If the Euro Collapses, what will happen to world GDP and the price of oil?
According to the IMF, World GDP in nominal terms expressed in dollars was $57 trillion in 2009. The European Union accounted for 29% of that; and let's say another 10% of the world implicitly or explicitly link their currencies to the euro (for the sake of argument I’m assuming the pound tracks the euro and the yen will track the dollar more or less).
Regardless of what the Gold-Bugs say (and they may have their day in court yet), the rest of the world effectively uses dollars. So…if the euro in 2010 on average (or however the IMF works it out) is worth 75% in dollar terms, compared to what it was in 2009, and assuming anaemic growth, rough number that would mean World GDP in nominal terms denominated in dollars would go down by 39% x 0.2 = 8%.
Rough Numbers!! Of course that’s not “Real.” And it does not account for PPP or any of those clever benchmarks that economists use to pontificate about this or that and justify their existence. But dollars are dollars, and nominal GDP is simply about dollars or their equivalent, passing from one pocket to another.
And then the penny dropped that “someone else” would NOT be happy to lend money to profligate PIIGS and the like so that they could pay huge sums of money (that they don’t stand a chance in collecting in taxes), to pay for armies of public servants and union members to live a life a of luxury, at the expense of a diminishing pool of people who actually work for a living and pay the part of the wages and pensions of the “majority”.
The trick there was that the majority always vote for an easy life of play-today pay-tomorrow, that’s what democracy as it is currently practiced is all about, that’s why UK joined with America to invade Iraq, it was the “will of the majority”. Just like the majority of Americans (the 70% who owned houses), voted for the housing bubble (and what they are really angry about is it burst).
That’s the joy of democracy, when nations vote to commit collective suicide (and there is a lot of pork to grease the wheels (no pun intended)), well if they have a majority, that’s what they will do (witness the credit crunch).
Put it another way, if the “profits” that banks reported in 2006 and 2007 were not “real”, then perhaps a lot of the GDP that the EU reported until recently, was simply a construct, built like the failed US model, on insanely foolish debt.
So What about Oil?
Regardless, money is money, and dollars are dollars, and so long as there are people prepared to accept dollars as payment for goods & services that’s the way it’s going to be (whether that was a good idea or not is not the issue).
Regardless also, one thing that everyone will buy; is oil, because if they don’t have oil they can’t drive to work, tractors don’t run, and just-in-time logistics gets snarled up.
When the market for oil is not in disequilibrium (and right now it’s not), short-term (I’m talking two or three years), the “fundamental” price of oil is a function of World GDP.
That’s of course assuming that the essential principles of Parasite Economics apply.
Oil was on a pretty steady path towards $90 until the latest “upset” with the euro.
If the euro goes down and stays down relative to the dollar, then unless there is a spike up in the GDP of the rest of the world, the “fundamental” oil price (in dollars) is likely to drop from about $75 now to about $69. Until of course it becomes blindingly obvious it’s about to run out (and given the inability of the governments of Western Democracies to plan any further ahead than what dish of pork they will have for lunch, it’s likely that will be a BIG SURPRISE.
Just like it was a BIG SURPRISE when a few weeks after Hank Paulson declared “The US Banking System is Safe and Sound,” all the banks in America started failing like dominoes.
So are those “nasty” markets that Angel Merkel is trying to defy, like King Canute ordering the tide to go down, anticipating euro at $1.15 or less?
Makes sense, the EU is full of pork and self serving “democracy” of the “I wanna-free-lunch” at the expense of the (ever-diminishing) productive part of the economy, variety. Perhaps now is the time for that to get washed out by a dose of reality, like neat cod-liver oil?
The big question now, is when will Germany decide to leave the euro?
Disclosure: All in dollars
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4 comments
"Europe therefore finds itself being tied in a Gordian knot"
It is worth remembering what the original Gordian Knot was and how it was resolved/untied. AIUI Alexander the Great passed by a temple at Gordia in which was the largest and most complicated knot ever devised. An ancient prophecy said that whoever could unfasten the knot would thereby prove themselves to be the wisest man in the world. many people had tried to untie the knot but all had failed. Alexander went to see the knot, was told about the prophecy and examined its many intricate convolutions. After a few minutes he announced that he knew how to unfasten it. He drew his sword and sliced through the middle of the knot. The strands of rope fell to the ground in pieces. Alexander left the temple, returned to his army and went on to conquer the known world.
The point is that you don't always need to waste time unraveling complexity. Sometimes you can simply cut through the problem, rather than untangle it. And sometimes you have other more pressing things to do, so it simply isn;t worth agonising over. Just do it and move on.
It seems clear to me that the whole EU project is an extravagant conceit for which there is no popular support, no valid economic argument and no rigorous theoretical underpinning. Monetary union only makes sense if it goes with political union. If there is a single unified government which can orchestrate economic and social policy on behalf of a unified constituency, then it makes sense. If not, not. Those involved in European governance do not have a legitimate mandate to proceed to political/social/economic union. Their project is the illegitimate offspring of political obsessives and extremists. It is completely un-democratic, in fact anti-democratic and it deserves to fail. What European people want is economic/political/social collaboration/co-operation, not integration.
I think it is entirely feasible that monetary union will implode. It may well be that the UK provides at least some of the detonation mechanism. I listened today to news that Europe is considering a significant change to its non-constitution to put in place support mechanisms to underpin greece et al. Cameron has already stated that the UK will not participate and will if necessary veto this initiative if that is the only way we can avoid being drawn further in. The EUrocrat being interviewed said that the UK's position was unacceptable to the rest of Europe.
Further ructions to come I'd say. Perhaps David Cameron's classical education has taught him how to deal with Gordian Knots.......
Hi, just on this topic, there's an interesting Stratfor piece that explores in some detail the idea of either Germany or Greece exiting the Eurozone here: http://www.stockopedia.com/content/germany-greece-and-reconstituting-the-eurozone-how-would-it-work/41390
When you talk of a Euro 'collapse,' do you mean the whole project falling apart? Or just further dramatic falls against the other major currencies?
I had originally thought you meant the former, triggered by your question about the possibility of Germany exiting. Clearly that would dramatically affect, if not wholly undermine, the Euro project. But how realistic is it? Whilst currency unification has taken place before, has any entity ever split out it's currency before? (Hello? EU Commission? Yes, it's Germany here. Listen, we've decided to do an MBO and launch our own product locally. We've got an old brand we can re-use and we think it's going to be quite a hit...)
What does it involve? What are the costs? What are the downsides for Germany? And it's allies, in Europe and elsewhere?
I'm a layman in all this and have been following it as best as I can, yet it seems utterly fanciful that this kind of collapse should ever happen. It's clear there are huge problems, a great deal of dysfunctionality and a bleak outlook, but I can't really see there can be any going back. Surely the future consists only of bickering, arguing and recrimination - before doing the uncomfortable stuff and getting on with the unavoidable unpleasantness of sorting the whole blasted project out properly?
SW10
I wasn't really thinking about whether or not there would be a collapse - just what would happen if there was.