The future of the Euro

[mgoetze]

I won't be hoarding Euros, I won't be selling them short. And not just because it is probably illegal.

 

LOL... now where did you get that idea?

[kenberg]

LOL... now where did you get that idea?

 

 

I thought that currency speculation is at least somewhat regulated. The Euro, being fairly stable against the dollar, presumably would not be a target. But I think that I cannot take, say, $20,000 to Mexico, trade the dollars for pesos at whatever rate I can get from farmers, and bring the pesos back home. Now I do not want to trade my dollars for pesos. A case could be made for trading my dollars for Euros in the same manner, and I was under the impression that this would be illegal. When I cross the border, I am usually asked about the form and amount of the money I am carrying. Maybe I just look like a drug smuggler.

 

But the main thread is interesting and I don't want to wander off with my uninformed comment so just consider it uninformed and forget it.

[hrothgar]

I thought that currency speculation is at least somewhat regulated. The Euro, being fairly stable against the dollar, presumably would not be a target. But I think that I cannot take, say, $20,000 to Mexico, trade the dollars for pesos at whatever rate I can get from farmers, and bring the pesos back home. Now I do not want to trade my dollars for pesos. A case could be made for trading my dollars for Euros in the same manner, and I was under the impression that this would be illegal. When I cross the border, I am usually asked about the form and amount of the money I am carrying. Maybe I just look like a drug smuggler.

 

But the main thread is interesting and I don't want to wander off with my uninformed comment so just consider it uninformed and forget it.

 

The examples that you are giving are specific to holding currency rather than futures trading.

Assuming that you meet the appropriate conditions, its quite easy to go short on various currencies.

 

The easiest way that I know of to do something like this is to short a currency ETF like any of the following:

 

http://currencyetf.net/euro-etf.htm

 

Moreover, there are ETFs that are deliberately designed to short another asset (even if you have a long position in the ETF, you have a short in the underlying asset).

 

To make things even more complicated, there are some weird hedging strategies in which you have both short and long positions in the same asset at the same time.

 

(Can you guess who's in the middle of his annual portfolio rebalance?)

[kenberg]

Can you guess who's in the middle of his annual portfolio rebalance?[/Quote] Bernie Madoff? No, I have no idea.

 

So I can trade currency electronically as long as I don't actually hold on to the actual cash? Happiness consists of staying out of things that I don't understand.

 

Anyway, thanks for the clarification. I now return this thread to its rightful topic.

[hrothgar]

Bernie Madoff? No, I have no idea.

 

So I can trade currency electronically as long as I don't actually hold on to the actual cash?

 

 

How were you planning on shorting Euros without holding some kind of derivative?

 

I suppose, in theory, if you normally have a portfolio that includes Euro denominated assets, you could sell off some of said assets and increase you holdings of dollars/yen/what have you. However, I don't know many investors who accomplish currency diversification via the denomination of their assets. (Currency funds are a much easier way to achieve the same end)

[kenberg]

Sometimes I speak carelessly. Early on this thread, I voted that for the first option, the members will stick with it and the currency will remain strong. Not hoarding and not selling short was a perhaps inept way of saying that this is still my view. Whatever the rules, I have no intention of doing either, not with the Euro, or the peso, or whatever.

 

European politics is pretty much beyond my grasp so I can't say that I am all that confident of whether some country will withdraw or be expelled. I recognize the problems of having several cultures attempt an integrated political and economic system. So far, it seems to be working more or less, and I think more rather than less. It seems to me to be a goal worth pursuing. I don't think we will yet all be singing Imagine all the people.... but the EU seems, at its base, to be a good idea.

[mgoetze]

I suppose, in theory, if you normally have a portfolio that includes Euro denominated assets, you could sell off some of said assets and increase you holdings of dollars/yen/what have you. However, I don't know many investors who accomplish currency diversification via the denomination of their assets. (Currency funds are a much easier way to achieve the same end)

 

My current non-Euro investments are (by volume) about 1/7 via a turbo certificate on the currency (PLN) and 6/7 via holding bonds denominated in the foreign currencies (Mainly BRL and a bit of USD). I would have thought that's perfectly normal, and I don't really see how anything could be "much easier".

[Aberlour10]

My current non-Euro investments are (by volume) about 1/7 via a turbo certificate on the currency (PLN)

 

The volatility of the PLN was pretty high in last months, are you not worried >>> your turbos can be knocked out before expiry day?

[mgoetze]

The volatility of the PLN was pretty high in last months, are you not worried >>> your turbos can be knocked out before expiry day?

 

Actually, there is no expiry date ;) and the current knock-out level requires the PLN to fall to 4.9192, which would be lower than at any time during the past 10 years.

 

I do admit, however, that this is not my safest investment.

[blackshoe]

I'm vague on it, because the last time I looked at it was 30 years ago, but I seem to recall a "straddle" strategy in the commodities market that involved the spread between dollar futures and euro futures, where you would sell one short and buy the other, hoping to make a killing when the spread widened (or narrowed, I forget which) and you buy back the stuff you shorted and sell the other.

[luke warm]

I'm vague on it, because the last time I looked at it was 30 years ago, but I seem to recall a "straddle" strategy in the commodities market that involved the spread between dollar futures and euro futures, where you would sell one short and buy the other, hoping to make a killing when the spread widened (or narrowed, I forget which) and you buy back the stuff you shorted and sell the other.

i try to do that in sports betting :)

[Aberlour10]

Current market interest rates for 10y Euro state bonds, the risk add-on are enormous:

 

Greece 11,3 %

Ireland 7,8 %

France 3,3 %

Germany 2,9 %

 

There is proposal for the common bonds of all €-states, to make it cheaper for zone-countries with financial problems but Mrs NO (Merkel) said once again: NO, and it is for sure not the very last time she does.

[beatrix45]

As a trained economist, I am an expert in these matters. Joining the Euro bloc is no different than pegging one's currency to another. Argentina has done this in the past with respect to the US dollar. The most recent effort eventually failed when when it became necessary to have a cheaper Argie currency.

 

When the Euro was formed in 2000 the head of Deutchebank is reputed to have said of the new currency (in German, of course): "I don't care what they call it, as long at it is the Dmark." And so, apparently, that's how it has been and still is.

[y66]

I am not totally clear on my exchange rate history, but for many years up until the 1970's many countries pegged their exchange rates to each other. This seemed to work ok for a large number of years, but perhaps this was because the trade imbalance was simply not so big.

 

Flexible exchange rates are often touted as a way to improve the competitive-ness of a country on the world market, but I have always been a little unclear on the details. On the one hand, a sinking exchange rates effectively lowers wages compared to your market outside your country, but on the other hand, any imported goods will rise in price compared to the average wage. So you can become better off only if most of what your country buys is made locally. It must be particularly bad for large importers of food, like the UK.

 

In Greece people will simply have to accept real wage decreases. This will have a negative affect on prices, and will have an equivalent effect to a weakening exchange rates. It is just politically and socially more difficult, as one cannot blame your government for the behaviour of the exchange rate. This will restore competitive-ness, and increase investment in their country. However, its unclear how one can bring this about, particularly given the large social security entitlements given to public sector workers in greece.

 

Yes, way less difficult if exchange rates are flexible. Good example here (Poland).

[mike777]

FWIW:

 

In keynsian economics deflation is bad...really bad:

In the Austrian school of economics....deflation need not be evil.....

 

I am not an economist but my understanding is that the austrian school imports ""time" as an important variable that keynsian does not.....(SPELLING)

 

I only add this since often the discussion is just focused on "consumer spending" rather than "capital spending over time"

[kenberg]

As a trained economist, I am an expert in these matters. Joining the Euro bloc is no different than pegging one's currency to another. Argentina has done this in the past with respect to the US dollar. The most recent effort eventually failed when when it became necessary to have a cheaper Argie currency.

 

I have assumed that joining the Euro bloc is different, and in fact the above pretty much highlights the difference as I understand it. I know nothing of the Argentine currency but from what you say, I gather the Argentine government has had a policy of pegging their currency to the dollar and then, when this became burdensome, unpegged it. With the Euro, I understand there to be long term agreements that, whatever the agreements are actually called, have the force of treaties and solemn commitments. If this is right, I would say it is very different. Of course treaties can be rescinded but that is a much more substantial act.

 

To put it another way, even though the Argentine matter directly involves the dollar, this is the first I have heard of it. But we are all aware, at some level, of the turmoil with the Euro and the EU. I take this to be because the agreement on the Euro is regarded by its participants as a far more permanent mutual commitment than the pegging you refer to.

[Aberlour10]

When the Euro was formed in 2000 the head of Deutchebank is reputed to have said of the new currency (in German, of course): "I don't care what they call it, as long at it is the Dmark." And so, apparently, that's how it has been and still is.

 

Not more. Its true, Euro would be so strong and stable as D-Mark so long the Maastricht Criteria ( Euro Convergance Criteria) are fulfiled by the €-zone countries. And in the first years of the Euro it seemed the members take these criteria very serious and be disciplined by only a minor cases of violation. What we see today, is slowly but continously erosion of them. The Maastricht Criteria exist still and are valid, but only "on paper". Creative accounting or open and massiv breaking these rules in the crisis times. The criteria about annual goverment deficit and goverment debt? Nobody cares serious about it.

Next point: "Long-term interest rates: The nominal long-term interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states."

 

I posted above the current rates... 2%? nowdays they = 8%

 

etc... etc..

 

The difference between D-Mark and Euro is quite simple: The Directors of the Bundesbank would never allowed that what the european politicans have done in the last time.

[y66]

Of possible interest to readers of this thread.

[mgoetze]

So Paul Krugman writes:

If I were a European leader, I’d be very, very worried about this — and willing to take some serious risks, like the creation of E-bonds

 

Does he mean the following?

€€€ New 5 Year Benchmark for European Union €€€ 
Issuer.................European Union (EU - Aaa/AAA/AAA) 0%rw 
Size...................EUR benchmark 
Maturity...............04 DEC 2015 
Payment................T+5 
Spread.................tbd 
Leads..................BARC/BNPP/DB/HSBC 
Timing.................Lauch & Price expected Wednesday 5th 
The proceeds will be used under the EFSM EU Regulation, in 
connection to the EU/IMF aid package to Ireland.

[hotShot]

I think he is referring to the suggestion from Luxembourg, that was rejected by Mrs. Merkel.

[Aberlour10]

I think he is referring to the suggestion from Luxembourg, that was rejected by Mrs. Merkel.

 

Yes, indeed. This idea about common European €-bonds is very unpopular in Germany for two reasons. It would bring additional costs ( the difference between % of the current german bonds and these new ) and the Germans want to save their excellent ratings at any price. It could be endangered due to this project.

Krugman uses severeal times the word "solidarity"... this solidarity exists under the EU states, but it is strong limited... by national interests. Merkel will reject all this , because she is afraid about several important elections that will take place in Germany in next months. Business as usual.

[Aberlour10]

So Paul Krugman writes: Does he mean the following? €€€ New 5 Year Benchmark for European Union €€€

Issuer.................European Union (EU - Aaa/AAA/AAA) 0%rw

Size...................EUR benchmark

Maturity...............04 DEC 2015

Payment................T+5

Spread.................tbd

Leads..................BARC/BNPP/DB/HSBC

Timing.................Lauch & Price expected Wednesday 5th

The proceeds will be used under the EFSM EU Regulation, in

connection to the EU/IMF aid package to Ireland.[/code]

 

This is a bond issued by The European Commission guaranted by the EU budget...it has nothing to do with this new idea of the common €-bonds. These would be issued by the single members of the €- zone (for financing the own budgets), but be quaranted by all Euro-states.

[blackshoe]

Heh. In 1787, or thereabouts, a committee of the Continental Congress was tasked to come up with modifications to the Articles of Confederation. One of the problems they were to address had to do with the debt the fledgling nation had assumed in order to fight the Revolution. One of the Articles said that the individual States would each assume a fair share of that debt. Most, if not all, when it came time to pay up, refused. Since there seemed to way for the national government to force the states to stick to their agreement (they were all signatories to the Articles, of course) the Congress hoped that this committee could find a solution. They did. They wrote the Constitution, dissolving the Confederation and establishing a strong Federal government, and giving that government the power to pay the debt.

 

It seems unlikely that a similar thing will happen to the EU, but who knows? B)

[phil_20686]

These would be issued by the single members of the €- zone (for financing the own budgets), but be quaranted by all Euro-states.

 

So because the euro was a strong currency on which it was possible to borrow cheaply, countries got themselves into trouble by borrowing too much, and now they have to pay penal interest rates. Thus the solution is to make it even easier and cheaper for these countries to borrow more money. That doesnt seem like a great idea to me :)

[Aberlour10]

Heh. In 1787, or thereabouts, a committee of the Continental Congress was tasked to come up with modifications to the Articles of Confederation. One of the problems they were to address had to do with the debt the fledgling nation had assumed in order to fight the Revolution. One of the Articles said that the individual States would each assume a fair share of that debt. Most, if not all, when it came time to pay up, refused. Since there seemed to way for the national government to force the states to stick to their agreement (they were all signatories to the Articles, of course) the Congress hoped that this committee could find a solution. They did. They wrote the Constitution, dissolving the Confederation and establishing a strong Federal government, and giving that government the power to pay the debt.

It seems unlikely that a similar thing will happen to the EU, but who knows?

 

I cant imagine the EU will become the same status as a federal state in sense of the USA or Germany in foreseeable future.

Europa with single currency but without really common economic and financial policy, can it work in long terms?

Just imagine, Arizona has to pay interests of 3% for the own state bonds and Wisconsin 11%? or Bayern 3,5% and Hessen 12%... Crazy or? and this is the real current situation in the euro-zone.

In the federal state Germany exists the financial commpensation between "poor" and "rich" states from the beginning (Länderfinanzausgleich ) and it has been working for more than 60 years. But such a "solidarity is possible imo inside the same nation, not in entire Europe.