Tuesday, December 6, 2011

2012: The first ten years of the euro banknotes and coins

The euro will become ten years old in 1st of January 2012. It's ironic that one of the strengths of adopting the euro for a country is that the trustworthiness of the economy will rise significantly allowing to borrow money cheaper from international markets. Just to balance things out more important from this is the rise in foreign investments. But still the adoption of euro lead to marginal interest rates in many countries like Greece, Portugal, Ireland, Italy etc causing significant rise in borrowing leading to crisis that we are facing today.

Even though there is a lot of talk about the collapse of euro I'm fairly certain we will see the next big anniversary as well. The most important argument against euro is that it is not possible for countries to print more money (devaluation). Seriously?! That is a weakness?! First and foremost countries should learn how to spend according to tax revenues. Spending more than you earn is just not sustainable and every person knows that. Why should countries behave differently? Devaluation leads to short-term shock - exports rise, inflation rises, debt nominated in national currency is also being devalued reducing the debt burden, debt nominated in foreign currency is being revalued (it becomes more expensive to pay that back). This strategy is not sustainable. Country is much more open to shocks in foreign resources for example (rise in oil prices etc). This will eventually lead to strengthening of currency, making exports noncompetitive again. Long-term solution is internal devaluation. The same thing we are currently seeing in Greece and other PIIGS. Salaries will fall, regulations improve etc causing rise in productivity which is the essential key to long-term welfare. Devaluation is an easy way out but a bad trap to fall into.

With that I hope that the some kind of solution to eurozone crisis will be found already in EU summit held in two days time. We will probably see strict fiscal rules agreed and implemented in EU level making it impossible for countries to overblow their national budgets. We will probably also hear something from the ECB regarding short-term solution for high yields for national bonds. This could mean that the ECB is willing to cap interest rates for national bonds causing them to aggressively enter the market and buy the bonds themselves when critical levels are reached. The ECB needs EU politicians to act before they can bring out the big guns, or bazooka if you prefer.

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