Whither the Euro?

Sunday, Aug 07 2011 by
Whither the Euro

Once again, ee has taken the words out of my mouth :0) .. "Of course the possibility is a serious one that the Euro project is (and always was!) fatally flawed...and the only solution is one of:

a) full fiscal union (v unlikely)

b) formal defaults by Greece, Italy, Spain etc (also unlikely as Eurozone banks would need to take large haircuts and make substantial provisions - as RBS has already done with Greece, incidentally)

c) dividing the euro into a hard euro and a soft euro....or just chucking out those who don't pass the test. (the trouble with that approach is that markets will continue to pick off the weak until the Eurozone consists of Germany and France ;-)) 

But Merkel has already indicated she stands behind the euro. But she hasn't understood the scale of commitments that this implies. IMO they have to do a very much larger deal - and, for Merkel, it will probably cost her the next election....but it has to be done".

One thing seems certain: the euro cannot continue as at present indefinitely. The global economy and hence our investments are fundamentally affected by instability in Europe. I was at the first AGM of the JP Morgan Brazil Investment Trust (LSE:JPB) last week and was surprised and interested the learn that Brazil's largest trading partner (for exports) is not the US (9.5%), nor China (15.3%), but the EU (21.5%)!

So ISTM that it would be worth creating a place to discuss this topic.

My own view is that the most likely ultimate outcome is some sort of breakup of the euro, i.e. c) above  - or even a complete breakup where each country reverts to their own currency. I take this view because I cannot see the German electorate being prepared to accept a German underwriting of PIIGS debt. Equally I cannot see countries being prepared to accept the loss of sovereignty that full fiscal union implies.

It may be quite a while before we reach the point where something dramatic and decisive happens. Maybe sticking plasters can continue to be applied for some time to come - maybe not!

A particular aspect of this that I am curious about is the impact on contracts that are written in Euros. There are many types of contract written in Euros. Some that occur to me are:

  • Trade contracts between customers and suppliers
  • Mortgages, loans and credit card agreements
  • Insurance contracts
  • Corporate bonds and sovereign debt

The first of these seems relatively straightforward to me, as many contracts can simply be renegotiated. However, this is more complex and troublesome where the subject of the contract is a long-running project of some type. There could be a hiatus whilst the the two parties thrash things out. This takes me back to a conversation I had with HG Capital Trust (LON:HGT) 's manager earlier this year about this topic, as HG Capital is heavily exposed to the Eurozone (but mainly Germany and northern Europe). I imagine that contracts with customers in less indebted and more stable countries can be renegotiated relatively straightforwardly, because the supplier will have confidence in the value of the customer's currency. However, contracts with customers in the PIIGS could be more troublesome. Those customers will want to stick to their own currency at whatever exchange rate prevails when that country decouples from the "old euro", but suppliers will not have confidence in that currency and will either want a more favourable exchange rate (to compensate for the risk which they can then hedge), or for the contract to be rewritten in a more stable currency. It could take rather longer to renegotiate those contracts.

Medium/long term this could be good news for banks, as there'll be more requirement for FX and FX derivatives, between parties that formerly were using the same currency as each other but now cannot.

Thoughts on the practical implications, or if you disagree with my analysis, would be particularly interesting to me.



Filed Under: Euro, Economics,

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62 Comments on this Article show/hide all

marben100 7th Aug '11 3 of 62

In reply to tournesol, post #1

I've found comprehensive figures through to 2007 here: http://www.eu-oplysningen.dk/euo_en/spsv/all/79/

In 2007, Germany, the UK and France (in that order) were the biggest net contributors. Italy was also a net contributor at that time. The biggest net recipients were Greece, Poland and Spain, also in that order.



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marben100 7th Aug '11 4 of 62

In reply to tournesol, post #2

You make a good point, tournesol, but wouldn't the "switch back" be somewhat easier if the system had already had to be changed to cater for a currency transition? I suppose the problem you mention may arise for new systems implemented since the transition to the euro.



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schober 7th Aug '11 5 of 62

What happened when Slovakia and Czechia separated? I seem to recall reading that it was all done ina morning and they went down the pub at lunch time - all quite undramatic!

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tournesol 7th Aug '11 6 of 62


"...wouldn't the "switch back" be somewhat easier if the system had already had to be changed to cater for a currency transition?..."

Only if the dual currency feature had been maintained during the past 10 years or so - which I am prepared to bet is not the case. As I remember in the systems in the company I worked in, the dual currency aspect was designed to be removed at the end of an extended transitional period, which will be long since past.

In effect the systems analysis and design work would have to be done from scratch in order to revert. OK maybe some of the database design consequences might be easier in some cases, where second currency fields have been left dormant/unused for 10 years, but you can't simply make the assumption that every system can simply be reset by pressing the page back button....


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SW10Chap 8th Aug '11 7 of 62

Living in the eurozone, and with incomes in GBP and EUR, I find myself contemplating this in odd moments - usually in the company of a small apéritif.

My experience is that big, surprising events rarely come to pass. Sure we can all think of some, but on the whole they are very rare - and all the more memorable for it. Generally we look back and find that we have been slowly overtaken by a number of incremental, apparently inevitable and individually-justifiable events. With that in mind, I propose a fourth possibility to ee's list: that business and the markets create their incentives and the EUR slowly withers away.

So we now have:

a) full fiscal union
b) formal defaults by Greece, Italy, Spain etc
c) dividing the euro into a hard euro and a soft euro
d) let the markets do their thing and watch as the euro becomes sidelined.

What I'm suggesting is that, rather than the weaker countries abandoning the euro, it could actually be the Germans that lead the way. I agree that the idea of recreating one of the pre-euro currencies is impractical and fraught with risk. Apart from anything else, it would require a political party to stand and ask for that mandate, and then to have a pretty resounding and durable majority to be able to pull it off.

I don't see this being voted for in the weaker countries - and it would almost certainly never happen in France for political reasons. I also think that the Germans would find themselves in political check if the explicitly tried to withdraw. But I think the impetus may be generated by businesses rather than politicians. Consider this unfolding not over months, but over years -- and maybe decades:

What if companies in these countries, particularly Germany, chose to denominate more and more of their contracts in another currency? What if they chose to define their productivity in terms of a currency they viewed as having more long-term stability than the euro? What if companies in a particular sector acted together?

Imagine, for the sake of argument, that the automotive sector led by a dominant player such as VW started to denominate in CHF. Suppliers would have to fall into line pretty quickly and ripples could spread through the supply-chain and even beyond. After a while, we might find the CHF becoming an 'acceptable currency' alongside the euro in certain centres such as Wolfsburg (VW's home town.)

It's diffcult to envisage the German government issung bonds in CHF, but if over the years things spread far enough there would certainly be a good argument for saying that the people had spoken and that,

just this once, for this very small issue, we're going to be issuing in CHF. Oh, and by the way, civil servants in VW's home state of Lower Saxony are already being paid some of their wages in CHF because, well, that's pretty much how things work down there now.

With the Germans out of the way, we're starting along the road of creating the so-called 'soft' euro - which would be the euro itself. How do other countries follow? Which other countries might exit? Would French companies also want to adopt the CHF? Or would they seek another currency?

Of course, we'd also be faced with the knotty problem of the Swiss becoming the junior partners in a currency union without any consultation...


PS. If the French followed suit through a similar reverse-takeover of the Swedish Krona, the idea of buying my apéritif using a note decorated with Greta Garbo has some whimsical appeal...

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marben100 8th Aug '11 8 of 62

In reply to SW10Chap, post #7

Nice thought SW10,

Imagine, for the sake of argument, that the automotive sector led by a dominant player such as VW started to denominate in CHF.

However, I can't see that happening. In effect, you're suggesting that the CHF could become a reserve currency. The problem is that the CHF has too small a base. If significant numbers of CHF started to be traded in this way, its value could climb rapidly. Eventually that could force the Swiss govt to introduce exchange controls - they're already taking steps to try and control the rise.

In principle, though, business could start using another currency with a larger base. This could be led by the Chinese and their trading partners, perhaps developing some new form of SDR. It makes sense for firms such as VW to use such a currency because they trade extensively with China and other countries, such as Brazil, who may also back such a scheme.



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tournesol 8th Aug '11 9 of 62

Hi SW10

seems to me that the time required to go down the path you suggest would be much too long for it to represent a way out of our short-term difficulties

what's that famous quotation - "desperate times require desperate remedies" - I'd paraphrase it that "urgent problems require urgent solutions"

no idea what they are but I don;t see a gradual reconfiguration as a contender simply on timing grounds


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emptyend 9th Dec '11 10 of 62

There's a good quote this morning from Terry Smith::

The UK is "as isolated as somebody who refused to join the Titanic just before it sailed" following treaty veto, says Terry Smith of the money brokerage firm, Tullett Prebon on BBC Radio 4.
There is absolutely nothing wrong in being "isolated" from a debacle.....and that is the point that Smith makes so well!
Now the Government has to continue to hang tough in order to stop the Eurozone countries from subverting the entire purpose of the EEC - which is to foster trade!
 The EEC MUST be firmly told that its responsibilites are NOT to the Eurozone - but are confined to the encouragement of trade across the entire EEC. The Eurozone countries should be forced to look after their own mess and not have the EEC as a whole dragged into something which is 100% the responsibility of the participating countries and the ECB.
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Fangorn 9th Dec '11 11 of 62

Indeed. Agree completely.

Have to say I didn't think Cameron would have the balls to veto. Pleasant surprise.

My personal opinion is that the sooner we have a referendum on EU membership the better. There's no better time than now to renegotiate our membership when the "enemy" is weak. This costly adventure far outweighs the benefits, the sooner we are out, the sooner we can bin all the needless anti business and healthy&safety legislation that so restricts business these days. Europe is paralysed by excessive regulation.

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Mancman 9th Dec '11 12 of 62

I think this serves Sarkozy's purposes very well, particularly with an election coming along.

I think it will be very difficult for the UK to have any real influence in the EU now, which cannot be good news for the UK financial services sector on which we are over dependent.

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emptyend 9th Dec '11 13 of 62

In reply to Mancman, post #12

I think this serves Sarkozy's purposes very well, particularly with an election coming along.

Yes that might well be his view.

I think it will be very difficult for the UK to have any real influence in the EU now, which cannot be good news for the UK financial services sector on which we are over dependent.

I'd certainly agree that we remain overly-dependent on financial services, but preserving the primacy of London as the main financial centre withing Europe (we have roughly a 50% share) remains critically important to the UK.

I don't accept the premise though that we have little influence! Of course we have little influence on the currency issues affecting the Eurozone - but we remain a full partner in (almost) everything else.  Accordingly I am fully expecting the UK to flex its muscles to ensure that the Eurozone is FORCED to be fully independent of the mechanisms of the EU itself....which is not something I think has been the case up to now, with many EU officials being deployed into helping to deal with issues that are purely Eurozone!


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Mancman 9th Dec '11 14 of 62

What allies do you think the UK will have in its defence of the city of London.
Interesting to hear the reaction of the UKIP leader, who is taking a similar view to mine: we are going to have so little influence we should get out. He would say that wouldn't he, but it has a certain resonance I think.

I will be interested as to how this plays out in Ireland and Scotland. I could see a future for Edinburgh as a financial centre within the Eurozone.

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emptyend 9th Dec '11 15 of 62

In reply to Mancman, post #14

What allies do you think the UK will have in its defence of the city of London.

None - but none are needed. There are treaties in existence which suit the City well enough.

Interesting to hear the reaction of the UKIP leader, who is taking a similar view to mine: we are going to have so little influence we should get out. He would say that wouldn't he, but it has a certain resonance I think.

Unfortunately whenever one finds oneself to be closely aligned with N Farrage, it is an indication that one is straying too far. Of course, if it should actually turn out that Merkel and Sarkosy seek to marginalise the UK's influence in the EU itself in their rush to Eurozone wedlock, then we should be prepared to up the ante and stick two fingers up at those who wish to make the Eurozone synonymous with the EU - but the present position remains (or clearly should remain) that the EU is a separate entity from the Eurozone.

I will be interested as to how this plays out in Ireland and Scotland. I could see a future for Edinburgh as a financial centre within the Eurozone.

Yes - quite possibly. But I wonder how many Scots would vote for getting into bed with the French and  making their purses available to their continental neighbours, rather than continuing the existing Union. It is an interesting question that I think Unionists in Scotland should be posing to Salmond as he contemplates the oft-promised referendum.

And if the Scots went for it then it might very well lead to a bigger role for Edinburgh - though at the expense of severing much existing business with the English.


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Mancman 9th Dec '11 16 of 62

If there are treaties in existene which protect the city, then what was/is all the fuss about, why did Cameron need to ask for "quite modest" assurances? I am far from an expert in these matters, but I suspect that past treaties cannot ultimately protect the city.

As for the Scots, I never underestimate their dislike of the English and the ability of Salmond, the smartest political operator in the UK by a wide margin, to revive the auld alliance with France!

Interesting times indeed. The tectonic plates are shifting in Europe and the world. It is I think impossible to predict where we shall be in a decade.

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emptyend 9th Dec '11 17 of 62

In reply to Mancman, post #16

If there are treaties in existene which protect the city, then what was/is all the fuss about, why did Cameron need to ask for "quite modest" assurances? I am far from an expert in these matters, but I suspect that past treaties cannot ultimately protect the city.

Because the new proposal from Merkosy was that there should be a Tobin Tax on financial transactions - and the UK won't agree to that (because UK institutions would be paying c. 50% of all tax received in the EU, effectively raising our EU contribution still further, whilst depleting our domestic tax base by the same amount!). a Tobin Tax globally (to include the Swiss and the USA) would be more palatable - but Obama wouldn't agree to that either.

Past treaties work well enough.

As you say though, it raises the uncertainty level for some years to come - though I'd expect that period of uncertainty to be 3-5 years rather than 10.


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repobear 9th Dec '11 18 of 62

In reply to emptyend, post #17

Just a couple of comments.

I expect Greece to pull out of the euro eventually because the austerity measures will squeeze economic activity even more. To get the economy up and running they'll have to quit the euro and bring the Drachma down to a level from where they can compete. There is no otherway out for them I'm afraid to say.

How long it will take them to reach that decision I wouldn't know but would hazard at guess at between one and two years. There will be pressure to keep them in place for now until Italy and the like can bring their economies into a slightly better shape and the fiscal union can be nailed down a bit more.

Further down the track the same questions will be asked of Portugal and Spain and perhaps Italy. However Italy could be one of the stars of the EU if they grasped the nettle and reformed all their outdated practices. Perhaps a few stiff measures of German discipline will work wonders for them.

As regards the UK. It's a mess despite the incredible talent and resourcefulness of many people living there. If the position of London is undermined there will be serious trouble ahead. Moreover I fear the incredibly stupid electorate will put Labour back in charge, with a mandate to spend its way out of trouble.The UK faces being cut adrift from Europe, but that could yield some very positive outcomes, because the focus will turn to the BRIC countries and the other emerging economic powers.

My youngest daughter has just got her first job working for a turnaround/corporate recovery specialist in Manchester. I expect her to be busy over the next few years and the banks probably won't have too many options on keeping the walking corporate dead alive for as long as they might want to.

It's pretty scary really.


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salty64 9th Dec '11 19 of 62

In reply to emptyend, post #10

Nice interview ee:


I keep wondering what sanctions the EZ will be able to impose to defaulters or if they will ever be in the position to start playing their new game.  They are changing the game before starting the second one.  Good on them to try to  save the Eurozone.  That most others rushed to join the failed enterprise amazes me.





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tournesol 9th Dec '11 20 of 62

In reply to repobear, post #18


"...As regards the UK. It's a mess...."

Compared to what/where exactly?

"...Moreover I fear the incredibly stupid electorate will...."

Compared to whom exactly?

Considering you live in Belgium - birthplace of Mr van Rompuy - who has signally failed to make any contribution whatsoever to solving the problems faced by Europe/Eurozone - and where it has taken 541 days of negotiation to form the recently announced government (yes folks, Belgium has been without a government during the past 18 month - still it's not as if there was anything urgent needing attention is it?) I find it astonishing that you slag off the UK. Would you prefer us to be more like the Belgians? the Greeks? the Italians?  (voting for Berlusconi, now there's incredibly stupid for you), the Spanish? the Irish?

We may well have our faults - slagging off our own country being one of the most irritating - but it seems to me we have a lot of strengths and overall rate pretty highly compared with most other countries/people. I've lived/worked in 25 countries and travelled for pleasure in another 40 or so. Out of all those there are only a tiny number I'd want to live in,and that's not because of the intellect of the inhabitants.

I think you are too fond of Belgian Waffles.


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repobear 10th Dec '11 21 of 62

In reply to tournesol, post #20


I think you had a little too much sauce when you wrote your reply and for the record I don't like waffles.

In answer to your question if you could combine the resourcefuleness and talent of many Brits with the discipline and organisation skills of the people here in Vlanderen, then I think that would be a pretty winning combination.

However the UK is being dragged down by a growing underclass and an elite that will do anything to get/stay in power. It is a mess and if Labour get in next time the pound and the economy will most likely spiral into a deep decline. I would expect the sovreign debt will balloon out of control and that will have severe ramifications for the banking system. The riots that I witnessed at close hand, when I was in London in August, will be nothing with what will happen in those circumstances, up and down the country. Those ###### politicians will still try to score political points while the country burns, just like Livingstone did in August.

In those circumstances I'd much rather live in any of those countries you named, and quite a few others that you have no doubt been to. Although I love the warmth, humour and openness of many people in the UK, I have seen far too much of the chav culture close up and there are I lot of places that I wouldn't like to live in, there. The UK has a much higher proportion of arseholes, than all those countries that you mentioned, and for the record not all of them are chavs. Not having a government in Belgium for some time hasn't changed that one little bit.

One of the things that does make a difference to the quality of life, when you live abroad/travel is learning the native language(s). Given your extensive experience is that something that you found?



 If you want to criticise Belgium, go for a few drives on their motorways and witness the aggression. My theory is that some of them don't get much/any sex. However I am too fond of that explanation for routine bad behaviour;-) Roundabouts? I don't know whether to laugh or cry. Supermarket checkouts or any situation  for the every day politeness that you get in the UK, might also be a more productive avenue.

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tournesol 10th Dec '11 22 of 62

"...The UK has a much higher proportion of arseholes, than all those countries that you mentioned..."

I have found loathing of one's mother country to be an unfortunate, but not rare phenomenon akin to falling out with your own family.

It's a lot easier to see the flaws in your own family/country than to see them in strangers. You know more about them for starters and you have seen them at their worst and in the crucible of family life and coping with change. Which is why it is so common for family relationships to be dysfunctional even when the members of the family are balanced and mature individuals when taken separately.

When ex-pats loath their home country there is of course an element of post-hoc rationalisation. "It's their fault I had to leave." "They don;t deserve me". And of course when they express over-inflated opinions of their adopted country it's just the other side of the same coin. Put together the love/hate thing is a justification for their choice of place of residence.

But it is hardly ever balanced and insightful.

Look at the problems of inner city Paris - the banlieus - they dwarf those of London. Look at the economic problems of Greece and Portugal - they are on a different scale from ours.

Look at Africa, the far East, America North and South. You are entitled to prefer them to the UK, but I wonder if that opinion would survive actually living there (as opposed to holidaying for a few weeks).

We certainly have problems, but that is the human condition. I do not accept that Belgium is some kind of Shangri-La where people live in a heightened state of civilisation compared with the UK. I mean the driving is the worst in Northern Europe for a start. That alone betrays a deep well of agression and homicidal instinct. I make it a policy to get out of the way of any car with Belgian number plates.

I don't think we should hog/clog this thread so will leave it there.



PS - for someone who dislikes chav behaviour, you do seem to express yourself in very coarse language. If it walks like a duck.......

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About marben100


I am a full-time private investor... with a little trading on the side (generally small-scale arbitrage in specialist niches). Previously, I spent 24 years in the IT industry, 13 of those running my own IT services firm. I invested as a "hobby" for 20 years before turning it into a full-time occupation in 2004. I really enjoy the "research" side of investing, finding out about varied businesses and industries and learning what makes them tick. Since going "full-time" I have learnt an awful lot from some very erudite investors & professionals who are kind enough to share their expertise in electronc forums such as this. I can now count a number of them as my friends, having had the opportunity to meet them in the real world, as well as this virtual one! I try to pay back the debt I owe by sharing what I've learnt and I always value constructive criticism to correct my errors and misapprehensions! I am a Director of ShareSoc, the UK organisation for individual shareholders. See below for details.     more »


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