Among monetary experts, the idea of a transitional period with the Euro as the international currency starts to rise. The Euro is currently the most stable currency. Over the last 2 years, its volatility has been relatively stable compared to other currencies. The European currency is slowly rising and more an more investors are following the Euro evolution with interest.
Currently, the Euro Zone as other monetary systems is living difficult times. In countries of the Euro Zone, there has been riots, PIGS countries are suffering from the debt crisis and politicians of different countries are taking austerity measures. Haven’t you thought that if the same occured in USA, the dollar may collapse?
In 2010, the global deficit in the euro area is lower than the US. Analysts often forgot to say that the Euro Zone is made of countries like Germany, The Netherlands, Luxembourg, Austria, Slovakia, Estonia and Finland which have experienced over the last decade a relatively stable growth, about 3-4% of GDP, about 50% average of public deficit and annual deficit of less than 3%. Germany is for instance expected to have a public deficit of 1.5 % for 2012 and Finland’s GDP have already been under 3% for many years. Also, in Europe, remains very competitive countries like Danemark, Norway and Sweeden who are not yet in the Euro Zone but who are planning to enter if the Euro shows signs of strenght. And actually that could happen.
Lately, the European Central Bank has been buying the debt of the southern countries of the Euro Zone in order to prevent a total collapse of the currency. Even if Angela Merkel has refused to implement a Euro Bond, the idea has been discussed and the time when the euro zone will see a global benefit from such a policy might not be far. In fact, a Euro Bond will have 2 consequences. It would increases the interest rates for the countries in the North of Europe but it would also lead to a “second exorbitant privilege”.
While the debt of the Southern European countries is growing, the ECB will have to increase its spendings towards those countries. In order to pay off the debt of the PIIGS countries, Nothern European countries could agree to issue a Euro Bond and therefore pay higher interest rates rather than defaulting the Euro curency. Moreover, with the falling dollar, the Euro has been overvalued and a as result, it has caused a decline in Europe’s exports and competitiveness. The privilege of printing monetary bonds for Europe would come as a relief for Europeans multinational companies who suffer from the undervaluation of the Dollar and the Yuan.
If such a system is implemented, its success will depend for a part on China. Like everybody knows, Chinese Central Bank is overwhelmed with dollars. They have to find growth drivers and they are ready to invest and will continue to invest in all that they are permitted to invest in (including foreign real estate), all exept the dollar of course. For now, Chinese gold reserves are ridiculous. India with its ”private holders”has a considerable advantage in the future. Another exorbitant privilege is not desirable, but it is still possible. Indeed, many politicians and economists would like it.
One thing that we often forget to say is that that China is currently weakened by its global financial crisis. If a global crisis were to appear in the months ahead, China would not be ready (especially since it does not have enough gold in reserve). Another problem is that China will not be able to sell its junk bonds without having to devaluate the , eventually making it collapse.
Hence, the theory of a the global economy’s “soft landing” that is switching from the US Tresaury Bond to the Euro Bond, would interest the Middle Kingdom as it will give China and other emerging countries the time to build enough gold reserves. If this scenario occurs, the Euro currency will depreciate, Euro exports will increases and gold will continue to rise more moderatly this time. Currently, European leaders are not ready to take such a decisive action. But in this particular period, Euro hasn’t played its part yet.