Register for Free
Post comments, receive updates via email, gain access to exclusive content, and more.
Spam Safe!
Currency failures from Argentina to Zimbabwe: A brief history of inflation
Print
Former British Prime Minister Gordon Brown has told BBC business editor Robert Peston he sensed there would be “a major crisis in the euro area” early next year because “the euro's problems were bigger than just its governments' debts”. Mr Brown warned that Europe must also solve the euro's structural rigidities and the enormous debts of its banks, underlining that the structural reforms needed to make the euro work as a single currency area had not been carried out, or even agreed.
http://www.timesofmalta.com/articles/vie...
One of two things will happen. All Eurozone memebers will be forced to cede their sovereingty or the Euro will implode. Of course the French will surrender easily, But I'd be wary of poking Germany with a stick.
So I wonder if countries who use the euro will want it to debase to zero so they can use it as a sacrificial lamb to pay off their debts as well as an excuse to go back to issuing their own currency?
*now THAT is a run-on sentence*
"Even if we are occupied with important things and even if we attain honor or fall into misfortune, still let us remember how good it once was here, when we were all together, united by a good and kind feeling which made us perhaps better than we are." - Fyodor Dostovevsky
Its a unique situation. I don't know of another instance where large numbers of countries agree to give up their sovereign currency for another currency to be used by all. The next closest thing I can think of is the use of currency pegs, but in that case the sovereign currency remains in place and the pegging can end. That too is not without consequences, but nothing like the situation the Euro has created. It was a stupid plan that could only succeed under near ideal conditions with states of near economic parity.
Debasing the Euro to zero creates hyper-inflation across the entire zone which would wipe out the EU. I suspect Germany for one (see Wiemar experience) wouldn't be party to that and divorce itself long before that occurred. Any of the core EU members abandoning the Euro is pretty much a game-over signal.
The euro currency situation is somewhat similar to Argentina's experience in the 1990s. Although the peso (pegged at 1:1 with the dollar) remained in existence, many mortgages were denominated in US dollars (mirroring the fact that Argentine property is priced in dollars). So when the currency peg collapsed, legal intervention was required to determine the rate at which dollar-denominated loan obligations would be converted back to Argentine pesos.
Any euro-area nation leaving the currency zone will face the same issue. Internal and external financial obligations denominated in euros will have to be converted to the new national currency. This process is messy, and produces winners and losers depending on the conversion rate.
I work at a wall street currency, precious metals, and fixed income place. I have been working the currency end of things for years. EUR/USD - I watch it every day. This last week was a good week for us. There was a lot of currency trading. EUR/USD up then EUR/USD down then up then down. It seems to have no fundamentals, it just swings several big figures every day based on the news of the day. Very volatile.