by Mark Scheinbaum
AR Financial Correspondent
June 2, 2012
FOR THE EURO, THE END IS NEAR
HOUSTON, Tex., June 2, 2012 -- News that the two-year German bond has hit precisely 0% interest is the leading indicator that the Euro, the newly-created currency of 17 of the member-states of the European Union used by 332 million Europeans, will disappear from the global scene. As we know it, the Euro is likely to vanish in the middle of a weekend night, much like the Baltimore Colts snuck out of their home town to move to Indianapolis.
For financial professionals, or even those tourists and other consumers of the European ambience, the front page of yesterday's Financial Times proclaiming the 0% rate in Germany put the European economic crisis in perspective.
People looking for the safe haven of the resilient German industrial machine are willing to "park" their money in Germany for two years with no return. Better, they say, to get the return of your money than a negative return on your money.
As the paper pointed out, the zero level is even more dramatically stark than the "lost decade" of Japanese markets, where money was available for loan at under 1 percent - but few qualified to receive a loan.
The Euro - after the U.S. Dollar, the second-largest world reserve currency and the seond most-traded - is one of those complicated stories that the average Joe and Jane gloss over, bleary-eyed with the belief that it is all too complicated. It's really not.
So let's start with the key years of formation of the Euro through its brief "golden years" until about five years ago, when mounting crises - Iceland, Ireland, Portugal, Spain, Italy, Greece, the UK, Spain and Greece again, France and Italy again, and even questions about Germany itself - affecting the Eurozone shook things up.
I have selected the following timeline by adapting freely from German financial newsletters. You can see the timeline in full at this link.
April: All border controls between Austria, Germany and Italy are abolished.
Jan. 1: The Euro and the EMU (European Monetary Union) are born. The Euro becomes the legal currency in eleven EU countries (along with national currencies) but will not go into cash circulation until Jan 1, 2002.
Jan. 1: The Euro celebrates its first birthday. It is still a cashless currency used for Eurozone bank accounts and stock market transactions.
Jan. 1: The Euro celebrates its second birthday.
Jan. 1: Euro banknotes and coins go into circulation in the 12-nation Eurozone. The Euro can be used along with the traditional currency until the end of February, but consumers get change back in Euros only. The national currency is no longer valid for bank accounts or cashless transactions.
Travelers in the Eurozone no longer have to exchange money as they move from one country to another. Prices are displayed in Euros only.
Feb. 28: The former national currencies are no longer legal tender. The Euro is the only money that can be used legally throughout the Eurozone.
March 1: German commercial banks no longer have to exchange marks for Euros, but old notes and coins can be exchanged indefinitely at any branch of the Bundesbank.
Sept. 14: In a referendum, Swedish voters say "nej" (no) to having their country adopt the Euro. This is seen as a setback for adding other countries to "Euroland," particularly Great Britain.
Jan. 1: The Euro celebrates its fifth birthday and Slovenia joins the Eurozone as the 13th nation using the currency. As the Euro entered its fifth year as a cash currency, it was trading at a rate of about $1.30. However, many Europeans were still not fond of the new money, despite the fact that it was becoming a strong competitor for the Dollar. They often have the false impression that the Euro has led to higher prices ("der TEuro"), although in fact - adjusted for inflation - prices in Euros were not higher. The Euro also makes it easier for people to compare prices for specific items among the European countries who use it.
Jan. 1 On the Euro's sixth birthday it was trading at a rate of about $1.45. In 2008, two more countries (Cyprus and Malta) join the Eurozone, making a total of 15 nations now using the Euro as their official currency. Today, the Euro is trading at $1.23, which is a two-year low versus the U.S. Dollar. In just the past three years, however, it has traded as high as $1.50.
The question now becomes how long the middle class and the wealthier Northern European users of the Euro will either see themselves as subsidizing "Southern" economies such as Greece, Spain, Portugal or even Italy? Germans, who are still paying off the gigantic costs of the reunification of East and West Germany (which worked rather well for a complicated economic integration), are getting politically tired of being the lender of last resort for overspending neighbors.
On the ideological level, the fate of two or three generations of Islamic emigrants to Germany, Belgium, France, Italy, Holland and elsewhere creates friction for lower-paid workers in times of recession.
As seen in the recent French elections, the questions of socialism, austerity, nationalism and much more are growing in temperature, rather than cooling off in what was supposed to be a lasting era of European cooperation.
Having been tangentially present "at the creation," it is tough for me to call the Euro a great experiment that failed. The savings in shipping, manufacturing and infrastructure were real.
Compared to the pre-Euro days, imagine the savings of a cork-veneer wallpaper manufacturer in Portugal, who is shipping designer wall coverings to a favorite wholesaler in Antwerp, Belgium. Instead of duties, tariffs, documentation, or even having to chaneg trucks in each country along the way, the driver leaves Lisbon and heads to Belgium, period.
For you, security considerations aside, fly from Newark to Amsterdam. A day or two later, fly to Rome and take a train to Nice. Rent a car and drive to Brussels. You get one stamp in your passport. People and goods move with less bureaucracy and cost. Yet national pride does not evaporate because of diplomatic agreements and economic consolidation.
In the early 1990's I heard people who truly did believe that poorer communities would find prices at the highest levels of the European economy. Milk, or bread, or dinner in a rural town in Italy would not be in Lira but in the new Germa-n and French-dominated Euro. As seen in the timeline, the experts say it was not so, but that was the perception of many consumers.
In 1997, with U.S. Dollars flowing into Bosnia-Herzegovina in post-war peacekeeping, reconstruction, and economic stimulus, many people asked me to pay for things in Deutschmarks, not Dollars. In Eastern Europe, there was certainly the perception that the currency of record, the safe and familiar currency, was the German and not the U.S. currency.
When the Euro entered the scene there were many Europeans who viewed it not as a streamlined and efficient Continental currency, but as the surrogate for the strong D-Mark. In fact, to this observer, it was almost a justificatio - proof positive - that all things from OPEC oil to trade agreements with China should now be priced in Euros (D-Marks) instead of Dollars, which carried too much volatility and political controversy for the Arab world.
Times have truly changed when the credit rating of the U.S. Dollar goes "below investment grade," but global money continues to soak up U.S. short-term Treasuries of the same duration as those 0% German bonds at around 1.62% return per year. But until the past five years of what amounts to a gigantic "mortgage modification" for Southern Europe, the Euro was flying high.
As an aside, Prime Minister Tony Blair and his predecessors - forced by the British electorate to keep the UK out of the Euro - seemed to produce milder recessions, stronger rebound ability, and at times an alternative safe haven currency versus the Yen, Dollar and Euro. One might argue that with the exception of the soaring Swiss Franc (which created its own domestic troubles in that country) the Pound Sterling has fared rather well in the worst recession (more correctly dubbed a "Depression," economist Paul Krugman said on BBC Radio yesterday) in 80 years.
The evolution of the unified European currency has created myriad rules, mores, habits, and bureaucracies of its own. It would be tough to untangle the intricate web created by the Euro strand by strand.
This is why in the dead of night one weekend late this year, the Euro will likely be swatted away with a sturdy broom made in France or Germany. Left clinging to the rafters will be small, lasting pieces future tinkerers might use to rebuild and thrive in a latticework of international fiscal cooperation.
Spain's biggest investments are in one part of the world where sub-prime mortgages and defaults of property are not a big issue: Latin America. Since many Latin countries have real property laws that are vestiges of the old Spanish Colonial rules, folks who in other countries could get mortgages to develop family lands into hotels, shops, or houses are cut out of the banking system by ruling elites. In a bizarre way, this actually protected them from the sub-prime mortage scandals of North America and parts of Western Europe. As a dominant investment force in this region, Spain still has assets, managers, and investments earning income - even if domestic outlook is dismal.
Can Germany and others survive with a Euro which is the debt instrument of Greece, perhaps for 30 years? Probably. Can Germany and others tolerate shoring up a Euro which is a bifurcated, or two-tiered currency meaning one thing for France, Benelux, and Germany and another for Spain, Italy, Greece and perhaps one day Turkey? Probably not.
The economists and bankers are debating whether or not a return to national currencies such as the French Franc and D-Mark actually create a more market-sensitive and realistic flow of economic trade for each society rather than a transEuropean Euro model.
If nationalism, with its language differences, national persona and customs were to disappear, and the world became one big Toyota-driving, McDonald's-eating, Idol-watching monolith, the Euro would certainly survive.
But as long as politicians need a meaningful identity, local issues and local passions to earn their paychecks, it seems a certainty that the Euro will be history by the end of the year.
AR Financial Correspondent Mark Scheinbaum, a political scientist and former UPI newsman, is managing director, of Shearson Financial LLC. His views do not represent those of his firm, its management or clients.