Saturday, November 19, 2011

Is the Future of the Euro now in doubt ...and is the US dollar now doubly secure?

Following reports in the press and on the grapevine this week, I have changed my view of the future of the Euro.

I used to think that the chances of the Euro breaking up were 10 for a breakup versus 90 against. Now, I think the chances are 50:50

If Chancellor Merkel really believes that the Euro cannot bring the markets to heel, then the markets will certainly not be brought to heel - and that means the slow or rapid disintegration of the Euro project.

Not guaranteed, of course, because a week is a long time in politics and in monetary history - and anything could happen to drive the recalcitrant Euro-periphery and other countries into the line that is necessary for greater economic and financial integration in the Eurozone - and that is in turn necessary for the Euro to be healthy.

In any case, a breakup is not something that is going to happen tomorrow (though things do move much more swiftly nowadays). In "normal" times, one would expect the disentanglement of the Euro to take place over some years.

Whether slow or rapid, it remains true that the breakup of the Euro will bring enormous costs for all Eurozone countries: Germany will be hit as its exports become more expensive because a revived Deutschmark or equivalent, released from the burden of the rest of the Eurozone will shoot up in value. German exports will also be hit because demand from the rest of the Eurozone (which will be badly hit by the breakup) will dry up. So will demand from most other countries - indeed, we should expect all export oriented countries to be further hit, and expect commodity prices to fall.

All that will, in turn, will provide a fillip for the fortunes of the US dollar (as well as for the UK Pound, which should anyway begin its swing back in the next 12 to 18 months). The question is how far the upswing will go. Sphere: Related Content

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