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June 5, 2005
Why The Euro May Collapse

Charles Moore explains in today's Telegraph why the Euro may soon disappear, as the political union it hoped to represent has been dashed by two consecutive referenda:

In this week of great events in Europe, it was something small that really caught my eye. In an article about the problems of the euro, the German magazine Stern advised readers to check their euro banknotes. The notes issued in Germany, it explained, begin their serial numbers with "X"; those issued in Italy begin with "S". Hold on to the former, was the suggestion, and get rid of the latter while you can.

Stern's X-factor advice was based on the idea that the euro zone might break up. When the euro began in 1999, it was glorious for Italy, Spain, Portugal and (prospectively) for Greece. Their interest rates halved. Boom followed. But those countries had not abolished their inflationary habits when they abolished their currency, and now they had lost their old remedy of devaluation. As a result, their competitiveness is collapsing. Italy's competitiveness against Germany has fallen by a quarter since 2000. Within the system today, all that Italy could do is to deflate, but in the resulting squeeze, revenues would fall, causing the deficit to explode. Real wages would have to be cut to compete with Germany. The politics would be horrible.

An alternative would be for the European Central Bank to inflate from the present two per cent a year to, say, four or five per cent to rescue the Mediterranean spendthrifts. But if that happened, there would be revolt in Germany. That devout believer in sound money only sacrificed her beloved deutschmark and joined the euro to make European finances German, not to make German finances Italian. It is therefore beginning to cross German minds (and other northern European ones, as the Dutch referendum vote showed) that they might be better off outside the currency. Hence the need to scrutinise the banknotes.

First, one has to wonder why Brussels has identifiers on their bills to indicate countries of issuance on the euro. It almost appears as an admission that the difference could create valuation fluctuations between national versions of the euro, an anathema to its entire raison d'etre. However, since they're there, Stern's advice is well taken. Italy and now France have openly talked about abandoning the united currency, and if the euro breaks up, those notes will likely take steeper dives than those of Germany.

I, for one, wouldn't want to hold much in euros from any country at the moment. Moore gives the euro another eighteen months, but given the cracks already showing in its foundations, that survival time frame may be optimistic. If France and Italy, two nations who benefited most from adopting the euro, decide to dump the currency, Germany will want to immediately bring back its solid and dependable deutschmark, regulated by the private Bundesbank. If that happens, the rest of the continent still using the euro will face economic ruination, as the currency will utterly collapse without German backing.

Sphere It Digg! View blog reactions
Posted by Ed Morrissey at June 5, 2005 9:32 AM

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» I guess someone made plans just in case. from Narcissistic views on News/Politics
Via Telegraph, an interesting way to spot your Euro. [Read More]

Tracked on June 5, 2005 10:25 AM

» Euros in many flavos from SCSU Scholars
Captain Ed is posting on the euro, in part because of a discussion we had on NARN yesterday. ... I don't think I went so far as to say superfluous, but it removes what I think is the primary mover in the push for the euro. Roger Cohen noted yesterday... [Read More]

Tracked on June 5, 2005 3:40 PM

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