{"id":36243,"date":"2013-02-17T22:52:24","date_gmt":"2013-02-18T03:52:24","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=36243"},"modified":"2013-02-17T22:52:25","modified_gmt":"2013-02-18T03:52:25","slug":"the-biggest-threat-to-the-euro","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/02\/17\/the-biggest-threat-to-the-euro\/","title":{"rendered":"The Biggest Threat to the Euro"},"content":{"rendered":"

By MoneyMorning.com.au<\/u><\/a> <\/p>\n

Europe\u2019s problems go a lot deeper than Greece.<\/p>\n

If you didn\u2019t already know that, it became pretty plain last week.<\/p>\n

Germany, France and Italy all saw their economies shrink in the final quarter of 2012, compared to the third quarter. Overall, the eurozone economy<\/strong> shrunk by 0.6%, a bigger drop than expected.<\/p>\n

It\u2019s all pretty grim. It also puts even more pressure on the most important relationship in the eurozone<\/a> \u2013 the one between Germany and France…<\/span><\/p>\n

\u00a0Why Greece Didn\u2019t Leave the Euro…<\/h2>\n

For most of last year, the biggest threat to the euro was the \u2018Grexit<\/a>\u2019 \u2013 the danger that Greece would drop out (or be kicked out) of the zone, resulting in a chain reaction of fellow members leaving.<\/p>\n

That threat receded as the Greeks voted to stick with the status quo, and the European Central Bank<\/a> (ECB) stepped in to promise unlimited government bond-buying, if necessary. Markets strengthened, along with the euro<\/strong>.<\/p>\n

Now Greece is hardly out of the woods yet. Between the fourth quarter of 2011 and the fourth quarter of 2012, the economy shrank by 6%. The Greeks may yet get sick of this.<\/p>\n

But I\u2019m rapidly coming to the conclusion that by far the greatest risk to the euro is an exit by Germany<\/a>, not Greece, or one of the other peripheral countries.<\/p>\n

Let\u2019s think about this for a moment. The peripheral nations are in a lot of pain. That\u2019s why pundits argue that they will vote to leave the eurozone: simply because the populations can\u2019t stand it any longer.<\/p>\n

But it\u2019s not that simple. The first problem is this: people in the peripheral nations are only too aware that they are suffering. But they don\u2019t necessarily link that suffering to the euro in itself. They\u2019re more likely to link it to the intransigence of their fellow members \u2013 the Germans in particular.<\/p>\n

So there\u2019s no direct link in the average voter\u2019s mind between the single currency and their economic woes. That\u2019s why we haven\u2019t really seen any major anti-euro political movement yet. There\u2019s a hint of it in Italy, but I suspect that\u2019s more about blackmailing other members to gain influence: Italy knows it\u2019s too big to fail, so the European Central Bank had better fall into line, or else.<\/p>\n

Secondly, for the peripheral economies, the euro represents a major advance for them. Many of the \u2018Club Med\u2019 countries have only recently (in historical terms) become democracies. Being able to join the euro and the ranks of the firmly developed economies is quite an achievement. Leaving again would feel like a step back. Nobody wants that.<\/p>\n

And thirdly, ditching the euro<\/a> is hardly an easy option. It\u2019s not as though these economies will recover the morning after they return to the drachma or peseta or escudo. Inflation will rocket, savers will be ruined, and you\u2019ll have a lot of potential for unrest and unpredictable side-effects. That\u2019s not something you vote for lightly.<\/p>\n

\u00a0\u00a0Why Germany Just Might Leave the Euro<\/h2>\n

So, thinking about it like that, the fragile countries are not in a good position to leave the euro. They might need a weaker currency, but they\u2019d much rather have a weaker euro, not a return to their old currencies<\/a>.<\/p>\n

And the peripheral nations now have a champion, in the form of France. French president Fran\u00e7ois Hollande is agitating for a weaker euro. But the Germans are not so keen.<\/p>\n

Jens Weidmann, head of the German central bank, told Bloomberg: \u2018I fear a politicisation of the exchange rate\u2019. Other German officials may not be quite as \u2018hard money\u2019 as Weidmann, but with a German election up ahead this year, Angela Merkel has to tread a line between creating more eurozone upheaval, and being seen as bowing to the demands of other nations.<\/p>\n

So we\u2019ve got a situation whereby France and a majority of the other eurozone nations need and want a weaker currency. None of them are prepared to take the consequences of actively marching out of the euro. Germany on the other hand, is having its arm twisted to bail these countries out (as it sees it), at the risk of inflicting higher inflation on its own citizens.<\/p>\n

If Germany were to leave the euro, its new currency wouldn\u2019t collapse. If anything, it would soar. We might see that as a big problem for an export-dependent nation, but estimates by various investment banks suggest that Germany could tolerate a much higher exchange rate before it caused it real pain.<\/p>\n

So here are the choices: if you are Greek, you have a choice of doom by deflation, or doom by rampant inflation<\/a>. Your best hope of a more moderate path is to get a far weaker euro. Given the options, throwing your lot in with the French and pressurising the ECB to weaken the single currency, looks the best of a bad bunch.<\/p>\n

If you\u2019re German though, your choice is: bail out all these other countries and put up with inflation. Or leave them to it, get the strong currency you desire, and keep pumping out top-class export goods that other nations will buy anyway. The only thing keeping you onside is an emotional attachment to the eurozone \u2018project\u2019.<\/p>\n

So what does it all mean investment-wise? A German exit would take ages to play out. It\u2019s not going to happen soon. But the Germans are not going to get the kind of euro they want.<\/p>\n

Indeed, I\u2019d be surprised if the euro gets much stronger this year from here. Given the litany of whining that has already started up, I hate to imagine the reaction if it actually gets to $1.40 or more, from where it is now. The ECB will come under pressure to act, or to at least keep talking it down.<\/p>\n

John Stepek<\/b><\/p>\n

Contributing Writer, Money Morning<\/i><\/b><\/p>\n

\u00a0<\/b>Publisher\u2019s Note: <\/i>This article originally appeared in MoneyWeek<\/i><\/a><\/p>\n

\u00a0<\/i><\/b>From the Archives\u2026<\/i><\/b><\/p>\n

Four Things to Look Out for When Buying Gold Stocks<\/a><\/p>\n

15-02-2013 \u2013 Kris Sayce<\/p>\n

Here\u2019s One Way to Eke More Gains from this Rising Stock Market<\/a><\/p>\n

14-02-2013 \u2013 Kris Sayce<\/p>\n

When Will the Inflationary Stock Boost End?<\/a><\/p>\n

13-02-2013 \u2013 Murray Dawes<\/p>\n

Gold Stocks: Back Up the Truck<\/a><\/p>\n

12-02-2013 \u2013 Dr. Alex Cowie<\/p>\n

The Next Surge in the Gold Price Looms: It\u2019s Time to Buy Gold Now<\/a><\/p>\n

11-02-2013 \u2013 Dr. Alex Cowie<\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au Europe\u2019s problems go a lot deeper than Greece. If you didn\u2019t already know that, it became pretty plain last week. Germany, France and Italy all saw their economies shrink in the final quarter of 2012, compared to the third quarter. Overall, the eurozone economy shrunk by 0.6%, a bigger drop than expected. It\u2019s … <\/p>\n

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