Greg's Note: The fall of the dollar and the relative rise of the euro has brought about much speculation about the financial state of the U.S. as the world's military and financial super power. But as Lord William Rees-Mogg explains, the problems existing within the Eurozone are far from resolution. Can an already shaky union maintain as the euro's rise exposes more weaknesses? Let us know what you think by writing to greg@whiskeyandgunpowder.com. Whiskey & Gunpowder
In the last year, the euro has decisively outperformed the dollar and the pound. Some commentators have argued that this means that the euro is the currency of the future, and that the dollar has been relegated to second place. However, there are problems about this argument. The United States is incomparably the stronger defence power; indeed the U.S. is now the only defence superpower in the world. As Britain found at the height of imperial power, it is not always easy to convert defence capacity into financial strength. Nevertheless, it was the sails of the British navy that maintained world peace in the nineteenth century and made the gold standard possible. In 1797 the Napoleonic War led to the suspension of gold convertibility, which was not resumed until after the Battle of Waterloo in 1815. Gold convertibility was again suspended in 1914, on the outbreak of the First World War. Britain was able to maintain gold convertibility for the hundred years of relative peace, which allowed the industrial revolution to spread around the world. In the 1860s, the United States had to suspend gold convertibility, during and immediately after the Civil War. The euro is now protected by U.S. defence capacity. ~~~~~~~~~~~~~Special~~~~~~~~~~~~~ Savvy Investors in 2007's Best-Performing Bulletin Board Stock Made Over 4,000 TIMES Their Money in Six Months Yes, you read that right: Those holding shares in the "Best of the Boards" rode gains of more than 4,000 times their investment (409,900%) between New Year's Day and the Fourth of July last year. Had you been one of them, your $1,000 investment would've morphed into $4,099,000... Get on board to find which one's going to be 2008's best performer… Read on here… ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ A more immediate concern is the growing divergence of European economies. Two big European economies, Italy and Spain, are perceived as more risky than the two core members of the Eurozone, Germany and France. The traditional indicators of risk in debt markets, as reported in The Financial Times, are Credit Default Swaps (CDS) and 10-year bond yields. The 10-year bonds are particularly interesting as they are Eurobonds for which the different Euro countries are separately responsible. Currently the Italian 10-year bond yields about 60 basis points more than the German, which is the benchmark bond. Greek bonds also have high yields. Financially, Europe can be divided into two zones. The Southern zone includes Italy, Spain, Greece and Portugal, of which only Portugal is not a Mediterranean country. Ireland is also financially overexposed, but Ireland is a small economy, and has separate problems over the Lisbon Treaty. The Northern group of the Eurozone countries are the Franco-German alliance, which includes the adjoining three core countries of the original six nations of the Rome Treaty — Belgium, the Netherlands and Luxembourg. On present financial trends, there are three Europes, a Mediterranean Europe, led by Italy, a core Franco-German Europe and a peripheral Europe, in which Britain is the largest economy. The peripheral Europe includes Scandinavia, the Central European group and potentially, a Balkan group. In American history, the original division was between North and South. That would now include the West as a separate economic zone. Europe is already divided in three ways. The risk is that North and South Europe will diverge in economic capacity. Can Italy or Spain maintain a fixed exchange relationship with Germany? The stronger the euro becomes, the greater the internal strains on the Eurozone are likely to become. Regards, Greg's Endnote: The euro's rise is leading to problems within the European Union. But those problems do little to solve the problem we are still facing when it comes to the value of our currency. Even as oil prices begin to retreat, we are still at risk of seeing more inflation here in the States. What happens when the value of the dollar plummets? Click here to find out… |
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