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Currencies dropping like stones

July 15, 2011


The markets have not yet thought about it, but the biggest threat to the Euro is not Greece, Ireland or Portugal, but the dangers posed by the fourth largest economy in Europe, which is also the third largest in the Eurozone, that of Italy. Italy is passing austerity measures but the measures may not be enough. The problem that the Euro faces is that there is little central control over the EU economy, control that exists affects states within Europe that have not adopted the Euro, as well as those that have.

Eleven years ago when the merits of the Euro were debated I argued against it. I was not fondly wishing to hold on to the pound sterling for sentimental reasons. I felt that there was a case for economies that were strong then to have a single currency. That meant Germany, France and the Benelux countries.  I argued that whatever controls were used as a qualification for joining the Euro, Italy, Greece and Portugal would probably either cook the books or get a free pass to join the Euro, with sins and lack of qualifications overlooked.

My argument was countered by those who pointed to the many diverse economies of the numerous states of the USA, which all adopt a single currency. If the USA can manage with a single currency, the argument went, then so could Europe.  I perceived the difference as being that the United States is one state, one nation where the Federal government can impose controls and enforce financial regulations.

Now we see that the adoption of the Euro by states that did not qualify for it and have not the discipline or the same economic weltanschaung as the qualified states was a political dream that has created an economic nightmare. Making economic decisions to fulfil political dreams shatters both economies and political aspirations, as the two are often intertwined.

The Euro problem is disguised by the fact that the US dollar is weak, the Yen is weak, the pound sterling is weak, all for their own similar reasons, and the lack of willingness for China to continue to support the dollar. All the major currencies are dropping in unison, dropping like stones, and you can measure the drop best by looking at the Swiss Franc, which is a traditional flight currency, and the price of gold.

I do not know when things may change or what the end result of this turbulence is, but as usual the poor will pay, through inflation of prices or deflation of their savings, which amount to one and the same thing.

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