Gold News

Crisis of Confidence in the Euro

Nations don’t have friends, only interests...even in the Eurozone...
THERE APPEARS to be just over one week left for the Eurozone Finance Ministers to resolve the Eurozone debt crisis or face a collapse of confidence, writes Julian Phillips at the Gold Forecaster.
This need not lead to a collapse of the Eurozone, nor the Euro. But in perhaps an underestimated situation, the discord among the members of the “Europe United” bloc, the seeming inability to permanently resolve the crisis, is well on the way to that end. 
It is an underestimated crisis because it will affect the confidence in the entire global system of currencies. Already the warning signals are being fired in the United States as they face similar and sometimes worse financial crises than some of the members of the Eurozone. If the Euro goes down, the Dollar will come under pressure but not fully until there is a viable alternative to the Dollar, which at the moment there isn’t.
To make it clear what has been happening since the Eurozone began, within that zone, we first need to look at the nations before they became part of the union.
Germany had a remarkable work and efficiency ethic and always has. This has made their products attractive globally. Their work ethic leads to far longer work hours and acceptance of lower wages too. This translates into a persistent Balance of Payments surplus (exports minus imports for goods and capital), much the same as we are seeing in China now. Within the Eurozone, this has meant that capital and export proceeds have moved to Germany.
The joy for Germany has been that the Euro allowed them to escape the restraints of the Deutschemark, which reflected these surpluses through a persistently rising exchange rate against all others. This, in turn, stunted the global attractiveness of German goods internationally, as well as in Europe. The principle as now put forward by Mr. Timothy Geithner, US Treasury Secretary, that exchange rates should affect economic fundamentals, came into play on the Deutschmark and kept making it more expensive in other currencies. So when the opportunity arose to remove the Deutschmark and replace it with a European wide currency, the euro came along.
What a huge break and benefit to Germany’s European trade competitiveness! It had the same effect as instituting a fixed exchange rate regime throughout Europe. This meant that capital as well as export proceeds flowed to Germany, making it the most powerful nation in the zone by far. But conversely, manufacturing blossomed there at the expense of the other Eurozone members. This is a fundamental rivet locking Germany into the Eurozone. The only reason why Germany will not accede to any recommendations that we will see in the next week or so, will be because they will prove more costly than the benefits of the Euro itself to Germany.
So why is there such a crisis in the Eurozone? The southern Mediterranean nations Greece, Portugal and Spain have always had a problem with corruption and overbearing bureaucracy that has made efficiency a distant dream. Greece, as we all saw, ‘cooked’ the books and tends to accept tax evasion. Until they can overcome these traits, there appears to be little point in having a plan to rectify their debt problem.
With the austerity measures put forward, the question is, will Greece be able to keep them up and bring in enough to repay their debt? After all, their wealth came essentially in supplying villas and holidays for the industrial nations to their north, particularly Germany. With the property market drying up in those countries, where are they going to earn enough to repay their huge debts?
Belgium, a politically divided nation on the brink of splitting, is facing similar problems. Italy, with its operatic politics, does not appear reliable enough to stick to the disciplines of austerity measures either.
So this crisis is not simply about an adequate rescue package; it is about being able to stick to the disciplines involved. The lack of proper financial discipline that led them there in the first place must be overcome for that to happen. So after over 2,000 years of a discordant Europe will we see financial restraints do what has not happened before?
The rejection of the International Monetary Fund's suggestion of a bigger rescue facility, plus the rejection by Germany of the notion of a Eurozone Bond, may well be more costly overall than the Euro benefits. After all, there has to be a limit on lending your customers more money than they can buy from you. But we believe that only if the plight of the bulk of the Eurozone nations becomes too much for Germany will it exit the Eurozone. 
There are cheaper and more expedient ways to come to some sort of compromise. The advantage to Germany no longer lies with the poorer southern nations for future trade and capital, but in the richer northern neighbors. To date, however, Ireland has been helped out. Will Germany see little gain to rescuing Spain and Portugal and Belgium? Thereby hangs the question, not in any philanthropic neighborly act.
If we don’t have a solution in a week’s time, then expect to see moves to force an exit of Portugal and Spain from the Euro and perhaps the Eurozone. Italy remains an unanswerable situation until we have seen the Iberian Peninsula nations resolved one way or another. This will be the most dramatic of moves, but will leave the stronger residual rest of the Eurozone and a stronger euro. It will also leave Germany with its better customers who can still afford to pay for German goods.
This may appear to be a skeptical view of matters, but we have been often reminded that nations don’t have friends, only interests.

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JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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