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Health & Fitness

A Dialogue on the Euro

Dick Hubert shares his thoughts on the euro's future with international hedge fund manager (and Rye Town Supervisor) Joe Carvin - and gets some unique professional insights.

Watching the slow motion disintegration of the European Community’s EURO, the financial, intellectual, and emotional glue - and currency - that was to build the new Europe into a One World powerhouse of formerly warring and fractious nations, has been, frankly, horrifying.

Following the close of markets on August 19 in an especially dispiriting and financially destructive week, these warnings from a Wall Street Journal story sum up the situation.

Friday's unease was fueled partly by the Swiss National Bank's disclosure that it turned to the Federal Reserve last week for $200 million of short-term funding. The move was made on behalf of an unidentified bank, causing investors to speculate about a cash shortage.

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In a sign of the runaway jitters that are pounding bank stocks, Credit Suisse Group and UBS AG denied they borrowed the funds, saying their liquidity remains strong. Julius Baer Group AG and Bank Vontobel Holding AG also said they didn't turn to the Swiss and U.S. central banks.

Stocks also were hurt by worries that Europe's latest bailout for Greece is in danger of collapsing over whether countries that have pledged to provide aid should receive cash collateral. The European Commission on Friday implored euro zone members to resolve the issue quickly or risk disrupting the bloc's bailout efforts.

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Banks around the world are being whipsawed by the fact that much of the bank-funding market is opaque, and information produced by central banks can lag behind real-time events or be limited in detail. That forces nervous traders—and even regulators—to piece together a view of a complex, global banking system using threads of data, anecdotal information and even rumors.

‘The minute you hear a rumor, just get rid of any risk and substantiate it later," said Doug Dachille, chief executive of First Principles Capital Management LLC in New York, describing the mindset of short-term debt investors who are already earning near-zero returns because rates are so low.’

Friday's stumbles are the latest sign of frenzied speculation about Europe's financial system, including rumblings about a possible funding shortage among European banks”

 

And this update from the WSJ on August 23:

Euro-zone growth remained at a two-year low in August as Germany slowed further, a survey showed Tuesday, adding to fears that the economy is stalling at a time when political leaders are struggling to resolve the region's debt crisis.

Separate data showed economic expectations in Germany, which has been driving euro-zone growth, posted its sharpest drop in nine years for the month. The mood among euro-zone consumers also deteriorated significantly.”

 

You will be reading this in the light of new urgencies, but I think I can write with a sense of confidence that the slow motion collapse of the euro will not suddenly go away.

From the relative distance of a pound sterling environment (London) but the closeness of the euro zone (a train ride underneath the English Channel), the Economist had this warning:

 

“…the current rescue plan for the euro is just not working. The markets continue to price in default by Portugal as well as Greece (though the third bailed-out country, Ireland, is looking a bit healthier). The attempt to limit the trouble to these three and stop contagion spreading to Spain has manifestly failed: instead Italy and now France, both of which seem to be solvent, have been infected. A year ago it was said that the euro zone could take care of two or three small countries but that Spain was too big to fail. Today, with Italy and even France looming into the picture, the very survival of the euro is coming into question.

A break-up of the euro may not be unthinkable, but it would certainly be damaging, painful and very expensive. This is most obvious for debtor countries whose banks and governments would go bust; but Germany and other creditors would also pay an extremely high price. And the consequences would be scarily unpredictable: Europe’s single market, and even the European Union itself, might be at risk.”

The Economist sums up the only alternative to the present crisis – that the leaders of Europe’s financially strongest countries (France, Germany, the Netherlands – especially Germany) tell their constituents they either have to bail out their fellow Europeans – however profligate and irresponsible their financial practices may have been, or risk continent-wide economic and political catastrophe:

Again, to quote the Economist, which looks at the various financial rescue plans and their mind bending costs::

 

Any or all of these measures have three things in common: they involve stronger countries giving more support to weaker countries; to offset this, they require intrusive outside control of national fiscal policies. They thus constitute a step towards political union. That is what airy labels like “economic government” or “deeper integration” actually mean.

The problem is that most governments have no mandate from voters to move in this direction. Politicians therefore need to start explaining to their electorates the choices they face, and the consequences of those choices. If Europe’s leaders sign up for a level of integration deeper than voters want, the backlash could split the EU apart—exactly the outcome they are trying to avoid. “

It’s difficult for an American to offer any “you must do this” advice to our European friends – after all, our political system is so fractured that it seems neither President Obama, nor any of his Republican rivals, feels politically capable to tell American voters the incredibly strong economic medicine they must swallow to get our own fiscal house in order: like massive Social Security, Medicare, and Medicaid reform, for starters.

Those who argue that we need to be more integrated – economically, politically, and socially – for the survival of mankind – the One World ethos if you will, have to be very discouraged at this moment. If the grandest effort at all for One World understanding, the European community, collapses under the weight of economic hubris, then what hope is there for the rest of the world’s peoples? Will they be retreating into economic and political silos that see them perpetually at each other’s throats?

We are witnessing a critical time in world history, and, frankly, I have no sense which way our world society is heading. The Western (that includes United States) leadership out of this morass is, it seems to me, missing.

AN ADDENDUM

Ever the blogger looking for an audience, I asked for comment ahead of making this post from my good friend, Rye Town Supervisor Joe Carvin, who in his day job runs a world wide agricultural hedge fund and has decades of experience in the international financial world. He writes:

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“In spite of the fact that members of the Bush administration liked to talk about “Old Europe,” the reality on the ground is that no group of nations has made such a strong effort to push global governance and a sharing of sovereignty so far forward as the nations of Europe. In an unprecedented move to improve global well being, they incredibly enlarged the European Union to incorporate the emerging nations of central and eastern Europe. That move was both courageous and provided a tremendous boost to those emerging nations.

 

The other big experiment going on in Europe has been a new and deeper commitment to shared sovereignty with the creation of a new joint currency, the Euro. This more profound integration has been taken up by some but not all of the European Union countries.

The principal debate presented by the current rash of problems is: do they DECIDE to strengthen the monetary zone BY MOVING toward more full-fledged fiscal union AND issue for example, Euro Zone bonds with the full faith and backing of ALL Euro Zone countries, or do they continue to TRY and paper over the nature of the zone.

At this point it does not seem that financial markets will support any more papering over of the challenges. It seems as if the challenge is to move either toward greater political financial union or risk the unwind of the Euro Zone and all that implies.

Either way one of the most far reaching, yes, revolutionary experiments in shared sovereignty is being challenged as never before. The big challenge for Europe’ s leaders, particularly those in France and Germany, are

1)    Can they move quickly enough to calm markets?

2)    And can they make the profound reforms needed in this uncertain context to generate sufficient confidence to quiet markets?”

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