Euro: Pounded, Sold, Discarded

Eurozone: Gloom and Doom Without Respite
Not even a $1 Trillion rescue package can save the euro

When I wrote my dissertation in 1991 - ironically commissioned by the then still powerful German Bundesbank - I started out quite optimistically for the pan-European common currency, to be imposed on selected member states in 1999. In the wake of global (involving travels to Asian and American nations who operated under Currency Boards at the time) research and close scrutiny for my dissertation, however, I became more and more a euro sceptic. The final product earned me a PhD in economics, DM10,000 from a growling Bundesbank and its scorn ever since: I had come to the conclusion that the euro is unsustainable and cannot last. Shortly afterwards I became a director of the British Conservative think tank and public activist group Keep the Pound (member #4), which emerged as an essential election platform within the Tories by 1994 (at its peak the campaign had 992,000 members in 1999) and ever since.

Events in the past 3 weeks have proved me right. A common currency for incompatible economies such as the Greek, Portuguese, Spanish cannot work in unison with Northern European countries. Robbed of the past 'safety valve' of having individual currencies, which fluctuate according to economic developments and reflect adverse factors such as exploding state budget deficits, sovereign debt, trade and inflation, miserable economic performance tears the whole eurozone apart now. Greece's economic disaster is not a localised trouble anymore, it affects the 16 members of the eurozone.

In a last-ditch effort, rife of desperation and denial of reality, the unelected EU Commission imposed drastic punitive action on European taxpayers, pouring good money - and money it doesn't even have (=new debt) after bad. This in an effort to reverse the downward spiral of the euro on international currency markets and to conceal the criminal neglect committed by irresponsible politicians - from German chancellor Kohl to EU commissioners Delors, Prodi and Barroso - who admitted Greece into the eurozone, well aware that the country tricked itself into the euro by deceipt, fraud and extortion. Too bad we don't have Chinese-style trials for economic crimes as colossal as the creation of the expanded eurozone in 2004. In China, dozens of European leaders, government officials, whole EU commissions and the Greek government would be summarily executed.

 After the "rescue package"
After the nearly $1 trillion rescue package meant to end Europe’s debt crisis once and for all, financial markets took a second look yesterday and began to worry about how the plan would actually work and the implications of the drastic austerity measures for the fragile European economies. The worries sent financial markets into a tailspin in Europe and the United States, only five days after the European Union and the International Monetary Fund hoped their $957 billion package would signal a “shock and awe” commitment to ending the continent’s crisis.

The euro, which initially rallied on Monday (to $1.3090) after the rescue package was announced, fell Friday to as low as $1.2360, an 18-month low and 17% below the $1.51 just five months ago. The outlook for the beleaguered currency is bleak: many experts and traders predict the parity between dollar and euro.

“We’re on the cusp of a crisis of confidence,” said Derek Halpenny, currency economist at Bank of Tokyo-Mitsubishi UFJ in London. “We’ve had rumours of countries threatening to depart from the euro and comments from officials that sound like people at the heart of Europe are concerned about a possible collapse.”

Some of the fears expressed in the markets were distortions of what officials said. But Mr. Halpenny noted that Paul Volcker, the former chairman of the Federal Reserve and now an adviser to the Obama administration, had warned Thursday about a “potential disintegration” of the common currency and that Jean-Claude Trichet, the European Central Bank president, had called for “fundamental change” in the euro zone.

Aside from the future of the currency itself, I commented to Reuters last night that there was a growing conclusion among investors that the package put forward by European officials to address the crisis was only a notional backstop, not a stimulus. "Investors are now focusing on the commitment among European nations to significant fiscal tightening, which is going to be negative for growth in the European countries. There are growing fears about the state of the European banking system, in particular, which economists said could be hit hard by a deceleration in already slow-growing economies and the subsequent rise in bad loans."

This led to fears that their problems could be transmitted to the United States through the linkages of the global financial system. The Dow Jones industrial average closed 162.79 points lower, or 1.5 percent, at 10,620.16. European bourses, such as LSE, Paris and Frankfurt were down even sharper, on average by 3.5%.

I noted that even promising United States economic data on Friday had failed to offset the apprehension over Europe’s financial troubles. "We had a bounce back, but the last two days have been really, really bad and have reminded everybody we are not out of the woods yet. The conflicts in eurozone begin to wear down global markets."


Europe’s economies will remain moribund, and there is also a growing fear about inflation after the European Central Bank agreed this week to help calm the financial turmoil by buying government bonds for the first time ever; bonds that have been downgraded to junk bond status 2 weeks ago and that cannot be otherwise bought by 90% of global investment funds by law! That is a departure from the ECB's mandate to focus solely on price stability and as a result is further undermining and eroding the euro.

The questions about Europe have weighed on global credit markets. On Friday, the cost of insuring against corporate loan defaults with credit default swaps rose and three-month dollar lending rates on the London interbank market rose for a fourth consecutive day. Still, there has been no sign yet of the shocks suffered after the collapse of Lehman Brothers in autumn 2008. As a measure of the nervousness of investors, gold has rallied to all-time highs in recent weeks, and traders said European investors unnerved over the euro’s prospects were selling euros to buy gold. The reputation of the ECB has been dented, and it spells disaster for the euro's future.

Post-publication posting