The End of the Euro?
Jun 09, 2006
It seems that at the Profit Hunter headquarters, one of our key predictions is turning into reality.
It was back on June 3 2004 that we wrote: 'In a year's time, talk about the demise of a currency will be focused on the Euro, not the US Dollar.'
Back then, we wrote a guest essay for the fledgling 'Profit Watch' email about how relatively easy it would be in practical terms to bring back the Deutschmark, the Italian Lira and the French Franc.
Skip forwards a year and a couple of days. On June 5 2005, an Observer headline posed the question, 'How long can the Euro last?' And the chatter is getting louder...
It seems that Profit Hunter's prediction has come in one year and 2 days later. We were two days late.
Now, the 'No' vote on the Euro by both the French and the Dutch has led to turbulence in the world's currency markets. The Euro has plunged against the Dollar and is now at its weakest against the greenback since last October There's already talk about a potential return by at least some EU countries to their former national currencies. Last week, Italy's Northern League called to have the lira back. This rattled the euro, helping to bring it to its lowest level in 10 months on a trade-weighted basis on Tuesday.
And if you listened to Radio 4's Today programme recently, you'll have heard it report at length on public opinion in Italy for a return to the lira.
Without wanting to overindulge in our timely prediction, the ideas we set out in that text are largely still valid today. In fact, some of the recent press coverage could have been lifted straight from this old text.
The Deutschmark certainly won't come back that easily. It won't be quick. Never underestimate to what a degree politicians are able to sit out periods of voter unrest. Plus, once the emotional factor of returning to the 'good old times' is taken out of the equation, a reintroduction of the former national currencies wouldn't immediately lead to the EU's economic problems being solved.
Both Germany and other EU countries first and foremost need to reform their labour market and their vast bureaucracies and inefficient tax systems. Getting a different currency would not get rid of any of these hurdles for European growth.
The media now often cites that some 50% of Germans are in favour of returning to the Deutschmark. The willingness of Germans to support drastic structural reforms, however, is much lower. After all, the country has just called early national elections because of Gerhard Schroeder feeling that the people don't support his reform path – and it's not even like Schroeder had enacted Thatcher-esque all-round reforms.
It's symptomatic of the EU's economic problems that the people support short-term measures, but they aren't willing to really cut through the chaff. In the end, such short-termism might just lead to the gradual end of the Euro. Let me explain...
It was Italy that during the 1990s found it convenient to devalue the Lira to remain competitive on the export markets. With the Euro still being comparatively strong against the Dollar, this might once more become the favoured route. It saves a country from having to enact stark reform measures.
As I had set out in my original column, taking the Italian Euros out of circulation wouldn't be too hard a task. And it'd be exactly the kind of short-term measure so favoured by most Europeans.
With a debt of 112% of GDP, Greece would be another natural candidate for leaving the monetary union. Devaluing its currency would also free it of a huge chunk of its debt load. Once Italy and Greece are out, the EU's monetary system could crumble and fall to pieces.
Hence, it's been noted with much interest that as a publicity stunt, Deutsche Telekom will temporarily accept Deutschmark coins in its phone booths. A sign of things to come?
The Euro now looks like a wounded animal. It's down to an 8-month low versus the pound of just 67p. And currency traders and the media are almost certainly bound to hound it for the months to come.
Further weakness in the Euro seems more than likely. What's the real good news about this?
Export orientated companies in the Euro zone will find it much easier to compete on the world market, after a time when the Euro/Dollar exchange rate put enormous pressure onto their cost structure. That's one area the Profit Hunter team are focusing our attentions right now – and we'll look to bring an investment to catch this trend to members of our premium service soon.
One thing is clear: no matter how bad the headlines, somewhere in the world money is being made at any given time. And it's our job to find it for our readers.
Until the next time...
Sven LorenFor Profit Hunter Files
PS: By the way, of course traders and investors will be able to make a profit on these developments – if they are in the know about the right investments. Advising on which shares have the highest profit potential is what our premium service, Profit Hunter, does. For a flavour of exactly how this service can help put you ahead of average investors, take a look at this report:
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