There’s been a lot of talk among traders and in the media about the prospects of the euro zone blowing apart. I think it’s largely being put forth by those who are taking too limited a view. I’m personally not buying it for several reasons:
Leaving the euro zone (EZ) could make things much worse. If any current EZ member leaves, the potential depreciation of its new currency relative to the EUR could put the debtors of the country – including the government – in a major bind because of all the euro-denominated debt.
Consider having a €100,000 mortgage, but living in a country that is not part of the EZ. What happens to that mortgage if your own currency depreciates by 20%, 30%, 40% or more? Your debt – and your monthly payments – rises by that amount. It’s potentially a huge financial disaster. This is actually a problem for borrowers in many Eastern European countries now (like Hungary) where home loans were taken out in EUR (or in CHF in some cases) by residents of non-EZ countries. If you think things were bad in the US when the real estate bubble burst, imagine how much worse it would have been if those loans had been denominated in Canadian or Aussie dollars.
Costs go up when that is least desirable. One of the big reasons for introducing the euro was the cost efficiencies in trade and the transition from many different currencies down to just one. With no need to exchange one currency for another, the cost of cross-border business was reduced for firms of all sizes (I can think of many banks and Forex brokers who’d love to see the old regime return!). A major risk element in multinational trade was also taken out. European firms no longer need to worry about exchange rate risks trading within the EZ. This lower cost, lower risk environment leads to lower prices. If the euro is broken up or a country were to leave it, that would see costs move up again. This isn’t exactly the best time for prices to start rising, is it?
Those pesky Germans. Few folks today realize that the whole concept of the European Union – and by extension the single currency – was partly motivated by the desire for peace. In particular, the other nations didn’t want Germany left to its own devices. Europeans have much longer memories than we young Americans do. They remember all of the wars which devastated the continent over the years, where the most recent ones saw Germany in the villain’s roll where history is concerned. Having Germany’s economy closely linked with its neighbors (and all the other members as well) lowers the prospect of aggression. It also brings the most economically powerful European country into an arrangement where all can benefit from that strength. The idea of Germany being off on its own again is not one the EU members like on any level.
It’s a long-term project, only partly completed. We need to also realize that the European Union and the single currency are stills works in progress. The EUR should not be looked at as a finished product. There is a steady stream of prospective new members being considered for inclusion. The peripheral countries want to get in because they see the benefits of membership noted previously.
What we are seeing now with the Greece crisis and others is growing pains in the process. The folks in the EU and EZ will learn from it. They have shown no inclination toward even considering a split of any kind. They are, instead, trying to take the hard steps of getting financial houses in order, just as the states in the US are doing. There’s a lot of talk about how the single currency means there’s no relief valve in terms of currency devaluation to self-correct things. California doesn’t have that relief valve either and nobody’s talking (seriously) about them leaving the union.
The more likely scenario. I think what is probably more likely down the road than the EZ breaking apart is the UK joining. The British will no doubt fight such a move for a while, but my suspicion is that once the continent gets past the current crisis the benefits of the single currency accruing to the EZ members will put the UK at an increasing disadvantage which will force a change. The Brits are not such a strong economy they can stand alone when basically everyone around them is unified. This is well into the future, though.
Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.
Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.