Friday, February 8, 2013

Where the hell is it? [and why the euro’s finally lost it]

The ongoing sovereign debt crisis has revealed major cracks in the foundation of the euro. Though EU has suggested an amicable solution, it’s definitely not going to work. B&E gets questions answered by the European Central Bank and other experts by Manish K Pandey

Is the currency with the highest combined value of banknotes and coins in circulation across the world (with over €790 billion in circulation) finally headed for the deathbed? The euro! With a name and an inauguration ceremony that slapped the elongated twang out of the dollar, the euro was expected to be the white man’s answer to himself, and of course, the downcountry Neanderthals in Asia (who’ve been trying for long for a common currency) – an answer that was supposed to unify global economies beyond what dainty dear Bush could have ever done in two lifetimes. For starters, the euro magnificently unified at least the EU (well, it wasn’t named the ‘euro’ for nothing, right?) – but before they could start daydreaming, ruthlessly beat the Nordic daylights out of their economies!

‘One currency, one future’ was the call that had earlier united Europe while adopting the euro. ‘One currency, one fate’ is what it sounds like now! Critics now comment that the Euro Zone would actually have been better off without the euro! Harvard economist Martin Feldstein had predicted much earlier of an economic conflict because of the common currency. A closer look at the numbers and one can smell disaster. Hedge funds have already bet $8 billion against the euro (the biggest ever short position in its 11-year history!) and are continuously losing confidence in its ability to withstand the sovereign debt crisis. Well, not to forget, euro has already touched the lowest level against the dollar (1 Euro = $1.2585; as on May 21, 2010) since the collapse of Lehman Brothers in 2008.

“Such market sentiment can be sufficiently strong (and long lasting) to create its own reality and expose all these countries to a common threat,” says UK based Robert Thomas, Senior Vice President, Moody’s Investor Service to B&E. But in an official communiqué sent by ECB to B&E, Jean-Claude Trichet, President, ECB still seems optimistic on the euro’s future, “I don’t think that there is any such sentiment in the Governing Council. We consider – and, to my knowledge, it is also the sentiment of all Heads of State or Governments who I know – that belonging to the euro area has brought an enormous number of advantages, as we have always said.”

Well, the advantages don’t seem so attractive right now. The ongoing credit bubble has left several southern European nations gasping for air. Countries like Spain, Portugal and Greece are struggling with unbelievable foreign liabilities standing at 91% ($1.20 trillion), 108% ($225.35 billion) and 87% ($264.82 billion) of their GDP respectively. The others don’t seem better off either. The latest country-wise data reveals that the correction of the large fiscal imbalances will require a significant stepping-up of current efforts. Fiscal consolidation will need to exceed substantially the annual structural adjustment of 0.5% of GDP set as a minimum requirement by the Stability and Growth Pact. And if this does not happen, chances are high that the Euro Zone’s common currency collapses. A deeper examination of the situation and it feels that the common currency can only survive if EU gets control over the spending power of its members.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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