1999 to its near destruction by the Greek debt crisis, is the European common currency of the euro still worth saving?

By: Ringo Bones

From its origins dating back to the late 1960s to its eventual introduction in January 1999 with the help of the US Federal Reserve and the German Bundesbank. The common European currency – called the euro – supposed raison d’être was to provide Eurozone economies with a currency equipped with built-in price stability and hopefully apolitical-flavored neutrality. The euro nearly died back in December 1999 when its value tumbled below that of the US dollar. But the common European currency did wonders to Europe’s capital markets as its value dropped by triggering a mergers-and acquisition boom that allowed the European corporate bond market – then worth 2.3-trillion US dollars – to grow almost threefold.

Despite of its “miraculous” first twelve months of life, euro-skeptics were not so shy in voicing their opinions. Like the now-defunct British pop band called the Spice Girls -whose members can’t even tell a mathematical equation describing a typical credit derivative from one describing the ballistic coefficient of a 155-mm projectile. And who can forget former British P.M. Tony Blair who said during the 1998 EU summit that the UK would not be using the euro before 2002.

Even though I harbor the perception that the German propensity to over-engineer their creations, it seems to have done wonders to the euro’s apparent resilience despite of the current debt crisis affecting Greece that is also threatening other Eurozone economies like Portugal, Spain, Italy and Ireland. And maybe it is no wonder why Germany has exerted the most in trying to save the euro because, historically, it seems like it is their pride-child.

Wim Duisenberg was serving as the first European Central Bank president when the euro was launched back in 1999, and the then Finance Minister of Germany – Oskar Lafontaine – used the euro as a platform to reduce Europe’s unemployment rate at that time. Not to mention Hans Tietmeyer’s announcement back then on the Bundesbank deciding to join an Eurozone wide interest rate cut with a tragic result to many mortgage holders at the start of 1999. Nonetheless, then German Chancellor Gerhard Schröder together with then French President Jacques Chirac’s well-panned rhetoric of using the euro as a platform for economic growth.

Over-engineered supercurrency or not, it seems like the only solution for economic stability in Europe – and the rest of the world for that matter – is probably something like a Bretton Woods version 2.0 overhaul of the global financial system. The euro might survive even if an economic crisis rivaling that of the 2008 global credit crunch occurs with regularity every five years, but I doubt if typical Europeans and other working-class people around the world can survive such economic onslaught.

As of late, EU finance ministers have been meeting to put forth proposals that would save the euro after it plunged to an 18-month low of just below US$ 1.25 back in May 14, 2010. There has been a consensus in favor of more regulation of hedge fund trading on European soil in order to curb risky behavior by fund managers and its current fight against currency speculators that could irreversibly harm the euro. But as usual, UK opposed such a deal primarily because it handles 80% of Europe’s hedge fund market. A stricter regulation on hedge funds could put pension funds at a disadvantage because they are inherently tied down to hedge funds. It seems that in saving the euro, working-class folks are put into a disadvantage yet again – just like back in 1999. Isn’t quantitative easing such a fierce and fickle mistress?


VaneSSa said...

Too bad nobody convinced one of the Spice Girls back then to have the Schrödinger Cat Equation tattooed on her ass - or her mons veneris - so that one of them can feign that she's into quantum mechanics.
Anyway, I too share your view that the euro could be nothing more than a "deutschmark in sheep's clothing". But given the recent pragmatic approach of German financial regulators when it comes to saving the euro - like a crackdown on euro speculation by imposing a temporary ban on naked short-selling does make appear the Germans having a more altruistic outlook. With this action, US treasury bonds and gold had recently become the safe haven investment du jour after the euro plunges to a 6-year low of US$ 1.22 - lowest since April 2006.

Sherry Rashad said...

I'm doubtful whether German Chancellor Angela Merkel's decision to save the European common currency is grounded in fiscal common sense. It is even doubtful if by saving the euro, the present financial problems besetting working-class Greeks will be alleviated. Chancellor Merkel's cabinet's move to save the euro could undermine German pensioners and mortgage holders by causing inflationary pressures.

Ringo said...

Bad news too on the proposed Eurozone wide credit default swap crackdown given that I've only learned to use CDS's as an early warning system to spot runaway sovereign debt amassment back in 2005.
Sometimes I wonder too if German Chancellor Angela Merkel is confusing the euro with some notable German national treasures worth saving - like the collective works of Goethe, Schiller and Nietzsche. But still, I find it hard on my conscience to criticize the Chancellor and her cabinet for trying to save the euro.