[Aberlour10]

The fathers of the Euro ignored completely the fact that the southeuropean countries have used the currency devaluation xx times as a main mean of endeavourning to restore marginal competitiveness since the end of the II WW. These ways were unthinkable in countries like Germany, Netherlands, Austria etc..
To bring these two groups together in one currency zone with the Maastricht Treaty was 100% a political decision, and this is always bad for the economy. The consequenses in this way made decisions we can see since 2 years.
I cant really imagine that in 10 years Euro will exist in exactly the same form as today.

[hrothgar]

As I understand matters, its infeasible for any country but Germany to leave the Euro zone with defaulting on their foreign debt.

Consider a nation like Greece or, for that matter Ireland.
Their debts are denoted in Euro's.

If they leave the Euro zone in order to regain control over their monetary policy

1. Their currency will sink like a rock
2. Their foreign debt suddenly becomes many times more difficult to repay

The only way out of this bind is either crippling austerity measures or defaulting on the foreign debts. (With crippling impacts on interest and exchange rates)

I don't think any of the European economies are willing to deal with this:

The strong economies don't want their debts defaulted on
The weak economies don't want to be completely cut off from trade and capital flows

In retrospect, it looks as if the Europeans were much too ambitious in expanding the Euro Zone. It would have probably been much better to insist that counties like Greece, Spain, and Italy peg their currencies to the Euro for a few business cycles (say 15 years). If Greece were able to pin the the drachma to Euro exchange rate for 20 years, there is probably little risk to letting them join the Euro Zone.

Oh well, live and learn.

[Oof Arted]

There hve been more problems since the 'Idiots' running the State of Europe decided on one curency

Europe has always and will always be a Disaster

[helene_t]

hrothgar, on 2010-December-04, 06:48, said:

From my perspective, one of the big common threads during this crisis is that government seem unduly focused on cutting taxes during temporary upswings in the economy rather than using the money to pay down long term debt / establish rainy day funds.

The problem is that we don´t know who will be in office during the rainy days. Why save up to prevent a disaster for which the other political block may be "responsible"? It's better to burn off the money while we know that it's the good guys who get the credit for the tax breaks and/or improvements of public services.

[hrothgar]

Oof Arted, on 2010-December-04, 11:49, said:

Europe has always and will always be a Disaster

Compared to what?

Assume for the moment that you were about to be born. You get to chose where you're going to come into existence, however, other than that you're rolling the dice. (your "position" in life would be determined by prevailing population statistics, meaning that you'd be most likely to be born in Nigeria, followed by Ethiopia and Egypt...)

I'm hard pressed to think of a better (large) area to be born in...
You could certainly do better by specifying one of a small number of very rich states (Monte Carlo or some such).

Arguably, Australia, or Japan might be as good...

However, if I had a choice, I'd go with the EU

[mgoetze]

hrothgar, on 2010-December-04, 13:06, said:

I'm hard pressed to think of a better (large) area to be born in...
You could certainly do better by specifying one of a small number of very rich states (Monte Carlo or some such).

Norway or Switzerland sounds good. Canada might be OK if it weren't in the ACBL and otherwise beleaguered by USian culture...

[fromageGB]

It always seemed a crazy idea to me, without central economic/taxation control. Good for us tourists!
I think the answer to the problems can only be countries leaving the euro. As someone has pointed out, "poorer" countries can't leave the euro, so what I think will happen is that Germany and France, maybe a few others, will leave, set up a "united states" type government, and create a new currency.

The alternative, counties ceding their sovereign powers to a European parliment, just won't happen. It's far too big.

[mike777]

fromageGB, on 2010-December-04, 14:31, said:

It always seemed a crazy idea to me, without central economic/taxation control. Good for us tourists!
I think the answer to the problems can only be countries leaving the euro. As someone has pointed out, "poorer" countries can't leave the euro, so what I think will happen is that Germany and France, maybe a few others, will leave, set up a "united states" type government, and create a new currency.

The alternative, counties ceding their sovereign powers to a European parliment, just won't happen. It's far too big.

That is a big prediction.

France and GErmany and maybe a few others having their own currency and usa type government.

[Aberlour10]

mike777, on 2010-December-04, 19:45, said:

That is a big prediction.

France and GErmany and maybe a few others having their own currency and usa type government.

Sure, with Sarah Palin at the top we would be out of all problems within' a few months ;-)

But seriously, in my opinion we are in the process of the European integration already 2 or 3 steps too far. The politicans introduced all what is in EU theoretical makeable, but they did not care much about if it really would stable work in the future.

What stable works IMO: Europe as a big common market, free trade zone, duty free zone, free movement for the people ( Schengen Treaty )

What dont work IMO: Eurozone, common foreign and defence policy, >>> these exist only in EU speaches and "on the paper" No way to get all 27 countries to the real agreements in this case, nor today, neither in the future. No difference, the people on the streets of Berlin or Warsaw think the same >>> Brussel's bureaucracy overhelming slowly but continuously all life areas in the EU countries etc with its neverending "regulationsmania"

[y66]

"... the real story behind the euromess lies not in the profligacy of politicians but in the arrogance of elites specifically, the policy elites who pushed Europe into adopting a single currency well before the continent was ready for such an experiment." Krugman, February 2010

This January 2010 post by the same guy sheds some light on optimal currency area theory, in case you aren't up on this.

Some commenters on my Europe/euro post offer a reductio ad absurdum: if Spain should have its own currency, why not every state/town/family in America?

Strange to say, economists have thought about that — a lot. It’s called optimal currency area theory. (Optimal? Optimum? Nobody seems to know — or care).

The basic idea is that there’s a tradeoff. Having your own currency makes it easier to make necessary adjustments in prices and wages, an argument that goes back to none other than Milton Friedman. As opposed to this, having multiple currencies raises the costs of doing business across national borders.

What determines which side of this tradeoff you should take? Clearly, countries that do a lot of trade with each other have more incentive to adopt a common currency: the euro makes more sense than a currency union between, say, Malaysia and Ecuador. Beyond that, the literature suggests several other things that might matter. High labor mobility makes it easier to adjust to asymmetric shocks; so does fiscal integration.

When EMU began as a project, there were a number of studies comparing the EU with the United States. What all of them suggested was that Europe was less suitable as a currency area, basically because of lower labor mobility and lack of fiscal union. That didn’t settle the question of whether the euro was a good idea, but it did suggest that appealing to the success of the United States with a single currency didn’t tell you much.

What I’ve always found interesting is the way many Europeans now insist that a single currency is absolutely essential, when the example of Canada — which is closer to the United States than it is to itself — provides an obvious counterexample. But people tend to forget that Canada exists …

[Aberlour10]

Who is the next?

[kenberg]

An observation, related to the title of the thread: I see today that the Euro trades for a little over $1.30. The Last Time I Saw Paris, about five or six years ago, the Euro was trading for something like $1.30. Hang in there, baby.

Krugman's reference to Canada brings up this thought: Here ion the U.S. most of us spend little time thinking of exchange rates. But book covers usually display price in both U.S. dollars and in Canadian dollars. With exchange rates fluctuating, obviously it is sometimes a better deal to buy the book here or there. Of course no one cares. But maybe book publishers do. I suppose a common currency could be useful to them and to others who do a lot of Canadian-U.S. trade.

I think that the experience of most Americans with exchange rates is so limited that we, or at least I, have no great feeling for the issue. I won't be hoarding Euros, I won't be selling them short. And not just because it is probably illegal.

[hotShot]

The € started with about 1,20$ for 1€.
The historical minimum (4th quarter 2000) was 0,8225 $ for 1€.
It took about 6 years to reach 1,30$ for 1€. .
The historical maximum was 1,6038$ for 1€..

None of these exchange rates caused a collapse in European economics
This is because most of the trading happens between countries of the Euro-zone, where the exchange rates are irrelevant.

Germany is the country that had and still has the biggest benefit from the Euro, because it sells most of the produced good to other European counties.

GB decided not to join the Euro-zone, they thought they are better of without it.
Until the beginning of 2007 the numbers seemed ok the exchange rate was 0,6548 for 1€., When the crisis hit the exchange rate changed to 0,9786 in the end of 2008.
It is now around 0,85.
So anybody who thinks that his country would have done better without the Euro, should consider that carefully.

Did you read that Norway, who is not part of the Euro-zone, offered to help to defend the Euro?

Don't worry the Euro will survive.

[Aberlour10]

hotShot, on 2010-December-07, 09:16, said:

Don't worry the Euro will survive.

The only questions are, how much will it cost in next years, who will pay it, and where is the limit of people(voters) patient?

[phil_20686]

I am not totally clear on my exchange rate history, but for many years up until the 1970's many countries pegged their exchange rates to each other. This seemed to work ok for a large number of years, but perhaps this was because the trade imbalance was simply not so big.

Flexible exchange rates are often touted as a way to improve the competitive-ness of a country on the world market, but I have always been a little unclear on the details. On the one hand, a sinking exchange rates effectively lowers wages compared to your market outside your country, but on the other hand, any imported goods will rise in price compared to the average wage. So you can become better off only if most of what your country buys is made locally. It must be particularly bad for large importers of food, like the UK.

In Greece people will simply have to accept real wage decreases. This will have a negative affect on prices, and will have an equivalent effect to a weakening exchange rates. It is just politically and socially more difficult, as one cannot blame your government for the behaviour of the exchange rate. This will restore competitive-ness, and increase investment in their country. However, its unclear how one can bring this about, particularly given the large social security entitlements given to public sector workers in greece.

[mgoetze]

kenberg, on 2010-December-07, 06:55, said:

I won't be hoarding Euros, I won't be selling them short. And not just because it is probably illegal.

LOL... now where did you get that idea?

[kenberg]

mgoetze, on 2010-December-07, 13:56, said:

LOL... now where did you get that idea?

I thought that currency speculation is at least somewhat regulated. The Euro, being fairly stable against the dollar, presumably would not be a target. But I think that I cannot take, say, $20,000 to Mexico, trade the dollars for pesos at whatever rate I can get from farmers, and bring the pesos back home. Now I do not want to trade my dollars for pesos. A case could be made for trading my dollars for Euros in the same manner, and I was under the impression that this would be illegal. When I cross the border, I am usually asked about the form and amount of the money I am carrying. Maybe I just look like a drug smuggler.

But the main thread is interesting and I don't want to wander off with my uninformed comment so just consider it uninformed and forget it.

[hrothgar]

kenberg, on 2010-December-07, 15:54, said:

I thought that currency speculation is at least somewhat regulated. The Euro, being fairly stable against the dollar, presumably would not be a target. But I think that I cannot take, say, $20,000 to Mexico, trade the dollars for pesos at whatever rate I can get from farmers, and bring the pesos back home. Now I do not want to trade my dollars for pesos. A case could be made for trading my dollars for Euros in the same manner, and I was under the impression that this would be illegal. When I cross the border, I am usually asked about the form and amount of the money I am carrying. Maybe I just look like a drug smuggler.

But the main thread is interesting and I don't want to wander off with my uninformed comment so just consider it uninformed and forget it.

The examples that you are giving are specific to holding currency rather than futures trading.
Assuming that you meet the appropriate conditions, its quite easy to go short on various currencies.

The easiest way that I know of to do something like this is to short a currency ETF like any of the following:

http://currencyetf.net/euro-etf.htm

Moreover, there are ETFs that are deliberately designed to short another asset (even if you have a long position in the ETF, you have a short in the underlying asset).

To make things even more complicated, there are some weird hedging strategies in which you have both short and long positions in the same asset at the same time.

(Can you guess who's in the middle of his annual portfolio rebalance?)

[kenberg]

Quote

Can you guess who's in the middle of his annual portfolio rebalance?

Bernie Madoff? No, I have no idea.

So I can trade currency electronically as long as I don't actually hold on to the actual cash? Happiness consists of staying out of things that I don't understand.

Anyway, thanks for the clarification. I now return this thread to its rightful topic.

[hrothgar]

kenberg, on 2010-December-07, 16:58, said:

Bernie Madoff? No, I have no idea.

So I can trade currency electronically as long as I don't actually hold on to the actual cash?

How were you planning on shorting Euros without holding some kind of derivative?

I suppose, in theory, if you normally have a portfolio that includes Euro denominated assets, you could sell off some of said assets and increase you holdings of dollars/yen/what have you. However, I don't know many investors who accomplish currency diversification via the denomination of their assets. (Currency funds are a much easier way to achieve the same end)