The Break-Up Of The Euro?
Thinking The Unthinkable?
The recent "No" votes in France and Holland to the proposed new European constitution has sparked off political turmoil and also speculation about the fate of the Euro.
Leading politicians in Berlin have expressed concern that the tight rules governing the euro are strangling Germany's economy, by far the biggest in the 12-nation eurozone.
The country's finance minister and central bank president reportedly attended a meeting where the "collapse" of European Monetary Union was discussed.
Meanwhile, a senior member of Italy's coalition government has openly demanded a referendum which would call for the abolition of the euro and the reintroduction of the Italian lira.
As I read this, I recalled a report written way back in 1996 by David Roche. In that report he thought that there was a 60% chance of EMU (European Monetary Union) NOT happening and that if it did, there was an 80% chance of it blowing up afterwards.
It's worth quoting from the report...
There are three structural reasons why EMU could fail. First, there is no mechanism for fiscal transfers within the EU to offset the pain of adjustment of peripheral economies to the core. Second, the labour markets of Europe are not standardised or liberalised. So structural unemployment is the adjustment mechanism for the harmonisation of inflation and growth, as well as of monetary and fiscal policies. France's 25% youth unemployment rate already shows the way. But that's just the trailer to the main feature when the tide of EMU deflation sweeps along the Mediterranean shore. Third, the integration of Central Europe into the EU will provide a whole new source of cheap labour and imports, as well as competitive devaluations, for EMU members to contend with.
The most likely way in which failure will show is in a severe post-EMU recession with its locus in France.
The report ended up being wrong on a number of points (it over-estimated the economic strength of Germany and didn't forsee the impact of the emergence of China) but the scenario it forsaw is happening. Basically, the removal of individual currencies that could act as shock absorbers, has meant that employment and local economies are having to bear the consequences of misguided economic policies.
The Euro has already been exposed as something of a sham with the collapse of the "Stability and Growth Pact" that was meant to ensure that member governments acted responsibly. With the strains now emerging in the economies of the major countries of the Euro bloc (France, Germany and Italy) the chances of a breakup of EMU are increasing rapidly.
This might be the best outcome for everyone. The alternative is that...
Dissatisfaction will out, but no longer through volatility in financial markets. It will erupt in political life instead.
Unfortunately, my guess is that the politicians will cling to their dream of a European Super State and prolong the life of the single currency as far as possible. The result will be prolonged economic difficulties in the core EMU countries.
Outside of all this, the rejection of the European constitution is a major victory in the struggle against collectivism and the state. Gary North sums it up far better than I can and I commend the following article to you.
http://www.lewrockwell.com/north/north381.html
P.S. There is a precedent for a breakup of a currency union. The Latin Monetary Union initially involving France and Belgium started in 1830 and involved other countries at various times. It finally expired in 1926, which was long after it had any real relevancy.
The recent "No" votes in France and Holland to the proposed new European constitution has sparked off political turmoil and also speculation about the fate of the Euro.
Leading politicians in Berlin have expressed concern that the tight rules governing the euro are strangling Germany's economy, by far the biggest in the 12-nation eurozone.
The country's finance minister and central bank president reportedly attended a meeting where the "collapse" of European Monetary Union was discussed.
Meanwhile, a senior member of Italy's coalition government has openly demanded a referendum which would call for the abolition of the euro and the reintroduction of the Italian lira.
As I read this, I recalled a report written way back in 1996 by David Roche. In that report he thought that there was a 60% chance of EMU (European Monetary Union) NOT happening and that if it did, there was an 80% chance of it blowing up afterwards.
It's worth quoting from the report...
There are three structural reasons why EMU could fail. First, there is no mechanism for fiscal transfers within the EU to offset the pain of adjustment of peripheral economies to the core. Second, the labour markets of Europe are not standardised or liberalised. So structural unemployment is the adjustment mechanism for the harmonisation of inflation and growth, as well as of monetary and fiscal policies. France's 25% youth unemployment rate already shows the way. But that's just the trailer to the main feature when the tide of EMU deflation sweeps along the Mediterranean shore. Third, the integration of Central Europe into the EU will provide a whole new source of cheap labour and imports, as well as competitive devaluations, for EMU members to contend with.
The most likely way in which failure will show is in a severe post-EMU recession with its locus in France.
The report ended up being wrong on a number of points (it over-estimated the economic strength of Germany and didn't forsee the impact of the emergence of China) but the scenario it forsaw is happening. Basically, the removal of individual currencies that could act as shock absorbers, has meant that employment and local economies are having to bear the consequences of misguided economic policies.
The Euro has already been exposed as something of a sham with the collapse of the "Stability and Growth Pact" that was meant to ensure that member governments acted responsibly. With the strains now emerging in the economies of the major countries of the Euro bloc (France, Germany and Italy) the chances of a breakup of EMU are increasing rapidly.
This might be the best outcome for everyone. The alternative is that...
Dissatisfaction will out, but no longer through volatility in financial markets. It will erupt in political life instead.
Unfortunately, my guess is that the politicians will cling to their dream of a European Super State and prolong the life of the single currency as far as possible. The result will be prolonged economic difficulties in the core EMU countries.
Outside of all this, the rejection of the European constitution is a major victory in the struggle against collectivism and the state. Gary North sums it up far better than I can and I commend the following article to you.
http://www.lewrockwell.com/north/north381.html
P.S. There is a precedent for a breakup of a currency union. The Latin Monetary Union initially involving France and Belgium started in 1830 and involved other countries at various times. It finally expired in 1926, which was long after it had any real relevancy.
posted by Kevin Francis at
4:31 pm
