Buying the euro with an 80 cent handle was such a no-brainer at the beginning of the millennium. Here? A much tougher call.
We do think the euro, in its current form, will not last.
We suspect the first step, especially if the ginormous German current account surplus does not begin to decline soon, will be a move to a two-speed dual currency. One for the northern (core) countries, such as Germany; and one for the south (periphery), for Italy and Greece, for example.
A two-speed euro, involving two distinct but related currencies, keeps the entire euro project together and gives the EU donkey the carrot of moving forward while at the same time deploying the stick of promised economic reform. It is important to understand that the perpetual forward motion idea lies at the heart of the EU. As long as the project seems to be moving forward slowly towards the nirvana of more integration when the time is right, Europe is progressing…
So peripheral countries need a change in the value of the currencies we trade in to make our companies more competitive and thus more likely to export. In tandem, we need to make imports more expensive so we don’t buy too many of them. The weaker exchange rate achieves this. Devaluations work. And to anyone who doubts that devaluations work in small European countries, just examine the lasting competitive gains garnered by Finland and Sweden after their 1992 devaluations.
Without currency change, we can’t keep up with the Germans. Up till now, we borrowed to achieve a lifestyle and a level of economic activity. Now none of us can pay this money back. – OECD Observer
Tough map to getting there, however, and will have to be a sprung on the market as a surprise otherwise queue the financial panic. The new incoming ECB President (likely to be Finnish) and Eurozone leaders best begin to start thinking about it.
Hat Tip: Holger