Tags: sean | hyman | euro | lose | drop

Euro Zone Needs to Lose the Dead Weight to Survive

By    |   Monday, 24 May 2010 01:47 PM

With all of the bad euro news going on out there with Greece and other European countries, I’m starting to get many people questioning whether the euro will survive or if the euro zone and its currency will break up.

For starters, I really doubt in the near term that the euro will be allowed to die.

I think that central banks would team up and support the euro as they did when the euro hit the 82 to 85 cent range last time.

Now, with that said, I do believe that there could eventually be countries that are forced to leave the euro. I really don’t think that Greece will ever get its debt levels down to the EU standards of 3 percent of GDP.

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I also have my doubts about Portugal, Spain and a few others.

So if one or more countries were forced to leave the euro (and there’s a good chance of that over time), then I think that it would initially be bad for the sentiment in the euro, since it would be shedding members rather than maintaining, or increasing, its members.

In the long run, I think that this could actually be a healthy thing for the euro if some of these smaller debt-ridden countries were forced to leave the euro.

It would cut off some of the dead weight that countries like Germany and France have to pick up right now.

It would end up being a lighter and leaner euro, and in the end it would likely be the best thing for the euro — and a better longer term solution.

In the end, I really don’t think that the euro will be able to hold onto all of its members as it stands today.

For one, monetary unions historically don’t work out well.

Secondly, the interest rate environment that is needed to keep Germany running optimally will not typically work well for these smaller countries.

When interest rates have to be hiked to tame the growing inflation in Germany, for instance, it could really kill the smaller economies.

In the long run, this all won’t work like it is now.

They have a single currency but not a single government or taxing authority.

There are too many governments that are involved and you can’t get that many governments to agree on anything in a timely fashion when a real crisis hits, like what they are going through right now.

Think about how hard it was for the U.S. government to get mobile homes down to the Hurricane Katrina victims. Even then, most of the mobile homes made it to their destination. They landed in my home state of Arkansas and were still there the last time I checked.

So we know how incompetent that one government is … but then when you put as many as 12 governments together, you really have some serious chaos going on.

That’s exactly what we’re seeing right now.

So to sum it all up, I think that the euro has more downside to come — if not now, at some point down the road.

Then there will come a point when things could improve for the euro well after the weaker hands are forced out of the market and the stronger few remain.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Money Matrix Insider. Discover more by Clicking Here Now.

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SeanHyman
With all of the bad euro news going on out there with Greece and other European countries, I m starting to get many people questioning whether the euro will survive or if the euro zone and its currency will break up. For starters, I really doubt in the near term that the...
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2010-47-24
Monday, 24 May 2010 01:47 PM
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