Friday, August 23, 2013

Euro stability

Dieter Wermuth in Warum sich der Euro so gut hält Zeit Herdentrieb 21.08.2013 looks at the question of why the euro is maintaining its current exchange value relative to the dollar pretty well when the prospects for the currency look so bad at the moment.

He argues that the relative strength of the eurozone economy as a whole is comparable to that of the United States. Many discussions of the euro miss what a key role the aggregate eurozone economic state plays in currency issues. And, in particular, how much it benefits Germany. For Germany's heavily export-oriented economy, the presence of weaker economies in the eurozone, several of which are in real crisis, keeps the value of the euro down compared to what it would be if Germany had its own currency. And if the current euro structure falls apart and Germany goes back to the mark or to a smaller euro with much heavier representation of the northern European countries, the value of the currency will go up dramatically. and this in turn will hammer Germany's economy in a serious way.

For all the stiff dogma in Chancellor Angela Merkel's insistence on austerity for the southern European economies, there's also an element of panic. Germany is riding the tiger with the euro at the moment.

But Wermuth goes off the tracks after that. In fact, he sees the US economy being imperiled by the phantom menace of excessive debt. And therefore he thinks the euro has good times ahead!

He bases this on a paper by Robert Jenkins, Think the unthinkable on US debt, part of Sovereign risk: a world without risk-free assets? BIS Papers No 72 (July 2013). Jenkins' argument is based on the tired assumptions of the Very Serious People that inflation is always a deadly threat and quantitative easing, aaaiii-iiiii! Hyperinflation any minute now!

Robert Jenkins has been pretty good, though, it seems, on the need for better banking regulation: Robert Jenkins: Puncturing Bankers’ Myths Naked Capitalism 09/27/2012.

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