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The Euro Lingers on Life Support

The Euro Lingers on Life Support

Monday, 28 December 2015 09:36 AM Current | Bio | Archive

China didn’t start the last trading week of the year very well as the Shanghai Composite Index fell 2.57 percent while the Chinese currency the yuan (CNY) fell to its weakest level against the dollar since 2011 coming in at 6.4844 CNY per USD.

Also the Shanghai B share index, which tracks all B-shares listed on the Shanghai Stock Exchange that are available for foreign investors, tumbled.

No, this doesn’t bode well for China.

Anyway, looking back at this year, one of the most important lessons I’ve learned was during the Greek bailout crisis in July when the German Finance Minister Wolfgang Schäuble made it crystal clear: “The euro is not the money of a monetary union, but it is the money of a fixed exchange rate mechanism with a single currency,” which is of course extremely important for long-term investors who are interested in “euro-linked” investments.

Mr. Schäuble’s view and opinion got full support from the highly respected German Council of Economic Experts that in its July report “Consequences of the Greek Crisis for a more stable euro area” rejected:

  • The creation of a euro area fiscal capacity entity;
  • A European unemployment insurance scheme;
  • An economic government for the currency bloc.

In fact, the Greek bailout crisis did show us the real un-sustainability of the euro area in its present form because it has really become nothing more than a system of irrevocably fixed exchange rates to the euro of all the 19 different euro area member states.

Therefore, the whole euro system makes me think at the most famous of all fixed exchange rate regimes the world has ever known, which was the gold standard and that was a monetary system in which the standard economic unit of account was based on a fixed quantity of gold, but that in the end collapsed under the pressure of deflation in the 1930s.

Investors should never forget that deflation punishes debtors as “real” debt burdens rise, causing borrowers to cut spending in order to service their debts or to default. Lenders become wealthier, but may also choose to save some of their additional wealth and "not to re-invest" and by doing so reduce GDPs.

Yes, at present the euro works, economically speaking, similar to the gold standard. Any country that does not “save” as prescribed by Brussels, will have increasing difficulties to maintain itself into the euro system, as we have seen with Greece and whose problems still remain unresolved.

Maybe not that well known by most investors, but as of today, Italy, which is the third economy of the eurozone has not grown at all since 2000.

A legitimate question for Italy is therefore whether the euro was or still is the correct monetary system for that country. Of course, the same could be said for Greece, Portugal, etc.

I don’t think it’s an overstatement to say the euro is a modern edition of the gold standard.

As it was the case in the 1930s all states that applied the gold standard remained sovereign. Today, all countries inside the euro system have kept their sovereignty.

Moreover, and here comes the danger for the euro as we know it today, sovereignty of all eurozone member states implies they could and probably will leave the single currency system when it has outlived its usefulness.

This doesn’t mean it will happen tomorrow because it could take a long time to happen. Of course, it could also occur suddenly, as it has been the case with the gold standard in the 1930s.

Today we can only say with a high degree of certainty: The life span of the euro, as we know it today, will be limited.

Long-term investors could do well keeping that in mind.

Etienne "Hans" Parisis is a Belgian-born bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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I don’t think it’s an overstatement to say the euro is a modern edition of the gold standard.
economy, investors, china, fed
Monday, 28 December 2015 09:36 AM
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