St. James International · Further Readings


EURONLY AS GOOD AS...

THE EURO has been in the public eye recently with its sharp decline against the US dollar.

The size of the European Union and its significance as a trading partner will always provoke a sentimental inclination towards bullishness in the same way that there has always been a tendency to be bullish about the dollar and sterling because of their trade importance including invisible exports.  Bullish, that is, until the international speculators bring reason to bear.  We should not automatically assume that the pace of recovery in the EU will be uniform among its members, and in particular among those 16 countries that comprise the Eurozone.  The unpredictable pace of economic recovery among the members of the Eurozone ie those member countries which have adopted the euro as their only legal tender is ipso facto a reason for scepticism about the rate of recovery of their currency.

Within the rest of the EU there are different levels of commitment to the common currency. England and Sweden are looking the other way.  Denmark is thawing while Hungary, the Czech Republic, Bulgaria, Romania and Poland are indifferent.  Latvia, Lithuania and Estonia want to play and along with Denmark are undergoing a period of qualification in the Exchange Rate Mechanism.  Latvia however has turned to the International Monetary Fund whose conditions for help proscribe a pegged exchange rate so Latvia has shot itself in the foot. 

If the diversity and divergence of the economies were not enough of a concern there are also extraneous factors directly linked to the euro.   Monaco, San Marino and the Vatican City have all entered into agreements with the EU not only to use the euro as their sole currency but to mint their own coinage.  Andorra, Kosovo and Montenegro have adopted the euro as their currency without any agreement with the EU and consequently have no control over the issue in their own countries.  So, on the one hand we have three countries issuing euros without any control from the EU and on the other hand we have three countries using the euro without any control by the EU.

Monetary policy of the 16 countries in the Eurozone is managed by the European Central Bank and the European System of central banks which comprises  the ECB and the members of the EU which are in the Eurozone ie the 16 countries.  The Finance Ministers of these 16 countries meet the day before a plenary meeting of all EU Finance Ministers.  Of these 16 countries Greece has been bailed out; Cyprus and Malta are reliant on tourism in an economic trough; Spain and Portugal can be considered in the same category.  Slovenia and Slovakia have emerged from the East European communist bloc.  Not in the Eurozone but in the EU are Bulgaria, Romania, Hungary, the Czech Republic and Poland, all of them from the communist bloc. Then there are Estonia, Latvia and Lithuania from the break up of the USSR.  Using the euro outside the control of the ECB are Kosovo and Montenegro from the ashes of communist Yugoslavia.

You’re only as good as your weakest link.  For the EURO the million dollar question is, “ What is the weakest link?” 

ERIC DIXON                      June 2010

eric.dixon@stjamesinternational.com



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