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Thursday, December 04, 2003

The Case Against the Strong Euro

If things continue like this problems for the eurozone economy are likely to come thick and fast. In order to explain a bit more what I mean I would like to welcome a new blog on the scene: Brussels Today. Now those of you who know me well enough will know that, while I am a person who many would consider excessively opinionated, I value one thing much more highly than simply having the 'right' opinion, and that is: being open to dialogue. Since we are in a situation which runs well beyond the textbooks, it is a brave person indeed who would set themselves up as the repository of all wisdom. So, enter stage left Durani at Brussels today:

Time to hail the Euro
After being introduced at a rate of $1.17 in 1999, the euro slumped to become worth less than 83 cents the following year. Now, at the end of 2003, Europe's single currency surpassed its launch level with respect to the dollar and became worth over $1.20 for the first time in its history. The euro also hit a record high against the Japanese yen

The Euro as a global reserve currency

A strong stable Euro makes a compelling argument as a reserve and transactional currency for international sovereigns (multinationals and foreign governments). Sound financial and credit policies can help maintain the Euro strong thus appreciating European assets. These can be leveraged as collateral to buy international enterprises further internationalizing European business and cementing the concept of Europe as a geopolitical force.

The successful launch of the Euro as a new artificially created legal tender for over a third of a billion reasonably wealthy individuals creates an unprecedented opportunity for a United Europe to catch up on the knowledge capital gap.

This brings me back to Sharon's post earlier in the week. I didn't comment at the time, although I think it's fairly obvious I am not really in agreement. However what I do agree with Sharon (and Lloyd) about is the difficulty there is with the existing global financial architecture. This worked for a while, but it is pretty clear now that we have here a problem waiting to happen. This problem, as far as I am concerned, mirrors completely the problems encountered with the Gold Standard following WWI and the demise of the UK economy as the guarantor of the globalisation process. History is now repeating itself in the case of the US in the face of the rise of China and India.

What this means is that - following the idea of 'global imbalances' so eloquently described by Stephen Roach - we have a highly unstable dynamic in front of us. Now Durani's argument would be that the US demise is Europe's opportunity: except that Europe is suffering from all the US problems, and some more (see last post). In particular much rests here on whether you are convinced or not by my demographic argument.

Clearly, without the demographic factor we would have a kind of 'swings and roundabouts' situation, where one goes down and the other goes up. But Europe is a leaky ship, and taking on water fast. Out in front lies not a massive growth expansion, but a difficult and painful period of adjustment.

What this means is that the seesaw analogy fails: Europe cannot go up while the US goes down: both need to descend together. So the problem here is architectural (any suggestions Lloyd?): and I for one don't have the answers ready to pull out like a rabbit from my pocket. More daring folk please feel free to venture forth.

I also don't buy the gold and silver standard argument. We need something more imaginative. Forgive me if right now I can't tell you what that might be.

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