LIVE Gold Prices $  | E-Mail Subscriptions | Update GoldSeek | GoldSeek Radio 

Commentary : Gold Review : Markets : News Wire : Quotes : Silver : Stocks - Main Page 

 GoldSeek.com >> News >> Story  Disclaimer 
 
Latest Headlines

GoldSeek.com to Launch New Website
By: GoldSeek.com

Is Gold Price Action Warning Of Imminent Monetary Collapse Part 2?
By: Hubert Moolman

Gold and Silver Are Just Getting Started
By: Frank Holmes, US Funds

Silver Makes High Wave Candle at Target – Here’s What to Expect…
By: Clive Maund

Gold Blows Through Upside Resistance - The Chase Is On
By: Avi Gilburt

U.S. Mint To Reduce Gold & Silver Eagle Production Over The Next 12-18 Months
By: Steve St. Angelo, SRSrocco Report

Gold's sharp rise throws Financial Times into an erroneous sulk
By: Chris Powell, GATA

Precious Metals Update Video: Gold's unusual strength
By: Ira Epstein

Asian Metals Market Update: July-29-2020
By: Chintan Karnani, Insignia Consultants

Gold's rise is a 'mystery' because journalism always fails to pursue it
By: Chris Powell, GATA

 
Search

GoldSeek Web

 
Euro Trashed?

By: John Browne
Senior Market Strategist, Euro Pacific Capital, Inc.


-- Posted Thursday, 11 February 2010 | Digg This ArticleDigg It! | | Source: GoldSeek.com

The European experiment with a trans-sovereign currency is facing its first acid test. The flashpoint today is Greece, which looks set to default on its debt barring some outside intervention. While many commentators have been squawking about the immediate crisis as if it were the end of life on Earth, I would like to zoom out and discuss the history and longer-term outlook for the euro and its parent, the European Union.

The launch of the euro was a major milestone in the sixty year process of European federalization. Economic considerations have always led the charge, from a normalization of tariffs to a free-trade area to a customs union. Still, the launch of a pan-European fiat currency and central bank without a unified political apparatus behind it was always considered a risky move.

Since its launch, the euro has outperformed expectations, establishing itself both as the world's secondary reserve currency and the second most traded currency after the U.S. dollar. Because of this stellar introduction, the euro has been proposed as the new primary reserve currency in place of a devaluing U.S. dollar. However, its unusual foundation presents risks to which most investors are unaccustomed.

In essence, the euro was created as a lever to encourage a complete European political union rather than as a currency representing a call on an already unified economy, as with the U.S. dollar. Jean Monnet, one of the EU's founding fathers, is reported as saying, "Europe's nations should be guided towards the super-state without their people understanding what is happening. This can be accomplished by successive steps, each disguised as having an economic purpose but which will inevitably, and irreversibly, lead to federation."

The currency has largely succeeded in creating the will for a federal Europe among the member states' political classes; however, the citizens have voted again and again to maintain their countries' independence since 2005. Thus, the Union was already losing momentum when the latest financial crisis struck.

The combination of tight credit markets and high debt-to-GDP ratios caused bond yields for the EU members collectively known as PIGS (Portugal, Ireland, Greece, and Spain) to fly upward. As a result, Greece is now in acute jeopardy of officially defaulting on its debts. Because a political union was never implemented, Greece cannot be compelled to slash its budget, nor can it assume the Union will prevent its fiscal failure.

This explains why investors are making short-term trades out of the euro and into the dollar. While the Greek deficit-to-revenue ratio is roughly equal to that of California in 2009, the latter functions with an implicit (although untested) guarantee that the U.S. government will step in before they are forced to default. The EU offers no such backing to its member-states. In fact, recent questions have arisen out of Germany, the primus-inter-pares of EU members, concerning the legality of the European Central Bank (ECB) or the European Union ever giving direct aid to the Greek government.

While many assume that either Germany, an ad-hoc group of European states, or the IMF will bail out Greece, such a result would represent a temporary fix rather than a policy precedent. The move would pose more questions than it answers. If Greece were to be thrown a lifeline what would happen if Portugal, and then Spain, were to ask for equal consideration? Will Greece be spared expulsion from the eurozone if it fails to take the austerity measures necessary to restore solvency? If not, what message does that send to Ireland, which chose to slash its budget rather than wait for a bailout?

These problems did not spring from the ćther. The architects of the euro, in pursuit of their political agenda, willfully disregarded the historical divide between the Nordic economies, which have practiced low inflation and fiscal discipline, and the Mediterranean, high-debt, easy-money economies. While there were strict economic, monetary, and budgetary criteria for entry into the currency, one can reasonably suspect that enforcement was lax or the numbers were fudged. After all, the southern states' balance sheets tilted deep into the red soon after acceptance in the Union. Now, however, the ECB prevents them from monetizing the debt.

So, we are witnessing the results of this inherent contradiction.

If the EU becomes the "bailout union," a free-ride area where entitlement spending in Greece is underwritten by German taxpayers, then the euro will stabilize in the short-term, as investors face reduced uncertainty. However, this will lock the Union on a trajectory to gradual monetary collapse - the path currently being followed by the U.S. dollar.

If Greece is left to face the consequences of its profligacy, then the integrity of the euro will be preserved. The key in this scenario is whether Greece leaves the euro, or the Union, when it defaults. If it does, we could see weaker economies cast out one-by-one until Europe returns to a system of national currencies, with perhaps a rump euro uniting the Nordic block. If Greece defaults but remains in the block, then short-term shock will give way to a renewed confidence in the euro as a lasting reserve currency.

The future of the EU is being tested severely, together with much of the wealth of investors who have diversified into its currency. Likely, this crisis will draw the EU member states into a covert political struggle over the future of Europe. As this battle ebbs and flows, both the euro and the U.S. dollar likely will suffer great volatility. Those of us parked in the safe harbor of gold may benefit greatly from this transatlantic turbulence.

For a more in-depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar, read Peter Schiff's 2008 bestseller "The Little Book of Bull Moves in Bear Markets" and his newest release "Crash Proof 2.0: How to Profit from the Economic Collapse." Click here to learn more.

More importantly, don't let the great deals pass you by. Get an inside view of Peter's playbook with his new Special Report, "Peter Schiff's Five Favorite Investment Choices for the Next Five Years." Click here to download the report for free. You can find more free services for global investors, and learn about the Euro Pacific advantage, at www.europac.net.


-- Posted Thursday, 11 February 2010 | Digg This Article | Source: GoldSeek.com

- John Browne Senior Market Strategist, Euro Pacific Capital, Inc.


John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc. Working from the firm’s Boca Raton Office, Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with." A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military, John has a significant background, spanning some 37 years, in finance and business. After graduating from the Harvard Business School, John joined the New York firm of Morgan Stanley & Co as an investment banker. He has also worked with such firms as Barclays Bank and Citigroup. During his career he has served on the boards of numerous banks and international corporations, with a special interest in venture capital. He is a frequent guest on CNBC's Kudlow & Co. and the former editor of NewsMax Media's Financial Intelligence Report and Moneynews.com.




 



Increase Text SizeDecrease Text SizeE-mail Link of Current PagePrinter Friendly PageReturn to GoldSeek.com

 news.goldseek.com >> Story

E-mail Page  | Print  | Disclaimer 


© 1995 - 2019



GoldSeek.com Supports Kiva.org

© GoldSeek.com, Gold Seek LLC

The content on this site is protected by U.S. and international copyright laws and is the property of GoldSeek.com and/or the providers of the content under license. By "content" we mean any information, mode of expression, or other materials and services found on GoldSeek.com. This includes editorials, news, our writings, graphics, and any and all other features found on the site. Please contact us for any further information.

Live GoldSeek Visitor Map | Disclaimer


Map

The views contained here may not represent the views of GoldSeek.com, Gold Seek LLC, its affiliates or advertisers. GoldSeek.com, Gold Seek LLC makes no representation, warranty or guarantee as to the accuracy or completeness of the information (including news, editorials, prices, statistics, analyses and the like) provided through its service. Any copying, reproduction and/or redistribution of any of the documents, data, content or materials contained on or within this website, without the express written consent of GoldSeek.com, Gold Seek LLC, is strictly prohibited. In no event shall GoldSeek.com, Gold Seek LLC or its affiliates be liable to any person for any decision made or action taken in reliance upon the information provided herein.