Within the eurozone there are great stresses. At one extreme there
are punitive costs of borrowing for Greece, Cyprus, Portugal, Ireland, Spain and
Italy; at the other there is zero or negative interest rates for Germany, the
Netherlands and Finland. Doubtless the first group begets the second, as
captive investors in euros have to buy government bonds, and this requirement
is being funnelled away from risk into safety.
This is the
opposite of the convergence intended behind the creation of the euro. The
euro itself, as can be seen from the chart below, is not looking too healthy
either, and this is surely no coincidence. Furthermore, if it breaks the
1.2000 level to the US dollar, the chart will look very bad indeed.
potential weakness in the euro, which on the chart suggests there is little visible
support above the $0.80 level once $1.2000 is broken, suggests current
difficulties in the eurozone could begin to have a
serious effect on the currency. It is time therefore to think about the euro
January 1999, the original members of the eurozone
bent the entry rules to qualify with respect to budget deficits and the level
of outstanding government debt. This was not an auspicious start, but hey,
governments bend the rules all the time, don’t they? Greece then joined
two years later, and would have had a severe funding crisis if it
hadn’t. This was bending the rules at a new level.
followed what economist Philipp Bagus aptly called
the tragedy of the commons. Eurozone members, who on their own would have had
difficulty accessing affordable credit, used the low interest rates on the
back of Germany’s rating to borrow, borrow, borrow. This was not a
problem until the financial crisis of 2008, when the borrowing became
progressively more difficult, and insolvency beckoned.
the euro’s backers. On a rough rule of thumb, measured by the
commitments behind the European Financial Stability Facility, 41% of the
euro’s backers have requested, or are likely to request a bailout
themselves. This brings us back to the euro itself, a fiat currency that
depends for its value on government promises.
difference between this fiat currency and all others is that there is no
single government guaranteeing it. They have delegated every aspect of the
currency to the European Central Bank, whose balance sheet is looking
increasingly precarious. Normally this would not matter, because the markets
would take comfort in the backing of a single identifiable government with
tax-raising powers. In this case we have 17 governments, some of them
insolvent, and the solvent governments unwilling to underwrite the lot. And
one of the solvent governments, Finland, is quite likely to desert the
sinking euro ship: Finland is Scandinavian firstly, and European secondly.
She only participates in bailouts if she obtains extra collateral. It is
unlikely that she will remain committed to the eurozone
project if it continues to deteriorate.
There is no
identifiable government promise behind the euro and the ECB. This could begin
to matter very soon, which is why that USD1.2000 level should be watched. And
if that happens, interest rates for Germany, Holland and Finland are bound to
rise into positive territory.
published on Goldmoney here