# Should the Euro survive?



## horusd (4 Mar 2011)

The ECB are talking up an interest rate rise this year. Whilst this might suit Germany et al, it certainly doesn't suit us, Portugal, Spain etc. Historically, when we needed high interest rates, we got low ones insted, contributing to our present problems. Can a one size fits all currency *ever *work across such diverse economies? Is it not always going to negatively affect large parts of the Euro Area? Should we not plan now for an orderly return to national currencies?


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## shnaek (4 Mar 2011)

This scenario is not a surprise. We were debating it in first year economics back in 92. This situation was obviously going to arise, and the idea would be that countries would lose control over interest rates and money supply, but would compensate with tighter regulation and national policies geared to keep finances in check. The only other way a monetary union can work is if there is also fiscal union esp re the setting of tax rates. And national governments would never agree to that. 
My guess is that the Euro will survive, but it may become a smaller currency union.


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## Chris (7 Mar 2011)

I think that the very problem is that a small group of people is charged with the impossible task of setting interest rates and monetary base. Once you start messing with the supply and price of a good (in this case money) the consequences are always detrimental.
I would agree that membership of the euro is quite likely to shrink, but I think at this stage it is more likely that Germany leaves the euro than one of the small troubled countries. A strong currency has always been high on the German agenda, as they at least seem to understand that your currency reflects your economy and not the other way around.
Rather than asking "should the euro survive" I think we should be asking "can the euro survive". I would conclude that the euro will survive, but will become increasingly weak because of bad monetary policy.


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## csirl (8 Mar 2011)

Long term, interest rates in the Euro zone need to be set at a neutral level - fluctuating (as little as possible) in a narrow very stable band around 4%. By doing this over a long period of time, you effectively neutralise the effect of interest rates on all the economies.


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## Chris (8 Mar 2011)

csirl said:


> Long term, interest rates in the Euro zone need to be set at a neutral level - fluctuating (as little as possible) in a narrow very stable band around 4%. By doing this over a long period of time, you effectively neutralise the effect of interest rates on all the economies.



But 4% is just an arbitrarily meaningless number. It's like saying that a pint of milk should always cost €1 or €10 or any other amount. Interest rates are the price of money and the price of any good has to be allowed to fluctuate with changes in supply and demand. It is precisely the fact that a central body dictates the supply and price of money that we have these constantly recurring boom/bust cycles.


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## Klai (21 Oct 2011)

I was very enthusiastic about Euro when it was first introduced, but the EU is growing and the economies inside the Union become more diversified and it's harder to control them. I don't want Euro to die, but I think some day (not soon, though) it'll happen.


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## selfassessed (21 Oct 2011)

shnaek said:


> The only other way a monetary union can work is if there is also fiscal union esp re the setting of tax rates. And national governments would never agree to that.



Which is exactly why the euro will fail.  The current situation is concrete proof that monetary union without fiscal union is not viable.


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## NOAH (4 Nov 2011)

just a rider, the reason it will fail is that countries will tell lies,  a al greece,  the latest estimate is that a countyy of 12milllion people  should  have genereated 40 billion of tax revenues annually but did not, this was not because of no fiscal union it was becaase the governments  in power could not be .....sed. end of

noah


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## uwadel (7 Nov 2011)

There are more countries wanting to enter the Euro than countries wanting to get out of it, so I do not see it dying any time soon, and this economical crisis is the big test, if the Euro manages to survive this crisis, there is no way it will go away when the economy thrives. I think that European Central Bank is learning a lot out of this financial crisis and it can only get better at what they do, not worse.


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## Chris (8 Nov 2011)

uwadel said:


> There are more countries wanting to enter the Euro than countries wanting to get out of it, so I do not see it dying any time soon, and this economical crisis is the big test, if the Euro manages to survive this crisis, there is no way it will go away when the economy thrives. I think that European Central Bank is learning a lot out of this financial crisis and it can only get better at what they do, not worse.



Can you back up your assertion that there more countries queuing to join?

Also, your assertion that "if the Euro manages to survive this crisis" is a very very big if, it may survive, but in what shape is the question.


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## Ethan 1 (10 Nov 2011)

Excuse my ignorance, why would Germany leave the euro, surely forcing others to leave with higher bond prices is far more desirable and cheaper. IMHO the € will be this centuries DM............


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## Chris (10 Nov 2011)

Ethan 1 said:


> Excuse my ignorance, why would Germany leave the euro, surely forcing others to leave with higher bond prices is far more desirable and cheaper. IMHO the € will be this centuries DM............



The ECB came out with a paper in the last couple of years about the legalities of forcing a member to leave; the conclusion was that there is no way the ECB could force a member out. Even if the weak members were to leave, Germany would ultimately still be constantly looking over its shoulder to see if other members were misbehaving, that is why Germany would be better of if it were fully in control of its mo monetary policies.


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## Sunny (10 Nov 2011)

There is no way for a Country to be forced out of the Euro but just as importantly, there is no way for a Country to just leave the Euro while remaining part of the EU. There are always ways around these things but there is no easy get out clause for anyone.


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## onq (10 Nov 2011)

I don't think the original premise that the EU are taking up an interest rate currently applies.

The trouble is that the interest rates cuts are not being passed on.

Banks are using them to generate additional profits.


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## ringledman (10 Nov 2011)

The markets are re-pricing bond yields back in line with each member state's ability to pay and willingness to balance their books. 

The Euro created an illusion upon creation that all member states could share the same interest rate regardless of economic fundamentals within the member state in question. 

Greek interest rates fell from 18% or so prior to accesion to match German levels. 

Did Greece become as productive as Germany in order to justify such low repayment levels? 

Did Greece suddenly start paying back their debt (they have defaulted throughout history) as Germany always do?

Prosperous times created huge market deficiencies. Reality is merely bringing interest rates back in line with the underlying fudamentals of each member state. 

For the Euro to survive in its current state and stop the defationary depression, the Germans need to give up the concept of a gold standard and allow the ECB to print albeit at huge inflationary cost down the line. 

Likewise lets stop kidding ourselves that the Euro can survive without a federal tax raising and tax collecting central German state. Each memebr state cannot carry on acting independently without central control.

This is the only way the Euro can survive and prosper over the long term. Does the electorate of each member want it though?


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## thedaras (11 Nov 2011)

As I understand it, mortgage borrowings were in euro,and therefore must be paid back in euro value.
So if the euro collapses and we have a different currency,and lets say its value is worth 25% less than the euro,then we really are in the deeper muggy water!


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## Chris (11 Nov 2011)

ringledman said:


> This is the only way the Euro can survive and prosper over the long term.



I agree that the steps you outline are the most likely to happen, but I disagree that all this will make the Euro stronger. In the long run all the actions you outline will weaken the euro and encourage increasing levels of debt.


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## Duke of Marmalade (11 Nov 2011)

_ringledman_ I agree with much of that thesis. But I think the market (and its rating agencies) must take the lion's share of the blame. Individuals operate in a common currency. I the Duke would dearly love to have my own currency but unfortunately I have to use euros, so when a bank lends me money it assesses my credit risk. 

Many countries operate the dollar but are not part of the FED monetary system. They are treated by the markets like any individual, their costs of borrowing are determined by their credit rating. Similarly several countries operate sterling and euro without being part of the respective monetary systems.

The markets made a huge mistake in thinking that the single currency overnight changed the creditworthiness of perennial profligates. As a result these profligates got hopelessly drunk on cheap market credit. The argument now is that the markets have got it wrong in the other direction and that is why the profligates need official bail outs, provided they mend their ways.

Whilst I am on the theme, there are many to blame for the sub prime debacle which has triggered this whole financial crisis but the primary blame is with the mispricing by the markets and their accomplices the rating agencies.

So when I hear commentators implying the omniscience of the markets it does make my eyebrows leap.


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## uwadel (28 Nov 2011)

Chris said:


> Can you back up your assertion that there more countries queuing to join?



-https://secure.wikimedia.org/wikipedia/en/wiki/Eurozone#Enlargement

The 2008 financial crisis increased interest in Denmark and initially in Poland to join the eurozone, and in Iceland to join the European Union, a pre-condition for adopting the euro.[13] Since Latvia requested help from the International Monetary Fund (IMF), as a precondition, it may be forced to drop its currency peg. [snap] However, by 2010, the debt crisis in the euro zone caused interest from Poland and the Czech Republic to cool.[15]


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## Chris (29 Nov 2011)

Duke of Marmalade said:


> _ringledman_ I agree with much of that thesis. But I think the market (and its rating agencies) must take the lion's share of the blame. Individuals operate in a common currency. I the Duke would dearly love to have my own currency but unfortunately I have to use euros, so when a bank lends me money it assesses my credit risk.
> 
> Many countries operate the dollar but are not part of the FED monetary system. They are treated by the markets like any individual, their costs of borrowing are determined by their credit rating. Similarly several countries operate sterling and euro without being part of the respective monetary systems.
> 
> ...



You are leaving one extremely important thing out of your analysis, and that is supply of money. If the supply of money had not increased so drastically then the price of credit, i.e. interest, would not have been artificially low and there would not have been the same flood of money into sovereign debt. Yes many people on credit markets made ridiculous mistakes, but this was only made possible through the actions of the ECB.


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