Will Europe impose exchange controls to head off disaster?

Daily Telegraph ^ | 23 Nov 2007 | Ambrose Evans-Pritchard

[ScaniaBoy]

Thanks for some sterling comments.

I certainly agree on the Airbus and hedging, although that is certainly not my profession.

I have no idea about the EurIBOR (is what??), but note my comment on the Italian and German 10-year bonds. The spread took off the same day Prodi managed to get his budget through the Italian parliament (cause and effect unclear at best :-) ) and continued upwards, but the last few days it has stabilized and started to decline.

So, I think A E-P makes some very interesting points (especially for you currency traders!) but he may hyperventilate a little too much.

[wmileo]

My only concern is that the #1 scumbag in trading on the World Monetary System, George Soros will take advantage of this some way and hurt one of our allies or the US itself. he has shown himself in the past to be capable of some foul play to enhance his position before. That is how he made his billions of $$ to begin with.

[ScaniaBoy]

You make some good points, but you don’t seem to appreciate the large difference between the Club Med and the economies of northern Europe, nor the political game between the French and the Germans on who is going to control the European central bank (ECB).

Historically, those kind of problems have scuppered more than one currency union. One would be very unwise to to discount a major rift in the eurozone.

[stripes1776]

Think of government managing the Postal Service (cough), and multiply by 10,000. That's what we'll see if these losers go the route of currency controls.

They never learn!

[jrsmc]

The Nazis gained power on the back of the 1929 crash and the deflationary policy of the politicians at the time. Mass unemployment, not hyperinflation was the reason Hitler came to power.

Reparations imposed by non-German politicians initially resulted in deflation. In response, German politicians generated hyperinflation.

[SAJ]

EurIBOR (European Inter-Bank Offer Rate) is a 3-month interest-rate strip, not dissimilar in nature from the Eurodollar rate (pls note that Eurodollar is the 90-day interest rate earned by dollars held abroad, and has nothing to do with Eurocurrency, aka 'the Euro'.)

Not surprised at all (though I don't follow these mkts) to see the spreads between Italian debt and German debt widening. Frankly, I should have thought that this should have occurred long since, Euro or not. The ''single currency'' doesn't -- hell's bells it can't -- mask out consequences of traditional Italian fiscal policy, which has been generally insane, worse even than the Regress' fiscal policies by an order of magnitude or more.

Prodi being a dyed-in-the-wool Marxist doesn't help matters any, either, and certainly not confidence in Italian debt. Sheesh.

[ex-Texan]

The Euro is heading towards $ 1.75 next year. That may help stimulate the U.S. economy but will certainly upset people working for factories in France, Germany, Italy, Ireland, Spain and Portugal to name a few. What do we manufacture here in the U.S. today?

14,833 U.S. Companies have been taken over by foreign corporations since 1978.

In the meantime . . .

The Finance Industry in California is Laying Off Hundreds Right Now

By next year the number of unemployed mortgage clerks, realtors, bankers, construction workers, investment advisers, automobile finance clears will number in the thousands. As many as 20% of Californians were working at least part time as realtors. Another 5% - 10% were using their real estate license to work in mortgage lending. All those high paying jobs will be gone for at least ten years.

Food service workers hardly make $ 10/ hr. Unless they are working for a great family owned corporation like 'In-n-Out Burger.' The problem with finding employment in the food service industry is that you MUST speak fluent Spanish. "No Gringos Allowed!" Fast food restaurants have Mexican employees who taunt Anglo customers openly.

Have fun looking for work in California.

[SAJ]

Yes, indeed. Not in all of recorded history, afaik.

[ScaniaBoy]

Reparations imposed by non-German politicians initially resulted in deflation. In response, German politicians generated hyperinflation.

Yes, that and the French occupation of the Ruhr area in 1923. However, in November 1923 a currency reform was undertaken and inflation ceased. That was in 1923/24. The nazis did not gain in the elections until 1930 (after the Wall Street Crash) when they increased their number of seats from 12 (2.4%) to 107 (18.5%). By that time the unemployment rate was more than 15%. In the next general election in 1932 they further increased their tally to 230, when almost a third of the German workforce was unemployed.

[ScaniaBoy]

Not surprised at all (though I don't follow these mkts) to see the spreads between Italian debt and German debt widening. Frankly, I should have thought that this should have occurred long since, Euro or not. The ''single currency'' doesn't -- hell's bells it can't -- mask out consequences of traditional Italian fiscal policy, which has been generally insane, worse even than the Regress' fiscal policies by an order of magnitude or more.

Prodi being a dyed-in-the-wool Marxist doesn't help matters any, either, and certainly not confidence in Italian debt. Sheesh.

True, true, true, but one of the ideas with the euro was that it would shield the irresponsible from their irresponsible actions. Yes, there were many in Germany and elsewhere who argued for a small euro, which would definitely have excluded Italy. However, by the time the euro was formed it was only Luxembourg that would have been able to pass the Maastricht criteria and therefore entry into the euro became a political and not an economic decision. Italy as one of the founding nations could not be kept out.

And next year Cyprus and Malta will take on the euro as their currency (!!)

[bruinbirdman]

"French will not if they can avoid it start a full attack on the ECB "

The ECB is Germany. France can complain all it wants. Germany does not see it the same way.

Sarkozy can use his problems to institute more and quicker reforms.

yitbos

[ScaniaBoy]

The ECB is Germany. France can complain all it wants. Germany does not see it the same way.

The ECB was created as a pan-EU Bundesbank. However, all through the 80s and 90s there was a cold war between France and Germany who was going to control the bank, and whether the bank would run according to German or French policies. (See The Rotten Heart of Europe by Bernard Connolly.)

Unnoticed by almost every political commentator Mrs Merkel has allowed France to steal at least one base with the new "Reform Treaty".

First free market economy was dumped as one of the EUs main goals. Then the French managed to include the ECB as a full EU institution (§9 in the new treaty). That means that it will no longer be an independent bank, but basically run by the politicians. However, as long as no one makes any fuss about this things will carry on as before - in my opinion until the treaty has been ratified. Then the French will start to act, and the German's will have a much weaker legal position to defend their view of the bank.

We are witnessing a bank robbery in slow motion.

[bruinbirdman]

"it will no longer be an independent bank, but basically run by the politicians."

True and put better than I. But, Germany and its economy has the "political" clout.

If worse comes to worst, the Euro remains stealth capitalism. If the EU thinks it can alter the facts of capitalism, there are many who will be happy to pick up the economic pieces from the wreckage.

yitbos

[BfloGuy]

The EU economy, no great shakes to start with to be sure, is not going to roll over and die because the Euro is strong.

The overall EU economy won't die, but that won't much matter to the Italians, the Spaniards, the Greeks and the Portuguese (referred to by the author as Club Med).

The northern countries will weather a downturn, but the southern group (France can be included) are in very bad shape and this is why he speculates about the future of the currency itself.

The EU is a "country" in name only. The idea that its members could unite and reconcile their individual economies and governing styles was an extremely utopian and, I think, unworkable idea.

[stephenjohnbanker]

LOL!

[stephenjohnbanker]

” Fast food restaurants have Mexican employees who taunt Anglo customers openly”

You are lucky if they don’t hock a lugie in your food. I no longer eat out!

[JasonC]

The Germans control the central bank. It will pursue a policy that maintains the strength of the Euro, just like the Germans maintained the strength of the Mark throughout the history of Bretton Woods. They will still inflate and the Euro will lose value relative to commodities, over time. But not as fast as western monopoly money, let alone southern confetti.

And no, this will not harm anyone, it will help them maintain some of the highest living standards in the world. The rest of their economic practices will not, but their currency will remain better run than ours, because less wedded to inflationist nonsense. Their labor markets, on the other hand, will remain seized, their welfare states and especially treatment of public employees ludicrous, and their immigration and population policies a long slow suicide. Europe will be a well appointed museum, as it has been for some time now.

[JasonC]

Western europe has inherited the sense of the Bundesbank (and Swiss, come to that), and understand that trying to counterfeit one's way to prosperity never, ever works. You haven't, so much the worse for you.

[JasonC]

It isn't unworkable, it is working just fine. The southern economies can work harder, or they can be poorer. Same reality they have always lived in. Letting pols print lots of confetti to toss around to supporters didn't change anything for southern Europe for the last 6 decades, and it wouldn't change anything now, either. They are better off with a money actually worth something, and they know it.

[DeaconBenjamin]

You will rarely hear Germans complaining of a strong Euro (effectively the German Mark) which is rooted in the strength of the northern teutonic German financial discipline.

I thought that when the Euro was implemented, the Germans called it the "teuro" (expensive).