Thread: Euro Speeding Towards the Currency Graveyard

Euro Speeding Towards the Currency Graveyard

Currencies / Fiat Currency Apr 06, 2010 - 11:07 AM

By: Larry_Edelson

Between 1998 and 2002 I published several articles on how the just born euro currency would ultimately fail, resulting in the collapse of the European Monetary Union.

Almost everyone, even my colleagues, scoffed at my forecast. But my reasoning was sound: No matter what the short-term benefits of the new euro, mainly in trade within Europe, I said, long term, there was no way the euro would survive, because …

A. There was no political union in Europe, and there still isn’t. The European Union’s Charter is nothing like the Constitution of the United States, nor the set of Federal and State laws that have been mapped out over the last 234 years in the U.S.

Plus, in Europe, each country’s nationalistic pride, and each country’s culture, is far more deeply ingrained than in the U.S. which is far younger and was formed as a melting pot, with immigrants from all over the world.

In contrast, countries in Europe are thousands of years old. Trying to unify them and their many disparate cultures and 23 official languages with a single currency, I said over and over again, would simply not work on a cultural basis alone.

In short, there is no United States of Europe. There never was, and will likely never be one.

Moreover …

B. There’s no true central bank behind the euro currency. There is the official European Central Bank (ECB). BUT, the ECB is virtually nothing more than a figurehead bank. It does set interest rate and fiscal benchmarks, but importantly, in Europe each country’s own central bank has remained in place and still has the option of setting its own fiscal and monetary policies.

That’s like the state of Connecticut being able to set a different interest rate and monetary policy than, say, New York. That may work in the short run, but no way would it work in the long term.

The main function of a central bank is to smooth out a country or region’s seasonal cash flows, to foster economic growth commensurate with population growth, and to provide liquidity in the event of natural disasters and unusual circumstances that cause massive geographic shifts in liquidity.

Such as what happened in this country after the 1906 San Francisco earthquake, which caused massive disruptions in cash flow and commerce, and which gave birth to the Federal Reserve.

It is not to set monetary or fiscal policy, which is what has gone wrong with today’s central banks, in general. In the U.S., the Federal Reserve is deeply involved in fiscal and monetary policy, even to the extent that it can hold the country practically hostage to its ways. Which has clearly gotten out of hand.

But it’s even worse in Europe — where each country’s central bank can effectively act independently of the European Central Bank!

As the Greek sovereign debt crisis spreads, it is becoming apparent that the European Monetary Union is doomed to failure.

Short term, naturally, all this is clobbering mostly the euro, as the European Union deals with the Greek sovereign debt crisis.

And Greece isn’t the only country in trouble in Europe. Just over a week ago, ratings agency Fitch downgraded Portugal’s credit rating one notch to AA-, warning that Portugal faces “a sizeable fiscal shock.â€

Good.....I have been waiting for those chateaus in Provence to come down a bit.