Euro Zone as Optimum currency Area

November 29th, 2018 at 4:18:34 AM permalink
Pacomartin
Member since: Oct 24, 2012
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For decades before the exchange rate with the Euro was fixed, the German Deutschmark (DM) was one of the strongest European currencies.

Looking at the original 12 countries of the future Euro Zone and see how their currencies changed with respect to the DM over a 20 year period we get the following table:

* 0% Germany (base reference)
* +0.5% Austria
* -1.5% Netherlands
* -21.1% Belgium/Luxembourg currency zone
* -29.5% France
* -31.9% Ireland
* -36.9% Finland
1. -49.7% Italy
2. -52.3% Spain
3. -73.8% Portugal
4. -85.9% Greece

It's not a real shock, it indicates that instead of a union of 12 currencies, perhaps the optimum currency area would be to leave out four countries: Italy, Spain, Portugal and Greece. That would have removed almost 40% of the population of the Euro Zone.

An even more conservative conclusion is that the optimum currency area would be simply 5 countries of Germany, Austria and BENELUX

So is the Euro currency inherently unstable?
November 29th, 2018 at 4:48:28 AM permalink
AZDuffman
Member since: Oct 24, 2012
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Quote: Pacomartin


So is the Euro currency inherently unstable?


The problem is not the Euro itself but the diversity of its members. It seems that nobody cared how different the economies of the various members were. In one way, it is like the minimum wage in the USA. At the moment we are doing good there because we are getting to the point where MW is a de facto state level issue. But if the "Fight for $15" crowd got their wish, effects would vary wildly. San Francisco might hardly notice, businesses in most of the USA would be crippled and those in poor areas of Appalachia would be crushed.

So we have the Euro. For Germany it was just an accounting change as the Mark was its real basis. France had adjustments and Greece got crushed.

The EU wants to be unified almost to the point the USA is for multiple reasons. But they cannot do this. The better way would have been for the Mark to be adopted by those border countries. Or maybe have BENLUX have a local "Markized" system like the Bahamas has to the USD. Once that settled, the next neighbors could join, one at a time, over decades.
The man who damns money has obtained it dishonorably; the man who respects it has earned it
November 29th, 2018 at 5:39:01 AM permalink
Pacomartin
Member since: Oct 24, 2012
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Quote: AZDuffman
The problem is not the Euro itself but the diversity of its members.

OK, we take it for granted that the 5 countries of Germany, Austria and BENELUX could support a common currency without much difficulty. About 70% population of the 5 countries would be Germany.

But the euro area, currently is a monetary union of 19 of the 28 European Union (EU) member states which have adopted the euro () as their common currency and sole legal tender. By agreement the Euro Area must expand by 6 more members with UK leaving and Denmark and Sweden never adopting the Euro.Germany is less than 25% of that population.

Clearly, even if Greece and/or Portugal were to leave, the EURO would remain.

But is it more unstable than that? Is it destined to collapse?
November 29th, 2018 at 7:43:04 AM permalink
Fleastiff
Member since: Oct 27, 2012
Threads: 54
Posts: 6563
what is a currency based on: industrial might, nation character?

what are first impressions when hearing these countries names??


* 0% Germany
Hard working, honest, law abiding some problems with bribery and immigration.
* +0.5% Austria
small, weird traffic and prostitution laws
* -1.5% Netherlands
committed egalitarianism, army is unionized, drugs tolerated but not as openly as believed,

* -29.5% France
governments come and go but problems stay,

* -36.9% Finland
hard working, good schools, good life.
1. -49.7% Italy
theatrical governments, courts are theater, legislature an insane asylum.
2. -52.3% Spain
poor economy, sectarian troubles, immigrant enclaves, rampant bribery, govt spending unrelated to practicality.
3. -73.8% Portugal
tourism, bribery,
4. -85.9% Greece
featherbedding, no-show govt workers, bribery, determination to impose austerity on everyone who is not greek.

And you want to mix it all together to get stability and growth??????
November 29th, 2018 at 7:50:20 AM permalink
AZDuffman
Member since: Oct 24, 2012
Threads: 112
Posts: 8886
Quote: Pacomartin
OK, we take it for granted that the 5 countries of Germany, Austria and BENELUX could support a common currency without much difficulty. About 70% population of the 5 countries would be Germany.

But the euro area, currently is a monetary union of 19 of the 28 European Union (EU) member states which have adopted the euro () as their common currency and sole legal tender. By agreement the Euro Area must expand by 6 more members with UK leaving and Denmark and Sweden never adopting the Euro.Germany is less than 25% of that population.

Clearly, even if Greece and/or Portugal were to leave, the EURO would remain.

But is it more unstable than that? Is it destined to collapse?


They all collapse eventually. The USD collapsed 1964-1972, but nobody noticed because it just replaced itself with a USD no longer backed by gold and silver.
The man who damns money has obtained it dishonorably; the man who respects it has earned it
November 29th, 2018 at 1:19:06 PM permalink
Pacomartin
Member since: Oct 24, 2012
Threads: 869
Posts: 10320
Quote: Fleastiff
what is a currency based on: industrial might, nation character?
what are first impressions when hearing these countries names??
...

And you want to mix it all together to get stability and growth??????

The USA lost -0.6% to the DM in the same 20 year period, but in the previous decade (1971-1981) the USD lost -42.2% against the DM.

How would you summarize the USA in that period (1971-1981)?

Quote: AZDuffman
They all collapse eventually. The USD collapsed 1964-1972, but nobody noticed because it just replaced itself with a USD no longer backed by gold and silver.

Now cash is backed by the GDP. But Japan issues cash at 20% of GDP while the Euro Zone issues it at 10.7% of GDP and the USA at less than 9%.

With the non renewal of the 500 Euro banknote, the Swiss may step in with their 1000CHF~881EUR~$1000 banknote which will be released in 2019

There are no accurate images until the note is actually released, but the 200 franc note was released on 15 August 2018. All the new notes feature hands, and they are ultra secure with 13 security features.


Only Japan issues banknotes and coins worth 20% of it's GDP. But I suspect that Switzerland will exceed that value as foreigners will clamor for this beautiful new note. Switzerland is a leading exporter of high-end watches and clocks. Swiss companies produce most of the world's high-end watches: in 2011 exports reached nearly 19.3 billion CHF. I could see the export of 1000CHF banknotes exceeding that number by several multiples.

Until the banknote is released next year, there is only this black and white image showing some of the motifs.
November 29th, 2018 at 6:09:50 PM permalink
Fleastiff
Member since: Oct 27, 2012
Threads: 54
Posts: 6563
I don't remember that time periodtoo well. I think it was the tail end of the Vietnam war, protests, even riots,
massive economic impact as p;eople realized you can't spend billions on a quaqmire and not suffer
the consequences, price controls, headlines that make us a laughing stock of the world.
Not much to inspire confidence in the economy or government or anything else.
November 30th, 2018 at 2:57:04 AM permalink
AZDuffman
Member since: Oct 24, 2012
Threads: 112
Posts: 8886
Quote: Fleastiff
I don't remember that time periodtoo well. I think it was the tail end of the Vietnam war, protests, even riots,
massive economic impact as p;eople realized you can't spend billions on a quaqmire and not suffer
the consequences, price controls, headlines that make us a laughing stock of the world.
Not much to inspire confidence in the economy or government or anything else.


The crash started before Vietnam really fired up, it ended after the damage was done. The value of silver was getting to where people were hoarding coins to the point of causing shortages. Like Rome before it, the US Government took the silver out of the coins. Then the French saw the value the USA was getting out of Bretton Woods and started emptying out the gold reserves. Nixon sent them an up-yours card and closed the gold window at the Fed.

The result was almost 15 years of out of control inflation which took the worse recession post-WWII to date to break the back of then another 5-10 years of currency value re-ordering not broken until the Plaza Accord. The USA did not suffer like Greece has and will, but that secure life of 1945-1964 would be no more.

Another crash will come as so much debt comes due. Cities will have sold off all the assets from toll roads to parking meters that can be sold. Federal debt will in the next generation take up over half of the budget. The whole public sector will be like some family trying to re-finance their mortgage with a 47% DTI ratio, underwriter knowing it is a bad bet but they just have to do it to save a much needed $300 per month paying debt to pay other debt.

Then inflation will eat away everything like termites. Those with only locked-in mortgages or paid off houses and no other debt will make it thru and even come out ahead 20 years later. The rest will resemble late-1990s Russia.
The man who damns money has obtained it dishonorably; the man who respects it has earned it
December 3rd, 2018 at 1:51:05 PM permalink
Ayecarumba
Member since: Oct 24, 2012
Threads: 87
Posts: 1638
The OPEC squeeze in the early 70's really changed American economics and put the country's relations with the middle east, and Soviet Union on course toward the conflict won by Reagan's massive defense spending. We got kicked in the nuts by Bin Laden though.