The Euro will either Be Weak or Not Be at All. On the Future of Europe’s Single Currency.

Published on 2012/10/20

For the time being, the Euro is as strong as it’s ever been, at least against the US dollar. But what about the future of Europe’s single currency? Me, I consider either of two scenarios likely:

Scenario 1: European politicians will hang on to their political pet project of the euro “at any cost.” This would accelerate the fatal development of a transfer union. It will considerably weaken countries such as Germany without permanently boosting countries in Southern Europe economically. The European welfare state, which has overreached itself, will not be subjected to a radical reform, but will be kept on life support through monetary-policy measures. The outcome will be a very weak euro.

Scenario 2: The centrifugal forces will be so powerful as to pull the monetary union apart despite any bailout attempt. Whether it will be succeeded by a northern and southern euro, or whether the European countries will return to their national currencies, is hard to say.

So is there no way to turn the euro into a permanently strong currency? To make this possible, Europe would have to abandon its welfare tradition – and this would jeopardise Europe’s political elites, perhaps even our democratic system.

For the euro is not expression of a natural, organic economic development, but a political construct. The irrationality of statements such as “If the euro collapses, so will Europe” demonstrates this as much as the genesis of the European single currency itself. Market forces will eventually carry the day over political artifice, the way they have always done in history.

Currency forecasts are always fraught with great uncertainty, especially short-term ones. And yet I should like to venture a prediction: The euro is overvalued at the moment because financial market always respond enthusiastically to short-term monetary-policy measures of the central banks while ignoring long-term issues.

This translates into opportunities for investors with a long-term horizon who think not in months but in decades. Those with an investment horizon of at least ten years should not bet everything on the hope that the euro will remain as strong as it is today. Diversification in regard to currency aspects recommends itself much in the same way it makes sense to diversify among various asset classes.

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