Tel. +44 (0)20 7287 4414
Tel. +44 (0)20 7287 4414
The Bruges Group spearheaded the intellectual battle to win a vote to leave the European Union and, above all, against the emergence of a centralised EU state.
The Bruges Group spearheaded the intellectual battle to win a vote to leave the European Union and, above all, against the emergence of a centralised EU state.

Bruges Group Blog

Spearheading the intellectual battle against the EU. And for new thinking in international affairs.

Is the Euro going to collapse?

The Euro is a currency. That would seem blindingly obvious, but it means that there are two ways in which the Euro could collapse and one way in which it could get massively stronger.

A currency is not just a means of exchange for goods and services within a country, it is also an asset that has a shifting value against other currencies, that is, the dollar, the pound, even the South African Rand.

So the Euro could collapse if it breaks up politically and disappears as a currency altogether, with everyone taking back their original currencies (eg the French Franc and the Deutsche Mark) or its exchange rate can collapse against other currencies whilst remaining intact.

It is in this second way that I think it will collapse.

And then you have to ask: collapse against which other currencies? And, by how much? And, when?

A third scenario is the partial break-up of the Euro.The irony of this scenario is, that if a couple of 'weaker' countries left the Euro (for example Italy and Spain) this would lead to a stronger Euro, not a weaker one, the logic being that the remaining countries would be dominated by Germany and Germany would have a larger proportion of the Euro, thereby strengthening it. In a way this can be seen on a day-to-day basis in the bond markets. When Italian bonds come under pressure, everyone buys German Bunds.The logic in this is that people are either hoping for a strong Euro comprised of only a couple of strong countries or that people are hoping that they either get redemption in Deutsche Marks or even that the Euro simply becomes Germany's alone.

So to return to the initial question. Do I think the Euro can collapse? Yes, definitely. However, I do not think it is going to collapse because of politics. As I said above, should Italy alone came out, the Euro would actually get stronger.

I think the Euro is going to collapse because of global stresses and global capital flows. It will collapse against the US dollar and it remains to be seen if that leads to political breakup or not.

What is happening behind the scenes in the world right now?

First, America is lowering taxes and Europe is raising them.This is massive.The result will be the strengthening of the US dollar.

America is also raising interest rates, whilst Europe is doing nothing and that has the same effect: a stronger dollar. .America's economy is booming, Europe's is static and in trouble due to constant political uncertainty and its seeming inability to resolve anything, from the migrant crisis to Brexit.

America is talking about allowing billions of dollars to be repatriated free of tax. If this goes through, it will shift the entire global financial markets. It will literally mean billions of dollars leaving places like Ireland and elsewhere and returning home to the USA. Whether that will actually happen remains to be seen, but so far Trump's record on the economic front is pretty good as far as doing what he said he would in his manifesto.

The other big underlying trend is a global loss of faith in government. This is not just happening in the Euro zone. It is happening everywhere. However, the consequences will be particularly difficult for Europe.

A loss of confidence in government means people move assets out of government bonds and into private assets. Given that property is very expensive worldwide on every indicator, these will be into stock markets, particularly American ones. This has already been happening for a while but I expect the trend not just to continue, but to accelerate.

So whilst stock markets are likely to continue to soar, not because they are good, but because there is nowhere else safe to put money, the bond markets will plummet.

And the reason why the Eurozone will suffer so badly is that the European Central Bank (ECB) is not set up the same way as either the Bank of England (BOE) or the American Federal Reserve. (Fed.) Both the BOE and Fed each control the interest rates and bond issuance for one country. These countries control their own taxation and their own debt: one country, one central bank.

But the ECB is completely different. It controls one currency (the Euro) but has no control over the debt or taxation of any of the EU member state countries. To make matters worse, it then cross holds debt which means that a bond contagion in one part of the Euro zone can spread to other parts.

Martin Armstrong sums it up quite well when he says: 'They want one federal government, one single currency, but none of the responsibility of a national debt.'

This might all work fine when there are no stresses, the economy is doing well and there is general agreement, but it just will not work in times of severe stress.

And I think that is what we have coming: severe stress caused by a multitude of factors but particularly the rise in the US dollar and a total loss of faith in governments worldwide.

Thus, I think that

  • the Euro will collapse against the dollar.
  • the stresses are much bigger than anyone anticipated.
  • it will all happen much quicker than anyone suspects, probably within the next 5 years.

How low the Euro will go on for before it actually starts to break up is hard to say, but I would imagine it will touch its previous low against the dollar which is about 30% below the current trading level.

And of course, people will then ask, what happens to Sterling or the US dollar?

The main event is the rise of the dollar. I expect the Euro/GBp to be fairly static. Sterling will get battered by the contagion from Europe and its own problems, especially if a Corbyn government is a possibility. I expect GBp/USd to trade below 1.00 in the next 2-5 years – which may come as a shock; most people saying, No, that cannot happen. Well, it just might.

This is neither advice nor a forecast but just something to think about. The global winner will be America.

Sadly, Britain could also have been a global winner with America, if we didn't have May negotiating Brexit for us. Instead, it looks like we will end up being tied to the world's global loser, the Euro zone.

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