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Believe it or not, there was a time when investors saw the euro as the savior currency of the world.
People talked about how the euro would replace the dollar as the world's reserve currency – and there was plenty of proof to support that opinion.
At the time, t he European Central Bank (ECB) had the right monetary solutions in place to fight inflation, while the U.S. Federal Reserve was struggling to keep inflation under control . That was another point for the euro, and a strike for the dollar.
So not surprisingly, central banks started replacing some of their U.S. dollar reserves with euros, and the euro became a second "reserve currency" for central banks.
The euro also soared past the dollar in just a few years. In fact, the euro shot up from 82 cents at its inception to $1.60 in less than 10 years.
Yes, it seemed that the planets were aligned for the euro to step up to the plate and become the world's reserve currency.
But that's because the euro had never experienced a real "rough patch," or serious monetary crisis.
Fast forward to 2008.
The Euro Gets its First Test
Once the credit crisis was in full bloom in mid-2008, loans dried up and unemployment went to 10% in the United States and Eurozone.
When crisis struck in 2008, the euro came under pressure. Germany and France could handle the issues, but the world quickly learned that Greece, Portugal, Spain, Ireland, and Italy were the Eurozone's downfall.
The euro can only be as strong as these weakest links. Unfortunately, none of these weak links have recovered yet. More importantly, they are not going to recover anytime soon.
A bond crisis like the ones erupting in Greece, and to a lesser extent Portugal and Ireland, can take years to shake out.
That's why, to this day, no matter how many loans the ECB or the International Monetary Fund (IMF) gives Greece, Portugal or the other nations in debt, they still haven't been able to fix this problem.
The European Union (EU) continues to give Greece bailout funds. But securing bailout money will not solve things. It's just a band-aid, not a cure.
The larger problem is that the ECB sets an interest rate policy that does not work for all EU nations.
Larger, more fiscally sound nations like Germany and France can handle it when the ECB hikes rates. The smaller debt-ridden nations can't. These guys are quickly finding this out now.
Here's How It All Ends Up
In the next five years, I highly doubt the Eurozone will keep all its members. It will still exist, though. The euro will survive.
But for that to happen, it will have to purge the dead weight that's dragging it down.
In 2016, I'd say only the larger countries will still be in the euro. I have no doubt that Germany and France make the cut. They will probably find some way for Italy and Spain to stay in the euro, too. These are the largest economies (by GDP) in the Eurozone.
Most of the smaller economies are one-third or one-fourth the size of these larger ones. I believe that most of them will be forced to exit the euro and institute another "home currency" for themselves.
One of the only smaller countries that seems to handle the overall interest rate policies is Estonia. It has a fast- growing economy and a budget surplus.
Aside from that, I have my doubts about most of the other smaller economies making it longer-term with the euro. (That includes the smaller Greece, Ireland, Italy, and Portugal.)
With countries having their own currencies and central banks, when debts pile up, they will be able to simply devalue their currency (similar to how the Fed has done with the dollar).
It's not the best solution, but it will help pay off their debts. And the smaller countries will no longer drag down the larger economies.
In the end, it will work out best for the Eurozone. However, as this process unfolds, and one country after another leaves the euro currency, it's going to destroy whatever positive sentiment is left in the euro.
That's why I see the euro/U.S. dollar (EUR/USD) exchange rate heading so much lower. In fact, I believe the euro could hit parity with the U.S. dollar in the next five years. (Something that hasn't happened since 2002.)
As this all unfolds, there will be some incredible opportunities to short-sell the euro in the forex market, especially against the dollar. That involves short-selling the EUR/USD pair.
Bottom line: The euro woes are far from over. Over the next five years, we'll see this play out in the currency market as the euro plummets in value. As a trader, I'll certainly be looking to short the euro as it continues to fall.
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Hmmm. I'm not sure that the size of the various economies has much to do with the problem.
Italy is, after all, by any standards a pretty substantial economy – approximately seventh in the world. Even small countries, and it would be hard to be smaller than Luxembourg, are perfectly cpapable of running their economies properly, so there is no reason to expect that small economies, the Netherlands is an obvious example, would be unable to keep up. What is strange about the Eurozone solution is that France appears to have a political weight out of all proportions to the weak state of its economy.
I agree basically with your outlook, but think you are a bit too optimistic or pessmistic with your time-table for the Euros disappearance in its present form. It might fall off the cliff much sooner.
France is not sound fiscally speaking, the country is unable to control its spending side of the ledger. Next May we shall have presidential elections there, and almost certainly it will be a leftist government, inclined to spend or rather overspend. Ther will be such a mess, popular unrest and strikes, that the country might leave the Euro on its own demand. Teh other possibility is a snap election bringing the "Front National" to power who has publicly programmed to leave the Euro.
The only countries that will make it, are Germany, Netherlands and perhaps a few Easteren Europeans, provided they remain interested.
But after all that is precisely what the US is after since the Euros inception. The danger of the Dollar being dethroned as the world reserve currency was too big not to fight for it, even if it looks more as a dishonest manipulation rather than a loyal fight. However the US dollars days are numbered, the countries fiscal situation is desparate, "deficits dont matter attitude" wont disappear. So to my opinion, the Dollar might have another 5 – 8 years to live before going into oblivion.
Interesting piece on the state of the Euro. I too don't see it, the Eurozone, staying intact 5 years out and either doing away with the Euro and countries return to their own currency or a massive shake-up as mentioned above to "weed out" the debt-ridden weaker countries.
My question is, how will a Eurozone shake-up or disappearance of the Euro affect the global economy and especially that of the US? We've already seen over the last few weeks what the Greek crisis has done to the market here, what if Eurozone was suddenly to announce countries xyz are leaving and/or the Euro is no more? That would have to have another strong negative effect on the markets and investor confidence. Also, 'glocal' countries expanding in Europe I assume would have to be hit hard due to sales coming in from Europe and the devaluation of the currency lowering their margins and bottom-line. Any thoughts Sean or anyone else feel free to comment.
Dom
"Hymen's background stretches oven many…"
"…tight spreads…"
Too funny
The expected QE (quantitive easing) by the Bank of England is a copycat of US failures to halt a crisis turning into a depression. It’s a failure of BOE policies and another bailout of the banks. QE only creates inflation as history shows. Britain could now be under the BOE pilot entering a no return zone of hyperinflation.
The 2008 banking fraud crisis started in Britain with a subsidiary of Zurich Financial Services, Zurich the Insurers, (AIGFP unit in London.
The truth (ZFS) was insolvent and under command by the US Government related to serious fraud was suppressed in the UK.
This fraud started in the nineties many years before with Zurich the insurer, unfairly and fraudulently refusing to pay out claims on its policies. This escalated into rigging prices and steering business to itself.
A judge said it was very reactive advertising insurance fraud committed against Zurich. But was not so fond of mentioning the fraud it perpetrated against its own policyholders.
Zurich insured anything and everything. Because there was no intention of paying out it was simply a fraud. A company trading with different names hundreds of subsidiaries and subsidiaries of the subsidiary and holding companies.
The FSA and the Treasury under the BOE guarded Government relied on the Financial Services Sector, who had rigged rules and little control to stop the fraud.
This manifested itself in the 2008 Banking Crash and the bailout of UK high street Banks. And was repeated throughout the world, ZFS (Zurich insurance, its fraud, corruption, deception, price fixing, bid rigging, and worse had bankrupted Countries, Financial institutions, Companies, Communities and the Public and future Generations.
The US Government Bailed out Zurich its policyholders and its banks, and then ploughed over $800 thousand million dollars of Quantitive Easing into the Worlds Banking system.
Effectively keeping banks alive that had bet customers money on schemes created by the corrupt greedy banks and fraudulent insurer (Zurich.
Now the BOE will repeat this failed experiment to save the to big to fail fraudsters.
And the result will be similar Inflation, Unemployment, Crime, and Fraud by the same Banks and Insurers and Government. Followed by the worst events possible, the entire breakdown of law and order, wholly out of any control of authority.
Sterling has for centuries been the Reserve World Currency, the BOE should take the leading role “now, while the opportunity exist to become again the currency of World trade rather than devalue the Pound to inflate away dept. Imposing increases in raw material cost for everyone, so no exports.
People are angry they know the Government, Ministers, MPs, Authorities, Banks, Insurers and Corporate are corrupt. Failure to change will see a united response from the public in harmony with enforcers Police Army Air force and Navy.