Will the Euro Become the Most Hated
Currency for 2010?
January 2, 2010
By
Bryan Rich,
Money & Markets
For the better part of 2009 the U.S.
dollar was the world's most hated
currency. But it's looking
increasingly likely the tables could
turn in 2010. And the euro could
take over that unenviable title.
In recent weeks we've seen a surge
in scrutiny over sovereign debt.
First, it was announced that Dubai
would be "restructuring" its debt
(i.e. default). And then the focus
quickly turned toward the Eurozone's
weakest link — namely Greece.
This type of scrutiny can snowball
quickly. Now other weak spots in the
Eurozone, such as Spain, Italy,
Ireland and Portugal are getting
more attention. All of these
countries are running massive budget
deficits, many have huge debt
burdens and all have muted prospects
for growth.
That's a recipe of trouble.
Consequently, yields on government
bonds in these countries have surged
in recent weeks, reflecting the
rising uncertainty surrounding their
ability to meet debt obligations.
Investors are concerned about a
spillover of debt defaults that
could escalate into in a sovereign
debt crisis. That is, debt defaults
that spread throughout emerging
market countries, perhaps even the
industrialized world.
These problems aren't new. And
they're occurring in the same
European countries that have been
vulnerable from the outset of the
global financial crisis.
But the attention for much of 2009
has been squarely on the U.S. And
because of that, these weak
countries have gotten a free pass
for quite a while.
Flaws of the Euro ...
Countries that have joined the euro
currency have unique challenges when
economic times are tough. And we'll
likely find that the range of
problems within the Eurozone will
present a major threat to the euro's
lifespan.
The monetary union in Europe
consists of a common currency and a
common monetary policy. But fiscal
policy is determined by each
individual country. And to patrol
those fiscal decisions, the European
Union established its Growth and
Stability Pact that, among other
things, sets two criteria for member
countries:
1) Deficit spending by its member
countries cannot exceed three
percent of GDP, and
2) Total government debt cannot
exceed 60 percent of GDP.
As you can see in my table below,
those limitations have been
completely ignored by the countries
that are having the biggest
financial problems, exposing the
structural flaws of the monetary
union ...
In
short, the euro member countries are
in trouble for all of the reasons
Milton Friedman, one of the most
influential economists of the 20th
century, cited prior to the euro's
inception 10 years ago.
I'll paraphrase four of Friedman's
statements and follow each with how
it's playing out:
-
A
one-size fits all monetary
policy doesn't give the member
countries the flexibility needed
to stimulate their economies.
The European Central Bank's
mandate is inflation targeting,
not growth. A premature exit
from easy money policies could
drive weaker European countries
further into recession.
-
A
fractured fiscal policy forced
to adhere to rigid EU rules
doesn't enable member
governments to navigate their
country-specific problems, such
as deficit spending and public
works projects.
Milton Friedman offered an
insightful look at the flaws of
a single currency.
Milton Friedman offered an
insightful look at the flaws of
a single currency.
A majority of the sixteen
countries in the monetary union
have completely disregarded the
EU's Stability and Growth Pact
by running excessive deficits.
-
Nationalism will emerge.
Healthier countries will not see
fit to spend their hard earned
money to bail out their less
responsible neighbors.
The cornerstone of the euro,
Germany, has rejected the notion
of big spending to bail-out
troubled countries. And German
citizens are in a protectionist
mode.
-
A
common currency can act as
handcuffs in perilous times.
Exchange rates can be used as a
tool to revalue debt and improve
competitiveness of one's
economy.
Under the euro, weak member
countries are helpless. Italy
has a history of competitive
devaluations of the lira during
sour times. Now, in the euro
regime, its economy is left
flapping in the wind.
Today,
the most challenging issue facing
the euro might be addressed in this
statement by Friedman:
"Political unity can pave the
way for monetary unity. Monetary
unity imposed under unfavorable
conditions will prove a barrier to
the achievement of political unity."
Milton Friedman saw the
vulnerability of this single
currency concept coming and
predicted the euro's demise within a
decade. While the euro has outlasted
that prediction, if a sovereign debt
crisis defines 2010, look for the
viability of the euro to come under
attack again.
Regards,
Bryan
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Action To Take:
The U.S. dollar took a tumble in 2009, but
it's the euro's turn this year. For an easy
way to profit from any euro erosion,
consider
Market Vectors Double
Short Euro ETN (NYSEArca: DRR). This
ultra-short security is engineered to move twice the daily direction
of the euro. (Just don't hang on to these leveraged notes for long.
They're designed for traders, not investors -- so get in and get out,
then rinse and repeat.)
--Greg
DailyTradeAlerts.com
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