Now that the Euro is a fait accompli, the long slow glide begins, perpetually pointed just below the distant horizon. The interest rates prevailing across a very significant area of the industrialised world will now be set to suit the business cycles of France and Germany. Many predict that once the economies of Europe are integrated like that of the United States, that will cease to be a matter of concern. And of course they are correct, once the fringe economies are flattened.
As the structure of Europe’s diversified economies are slowly legislated into highest common denominator standards of ‘social fairness’ in order to protect the interests of French and German trade unions, uncompetitive businesses and their social democratic backers, a gradual leaching process will set in. Economic cycles will continue as ever, but each down turn will squeeze the non-core economies just that little bit more each time, favouring the parts of the economies whose main role is to service highly regulated French and German dominated sectors, rather than independent global export or entirely domestic sectors.
When economic dunce Ross Perot predicted a ‘giant sucking sound’ of jobs heading south of the border into Mexico, he did not seem to realise that all manner of spontaneous market mechanisms were also inexorably moving to adjust, rather than destabilise, the economies of the United States and Mexico. Mexican interest rates and currency fluctuations, and not just lower labour costs, were also of huge importance. Although trade was greatly liberalised, there was never any attempt to impose the US dollar on Mexico (or Canada), or make the writ of Alan Greenspan extend over the whole of NAFTA.
All that is different in Europe because whereas NAFTA has purely economic objectives, the Euro has mostly political ones. Sophisticated and relatively efficient European core economies will no longer have to deal with defensive depreciation of Spanish, Italian, Greek or Irish etc. currencies and will simply wipe out pools of local capital that might have buoyed up less effective local producers. This in and of itself is not automatically a bad thing, provided the local capital markets can adjust… which of course they will not be able to do. The mid to late 1990’s surge in the US economy was a disaster for Argentina, whose currency was pegged to the greenback, because unlike the US, it was not experiencing an economic surge. No mechanism was readily and incrementally available to off-set the asymmetries by allowing the currency to naturally devalue. With the Euro, which is in effect an ersatz Deutschmark/Franc hybrid, this same toxic effect will happen to Greece, Italy, Ireland, Spain, Portugal etc. with one big difference… it will probably happen to many of them at once when the cycle begins, as it surely will.
Even the obvious aspiration to challenge the US dollar as a global reserve currency is doomed. The welfare states of Europe simply cannot compete on equal terms with the less regulated US economy, either in terms on underpinning asset returns or total global liquidity. For all its faults, such as the current lunatic credit binge, the dollar will remain the international reserve currency for the foreseeable future.
Although I have not been bullish on gold for a very long time, any European portfolio might do well to tuck a little yellow ‘mad money’ away and just forget about it for 10 years as a hedge against economic apocalypse, particularly as dollar interest rates are so unattractive right now. Anyone who is actually confident about the future of not just the Euro but the Euro zone, well I have this bridge in Australia I would like to sell you.
