Chill Wind Blows Through Europe...
May 20, 2010 10:23 PM Subscribe
So is the Euro currency about to collapse?
This article seems to think it's a distinct possibility. What does a collapse of that currency actually mean? Timeline some possible scenarios if it all began to unravel tomorrow, presumably with a massive flight from the Euro. What if anything, will avert this?
This article seems to think it's a distinct possibility. What does a collapse of that currency actually mean? Timeline some possible scenarios if it all began to unravel tomorrow, presumably with a massive flight from the Euro. What if anything, will avert this?
I'm betting no.
Heres one argument thats not getting much play, yet. The latest round of trauma from europe is based on the austerity measures the ECB is requiring in order to make the $1trillion loan package available to member countries.
Short term, this is a GDP hit, but what are the implications longer term? If in fact we see a Europe in say 2012 with a much smaller public sector, lower deficits, and coming out of a recession it will be a beast of an economy. And on an fx level, where everything is "relative to someone else", how does this compare "relative to the US" where there are no strings attached to the drunken sailor bailouts?
Germans are pissed, and rightly so, but I dont think the euro dies.
posted by H. Roark at 10:34 PM on May 20, 2010
Heres one argument thats not getting much play, yet. The latest round of trauma from europe is based on the austerity measures the ECB is requiring in order to make the $1trillion loan package available to member countries.
Short term, this is a GDP hit, but what are the implications longer term? If in fact we see a Europe in say 2012 with a much smaller public sector, lower deficits, and coming out of a recession it will be a beast of an economy. And on an fx level, where everything is "relative to someone else", how does this compare "relative to the US" where there are no strings attached to the drunken sailor bailouts?
Germans are pissed, and rightly so, but I dont think the euro dies.
posted by H. Roark at 10:34 PM on May 20, 2010
A collapse in a currency usually involves a collapse in the value as has happened in Zimbabwe, Argentina and other places. In the case of the Euro it's possible that Greece and some of the other PIGS could leave.
It's unlikely to happen in the case of the Euro. The Eurozone is the world's second largest economic area. The trade balance of the zone is overall positive.
What will probably avert this is things calming down. The press in general runs on the principle of 'get the facts, simplify and exaggerate' and the Telegraph, or Torygraph, loves going on about the imminent break up of the EU or the Euro.
The 750 Billion Bazookooka and the fundamentals of the very, very large developed economy block will hold. The US didn't collapse after the economic management of Bush and the GFC. Eurozone will come through in the end too. Greece is in trouble, but Greece is only 10 million of the 328 million people in the Euro block.
However if Spain or Italy crack all bets are off.
Read The Economist and FT for a better assessment of the situation in particular read the excellent Charlemagne blog.
posted by sien at 10:35 PM on May 20, 2010
It's unlikely to happen in the case of the Euro. The Eurozone is the world's second largest economic area. The trade balance of the zone is overall positive.
What will probably avert this is things calming down. The press in general runs on the principle of 'get the facts, simplify and exaggerate' and the Telegraph, or Torygraph, loves going on about the imminent break up of the EU or the Euro.
The 750 Billion Bazookooka and the fundamentals of the very, very large developed economy block will hold. The US didn't collapse after the economic management of Bush and the GFC. Eurozone will come through in the end too. Greece is in trouble, but Greece is only 10 million of the 328 million people in the Euro block.
However if Spain or Italy crack all bets are off.
Read The Economist and FT for a better assessment of the situation in particular read the excellent Charlemagne blog.
posted by sien at 10:35 PM on May 20, 2010
I don't think the Euro is going to collapse. But it's not impossible that it may fracture, as individual nations eschew it and return to having their own national currencies.
posted by Chocolate Pickle at 11:07 PM on May 20, 2010
posted by Chocolate Pickle at 11:07 PM on May 20, 2010
The Euro won't collapse.
What may happen is one or more of the weaker PIIGS will be ejected.
I made this argument in an FPP last January when we started to see signs of systemic stresses intensifying, and the ECB suddenly begain exploring the previously unthinkable - how nations would leave the Euro.
Lots of chatter isn't making it out of the German into the English press, but the mood there is very, very grim and the electorate is demanding strong, demonstrative action. My Bloomberg terminal is buzzing with all sorts of rumour and market noise that we're gonna see some strong moves (i.e., tossing one or more weaker players) sooner rather than later.
At the same time we're hearing that Greece is "reconsidering" their membership / participation in The Euro.
As I argued in the FPP, if a nation does indeed leave, it may not be clear for a while whether they were pushed or jumped. Either way, if one or more of the PIIGS do leave stresses will start to recede. H. Roark's view upthread is spot-on and watch out America, as the United States can hardly eject their own "PIIGS" (e.g., California).
Finally, Greece is just a distraction; I wrote a research paper in March titled "The Eurzone crisis: all eyes on Greece but what about Spain?". By many measures Spain's problems are much more serious and potentially longer lasting. The difference is the Spanish aren't in the streets demonstrating, so folks who don't look for these things (potential market problems / opportunities) aren't aware of them.
Greece is the sideshow. Watch out for Spain.
posted by Mutant at 11:28 PM on May 20, 2010 [6 favorites]
What may happen is one or more of the weaker PIIGS will be ejected.
I made this argument in an FPP last January when we started to see signs of systemic stresses intensifying, and the ECB suddenly begain exploring the previously unthinkable - how nations would leave the Euro.
Lots of chatter isn't making it out of the German into the English press, but the mood there is very, very grim and the electorate is demanding strong, demonstrative action. My Bloomberg terminal is buzzing with all sorts of rumour and market noise that we're gonna see some strong moves (i.e., tossing one or more weaker players) sooner rather than later.
At the same time we're hearing that Greece is "reconsidering" their membership / participation in The Euro.
As I argued in the FPP, if a nation does indeed leave, it may not be clear for a while whether they were pushed or jumped. Either way, if one or more of the PIIGS do leave stresses will start to recede. H. Roark's view upthread is spot-on and watch out America, as the United States can hardly eject their own "PIIGS" (e.g., California).
Finally, Greece is just a distraction; I wrote a research paper in March titled "The Eurzone crisis: all eyes on Greece but what about Spain?". By many measures Spain's problems are much more serious and potentially longer lasting. The difference is the Spanish aren't in the streets demonstrating, so folks who don't look for these things (potential market problems / opportunities) aren't aware of them.
Greece is the sideshow. Watch out for Spain.
posted by Mutant at 11:28 PM on May 20, 2010 [6 favorites]
the situation as it stands is unworkable. france, for instance is damned either way. if greece stays in, france is on the hook for hundreds of billions of euros (which they will have to borrow on the bond market) in terms of fresh loans to greece, italy, portugal and spain, with others in the wings.
if greece leaves, then france's banks have a 600 billion euro (gotta check this number) hole, rendering them immediately insolvent.
the population of france (and germany) is not going to approve of funding pensions and retirement for the piigs.
my bet is germany leaves first. they benefit most, will have a strong currency.
and, exciting times, we get news today, germany is voting on the bailout package.
it would be nice if there was american outrage at our $9billion tossed into the greek bailout ring.
posted by kimyo at 12:22 AM on May 21, 2010
if greece leaves, then france's banks have a 600 billion euro (gotta check this number) hole, rendering them immediately insolvent.
the population of france (and germany) is not going to approve of funding pensions and retirement for the piigs.
my bet is germany leaves first. they benefit most, will have a strong currency.
and, exciting times, we get news today, germany is voting on the bailout package.
it would be nice if there was american outrage at our $9billion tossed into the greek bailout ring.
posted by kimyo at 12:22 AM on May 21, 2010
kimyo, you are assuming german wants a strong currency -- but the race is to the bottom when it comes to fx rates
posted by 3mendo at 1:23 AM on May 21, 2010
posted by 3mendo at 1:23 AM on May 21, 2010
There's a lot of silliness written about this, especially by Brits. The Telegraph has been babbling about the imminent collapse of the EU for years, which is funny considering the sorry state of Britain.
Kimyo, you say you'd bet on Germany leaving first. So, wanna bet? There's just no way this would happen. Mutant's perspective is much better informed.
posted by dhoe at 1:32 AM on May 21, 2010
Kimyo, you say you'd bet on Germany leaving first. So, wanna bet? There's just no way this would happen. Mutant's perspective is much better informed.
posted by dhoe at 1:32 AM on May 21, 2010
Mutant, can you give us a shortlist of reasons from your article stating why Spain's situation is worse than Greece's? I mean, I am Spanish, and my outlook is quite bad as it is, but I am not an economist, or able to reason objectively about the mess we've gotten ourselves in.
To tell the truth, in the mailing list where my friends and I congregate we have basically used up all our WE ARE ALL GOING TO DIE!, and we could use new grist for the AAAAARGH mill.
posted by kandinski at 3:08 AM on May 21, 2010
To tell the truth, in the mailing list where my friends and I congregate we have basically used up all our WE ARE ALL GOING TO DIE!, and we could use new grist for the AAAAARGH mill.
posted by kandinski at 3:08 AM on May 21, 2010
Reasonable people can disagree about this stuff, but if you're getting your analysis of European macroeconomics from a two paragraph editorial in the Telegraph then you should remind yourself that they have a dog in this race.
p.s. It is literally inconceivable that Germany would leave the Euro.
posted by caek at 3:13 AM on May 21, 2010
p.s. It is literally inconceivable that Germany would leave the Euro.
posted by caek at 3:13 AM on May 21, 2010
If the Euro sticks around, there is going to have to be some kind of profit-sharing in place to enable Europe to stick under one central bank. This is happening in an ad hoc way via bailout today. The reasons behind this statement are:
1) Massive trade imbalance within Europe due, at least in part, to the Euro.
2) Unreasonable ability for member nations to borrow based on the low interest rate associated with the currency.
1:
Germany benefits significantly from the Euro since it artificially makes it cheaper for them to export to other, less efficient member countries. Germany has a RIDICULOUS trade surplus ($1.2 trillion...about the same as f'ing China, and only with 80 million citizens), and a big part of that is due to the Euro.
Take Greece as an example. They import a significant portion of their GDP. Under normal circumstance, what would happen is that their currency would devalue against exporting nations, such as Germany's. This would make German goods more expensive in Greece, and Greek goods more expensive in Germany, helping to bring the trade imbalance into a more sustainable state. Since this doesn't happen today, Germany can continue to export relatively cheap goods all day long.
2:
The other thing that the Euro does that's systemic is enable member countries with weaker economies to get more favorable loans than they would otherwise be able to get since the specific risk of currency devaluation doesn't really come into play. You can lose money when buying national bonds in a number of ways, but this is one of the big ones. Even with a big return rate, if the currency loses against the dollar you can lose money.
Again, take Greece as an example. With a national debt of 112% of GDP and low economic growth, people should only consider lending them money if the terms are very favorable (such as high interest, short term loans). Under normal circumstances, this would make it difficult for Greece to continue its spending spree, and even to manage its existing debt since it would have to roll more favorable debt into less favorable debt over time. However, since they are borrowing in the Euro, they are able to get unnaturally favorable terms, since at least one of the *major* risks associated with the loans (currency-related loss of value) is removed from the system. I still wouldn't lend to Greece (they have, over the course of history, a tendency to default on fiscal obligations), but it's much better than if they were on their own.
Together this means that member nations with relatively inefficient economies can keep importing and borrowing until they need bailouts. So Germany, the Netherlands, and a couple other countries rake in money for years, then have to bail out their customers to keep the game alive.
posted by kryptonik at 6:14 AM on May 21, 2010
1) Massive trade imbalance within Europe due, at least in part, to the Euro.
2) Unreasonable ability for member nations to borrow based on the low interest rate associated with the currency.
1:
Germany benefits significantly from the Euro since it artificially makes it cheaper for them to export to other, less efficient member countries. Germany has a RIDICULOUS trade surplus ($1.2 trillion...about the same as f'ing China, and only with 80 million citizens), and a big part of that is due to the Euro.
Take Greece as an example. They import a significant portion of their GDP. Under normal circumstance, what would happen is that their currency would devalue against exporting nations, such as Germany's. This would make German goods more expensive in Greece, and Greek goods more expensive in Germany, helping to bring the trade imbalance into a more sustainable state. Since this doesn't happen today, Germany can continue to export relatively cheap goods all day long.
2:
The other thing that the Euro does that's systemic is enable member countries with weaker economies to get more favorable loans than they would otherwise be able to get since the specific risk of currency devaluation doesn't really come into play. You can lose money when buying national bonds in a number of ways, but this is one of the big ones. Even with a big return rate, if the currency loses against the dollar you can lose money.
Again, take Greece as an example. With a national debt of 112% of GDP and low economic growth, people should only consider lending them money if the terms are very favorable (such as high interest, short term loans). Under normal circumstances, this would make it difficult for Greece to continue its spending spree, and even to manage its existing debt since it would have to roll more favorable debt into less favorable debt over time. However, since they are borrowing in the Euro, they are able to get unnaturally favorable terms, since at least one of the *major* risks associated with the loans (currency-related loss of value) is removed from the system. I still wouldn't lend to Greece (they have, over the course of history, a tendency to default on fiscal obligations), but it's much better than if they were on their own.
Together this means that member nations with relatively inefficient economies can keep importing and borrowing until they need bailouts. So Germany, the Netherlands, and a couple other countries rake in money for years, then have to bail out their customers to keep the game alive.
posted by kryptonik at 6:14 AM on May 21, 2010
can you give us a shortlist of reasons from your article stating why Spain's situation is worse than Greece's?
Spain's debt load is larger in absolute terms than Greece's and it has an economy that is not growing much, if at all. It also faces a demographic time bomb similar to other southern European countries, in that not enough new babies are being born to replace the elderly. So all of the benefits its government provides will have to be paid for by fewer and fewer tax payers.
Plus, other countries won't be as willing to bail out yet another country, since they just did so for Greece.
posted by dfriedman at 7:13 AM on May 21, 2010
Spain's debt load is larger in absolute terms than Greece's and it has an economy that is not growing much, if at all. It also faces a demographic time bomb similar to other southern European countries, in that not enough new babies are being born to replace the elderly. So all of the benefits its government provides will have to be paid for by fewer and fewer tax payers.
Plus, other countries won't be as willing to bail out yet another country, since they just did so for Greece.
posted by dfriedman at 7:13 AM on May 21, 2010
kandinski the paper I referenced was Private Client Market commentary, can't reveal the position we took in our conclusion (i.e., better or worse than Greece) but the purpose of these papers is to suggest alternative ideas / market positions. Lots of attention back then on Greece, good trading positions still possible on Spain.
A few bullet points excerpted (original paper was about thirty pages with graphs inline and underling data in tabular form appendicised) :
Also kryptonik & dfriedman raise some excellent points.
posted by Mutant at 8:38 AM on May 21, 2010 [1 favorite]
A few bullet points excerpted (original paper was about thirty pages with graphs inline and underling data in tabular form appendicised) :
- Official unemployment rate approaching 20% - we est to break 20% by Q2 2010 and topping 25% by Q3 2010
- Unofficial unemployment rate > 50% in some regions / demographic groups
- We call between 5% to 10% of this unemployment structural and persistent - est burden to forward looking GDP of XX% is not unreasonable
- Growth in unemployment steady and uniform - no signs of abating
- Total debt / GDP > 300%
- Private sector debt > 200% of GDP
- Between 50% to 60% of private debt owned by foreign investors - will they hold to maturity?
- Spanish 10Y / Bund spread sharply widened over past six weeks
- Germany / France / UK financial institutions top exposure tables to Spanish debt - this could easily spread / impact healthier core euro nations
- Technical defaults can ripple as well, but this time inward ("canary in the coal mine"); opps are obvious but must move quickly
- Spanish economy has overreliance upon construction and real estate sectors
- Spanish official estimates of GDP - particularly in Q2 2010 outwards - sharply higher than IMF & EC
- We consider IMF estimates of GDP subject to downside revision of at least 2% by Q2 2010
- EC has already announced revision to numbers in progress
- We are calling Q2 GDP as XX% Q3 & Q4 trending downwards
- Zapatero (Socialist) came to power in 2004 - boom times
- Wealth tax abolished in 2008 raised 2B Euro / year significant cut in revenue
- Black economy officially sized at 15% of GDP is understating
- Black economy sharply growing, will approach 30% of GDP in Q1 2011 as necessary tax hikes bite
- has strong Union ties – not clear if mandate is present for strong medicine
Also kryptonik & dfriedman raise some excellent points.
posted by Mutant at 8:38 AM on May 21, 2010 [1 favorite]
The Euro is not going anywhere - it's now a world currency along with the U.S. dollar and the Japanese Yen. It is instructive to look at how the Euro fares against other currencies. Much is made of the collapse of the Euro against the U.S. dollar, but this is highly exaggerated from a historical perspective - the range has been much greater than this - at one point, the Euro was somewhere around 0.8 U.S. - at a time when the U.S. stock market bubble was collapsing. The Euro has quite a ways to get to that level again - and it's been there and survived. In fact, the slide of the Euro against other currencies is to a long term advantage for the export economies of the Eurozone, especially Germany, which is running trade surpluses not only within the block but globally as well... the Euro slide can only help in that respect. The Euro can go much, much lower, and survive - let us never forget that how an economy and currency performs must be seen in relative terms, i.e. relative to other economies and trading partners - look at the Canadian dollar, it climbed not because the Canadian economy has been doing so well, but because the U.S. dollar has been doing so badly. Sometimes you win because the other guy loses.
posted by VikingSword at 1:10 PM on May 21, 2010
posted by VikingSword at 1:10 PM on May 21, 2010
there used to be benefits to germany staying with the euro. they don't have unlimited resources, however, and they cannot support the entire eurozone on their own. asking working german citiizens to pay taxes to support greek/spanish/italian retirements is not going to fly.
obviously it would be painful for them to leave. but why would they continue to spend their money propping up states who have lied about the extent of their deficits?
if 1 trillion euros wasn't enough to fix the ship, and as there aren't enough lifeboats, the first ones out benefit greatly. (assuming they have desirable export goods and a strong internal economy)
volcker on bloomberg:
Euro Breakup Talk Increases
“You have the great problem of a potential disintegration of the euro,” former Federal Reserve Chairman Paul Volcker, 82, said yesterday in London. “The essential element of discipline in economic policy and in fiscal policy that was hoped for” has “so far not been rewarded in some countries.”
posted by kimyo at 2:21 PM on May 21, 2010
obviously it would be painful for them to leave. but why would they continue to spend their money propping up states who have lied about the extent of their deficits?
if 1 trillion euros wasn't enough to fix the ship, and as there aren't enough lifeboats, the first ones out benefit greatly. (assuming they have desirable export goods and a strong internal economy)
volcker on bloomberg:
Euro Breakup Talk Increases
“You have the great problem of a potential disintegration of the euro,” former Federal Reserve Chairman Paul Volcker, 82, said yesterday in London. “The essential element of discipline in economic policy and in fiscal policy that was hoped for” has “so far not been rewarded in some countries.”
posted by kimyo at 2:21 PM on May 21, 2010
kimyo: There used to be benefits to germany staying with the euro. they don't have unlimited resources, however, and they cannot support the entire eurozone on their own. asking working german citizens to pay taxes to support greek/spanish/italian retirements is not going to fly.
I think you misunderstand who's getting the money in the bailout. The German citizens are paying taxes to bail out the German bankers who got greedy and made a lot of really bad loans. Sound familiar?
posted by JackFlash at 3:56 PM on May 21, 2010
I think you misunderstand who's getting the money in the bailout. The German citizens are paying taxes to bail out the German bankers who got greedy and made a lot of really bad loans. Sound familiar?
posted by JackFlash at 3:56 PM on May 21, 2010
Sound familiar?
you know, the song is familiar. i know this music.
how bout we split it 50/50/-100?
50 to the greedy german bankers
50 to the greek pensioners
-100 to the german citizens
but, i won't really argue the point. here's a bit more rubbish from the telegraph:
Whatever Germany does, the euro as we know it is dead
In one respect, Mrs Merkel is right: "The euro is in danger… if the euro fails, then Europe fails." What she has not yet admitted publicly is that the main cause of the single currency's peril appears beyond her control and therefore her impetuous response to its crisis of confidence is doomed to fail.
Europe's fiscal Fascism brings British withdrawal ever closer
The European Commission is calling for EU powers to vet budgets of the 27 member states before the draft laws have been presented to the House of Commons, the Tweede Kamer, the Folketing, the Bundestag, the Assemblee Nationale, or other national parliaments. It applies to Britain even though we are not in EMU.
Fonctionnaires and EU finance ministers will pass judgement on the British (or Dutch, or Danish, or French) budgets before the elected bodies of these ancient and sovereign nations have seen the proposals. Did we not we not fight the English Civil War and kill a king over such a prerogative?
posted by kimyo at 5:46 PM on May 21, 2010
you know, the song is familiar. i know this music.
how bout we split it 50/50/-100?
50 to the greedy german bankers
50 to the greek pensioners
-100 to the german citizens
but, i won't really argue the point. here's a bit more rubbish from the telegraph:
Whatever Germany does, the euro as we know it is dead
In one respect, Mrs Merkel is right: "The euro is in danger… if the euro fails, then Europe fails." What she has not yet admitted publicly is that the main cause of the single currency's peril appears beyond her control and therefore her impetuous response to its crisis of confidence is doomed to fail.
Europe's fiscal Fascism brings British withdrawal ever closer
The European Commission is calling for EU powers to vet budgets of the 27 member states before the draft laws have been presented to the House of Commons, the Tweede Kamer, the Folketing, the Bundestag, the Assemblee Nationale, or other national parliaments. It applies to Britain even though we are not in EMU.
Fonctionnaires and EU finance ministers will pass judgement on the British (or Dutch, or Danish, or French) budgets before the elected bodies of these ancient and sovereign nations have seen the proposals. Did we not we not fight the English Civil War and kill a king over such a prerogative?
posted by kimyo at 5:46 PM on May 21, 2010
Genuinely sorry to alarm you kandinski, but its not as grim as I might have caused one to think from my summary of the situtation - last week. Zapatero has proven remarkably adept at pushing through some needed reforms and aggressive targets last week. Very impressive actually.
I'm giving a series of presentations this week on the Spain vs Greece question, and will post more detailed notes here after pushing this stuff out to folks who should read it first.
Very brief excerpt: July is the time to worry. 60% of Spanish debt comes due in the next two months or so. While the markets are showing a strong appetite for PIIGS debt, things can and do change rapidly in this business.
That being said, we were buying last week in the Eurozone. So its not all bad, just a spectrum of opps.
posted by Mutant at 2:10 PM on May 24, 2010 [1 favorite]
I'm giving a series of presentations this week on the Spain vs Greece question, and will post more detailed notes here after pushing this stuff out to folks who should read it first.
Very brief excerpt: July is the time to worry. 60% of Spanish debt comes due in the next two months or so. While the markets are showing a strong appetite for PIIGS debt, things can and do change rapidly in this business.
That being said, we were buying last week in the Eurozone. So its not all bad, just a spectrum of opps.
posted by Mutant at 2:10 PM on May 24, 2010 [1 favorite]
This thread is closed to new comments.
That article is an opinion piece in a Conservative newspaper which has always been anti-euro.
Here is, I think, a more balanced view.:
However, besides confidence, the fundamental indicators emanating from Europe—the falling Euro, ECB actions, debt auctions and fiscal reform—indicate growing strength and an increased likelihood that this crisis will be resolved without major fundamental damage. More importantly for me as an investor, once fickle moods change and investors see that the fundamentals are not nearly as bad as they currently seem, stock prices should come roaring back.
posted by vacapinta at 10:32 PM on May 20, 2010 [2 favorites]