Euro falls below parity with the dollar
reuters.com
reuters.com
At this point I feel the EU is pretty much done and the war just showed how weak the EU leadership is along how individual member nations acting sometimes totally against each other (see France doubling down on nuclear while Germany does the opposite). Like I don't see any positive outcome for the Union no matter what happens in the war, unless you see the US having an even greater influence over Europe as a positive thing. Personally I'm extremely pessimistic.
If you put zero value on European unity, and the security and economic benefits that brings, of course you aren’t going to value the EU. If Texans didn’t care when New York was attacked, it would be reasonable to ask why the U.S. is a thing. For what it’s worth, France building nukes while Germany snubs them is analogous to e.g. Kentucky burning coal while California puts down solar.
It seems adequate. Europe is helping Ukraine and putting pressure for a quick end to the conflict.
The real question is why is the US helping so much to the point Ukraine is refusing to negotiate. Part of me thinks it’s actually advantageous to them to weaken both Russia and the EU.
KILLING AND DEATHS OF PEOPLE ARE UNACCEPTABLE. FIGHTING SHOULD BE STOPPED IMMEDIATELY AND PERMANENTLY. ALL OPEN QUESTIONS SHOULD BE SOLVED BY FAIR NEGOTIATIONS. BOTH SIDES HAVE TO BE READY FOR COMPROMISES TO SAVE LIVES. https://scientists-against-war.org/
I agree with that in principle but I honestly can't see how to achieve that in practice in this situation. Russian leadership currently doesn't seem to care about internation rules. They believe themselves to have a sacrosanct right for greatness and the right to rule and bending to any compromise would be utterly unacceptable in that framing.
I don't think this as an absolutely Russian problem; it's the problem of super-powers that are no more (but still kinda are). I fully expect a similar situation to happen in the future when American will only be a shadow of the power it used to be.
Also agree we’re headed for a multipolar world, with climate change impacting geopolitics in the Northern hemisphere, majority of the global pop. concentrated around SEAsia, and a looming demographic collapse putting pressure on nation states to act now-or-never.
Ukraine should not negotiate with a terrorist state. The US and the UK are making the correct choices for once. Maybe they finally learned something from WW2?
Trade with Russia was obviously positive for the EU, as can be noticed from the economic damage and energy availability crisis.
Addiction to cheap resources prevented politically sustainable energy sector development. On top of that, it's likely that corruption was involved. Which is cancer that tends to cause more corruption in semi-related parts of the system. Once politicians sell out, it's much easier to bend them again. Be it pure greed or blackmailing.
Put another way, if it weren't for USA's hard stance, many large EU economies would have few misgivings about continuing to do business with Russia. And even hardliners like Poland AFAIK are still buying Russian gas through Germany, as do several others including Ukraine.
The reason they're doing that is because they need it, it's there and it's good for keeping their economies and societies in functioning order.
Was there corruption? You bet, former USSR states were and are drowning in it and the West was certainly not spared either. Doesn't change the fact that they need resources though and there's not a lot of alternative suppliers.
Ukraine is not part of the EU and the EU decided to take a moral position and live with the financial consequences that go with it.
Mostly another self imposed problem.
It generates some inflation as imports are pegged to the dollar(somebody mentioned that it is hedged, it is just by some extent), but overall is actually good for the economic block. The EU needs to export to survive.
The EU has been fighting a possible deflation for most of the 2010s, this is actually not so negative as people might think.
If ECB would raise interest to the same rate as the FED, Euro would become too strong. Inflation is already decreasing in Germany even with that 0% interest rate.
The main inflation concern is the gas prices for this winter and this isn't fixable with monetary policy. If we have no gas, no amount of money will be able to buy it.
A lot of MB sold in the UK are made in Mexico.
You’re running a real-goods arbitrage analysis. It’s dicey to compare national inflation statistics for this purpose. They’re measuring separate baskets of goods on different methodologies.
This means you must reconstruct the baskets. As such, you might as well measure the things you’re buying. For traded goods, e.g. grain and fuel, there is unlikely a massive pre-tax spread because professionals are looking at the same data. For non-tradable goods, e.g. hotels and restaurant meals, you might see a yawning gap.
Like exports from EU to US are now more profitable.
Or am I missing something? Can someone with more understanding/background explain how this might effect production and exports?
(not my area of expertise)
If they could produce and export a lot of stuff. But that requires energy. At the current energy prices- forget it.
In other words Europe depended on its (relatively) strong currency in order to sustain most of its remaining industry, if that currency strength is gone then things will become real bleak.
Or maybe the financialization of the remaining pieces of industry will save us all, even though I have very high doubts about it. In one of their recent issues The Economist was un-ironically suggesting that the people now producing actual fertilisers in Germany should switch careers and become "fertilisers consultants" or some such, seeing as the production process itself will have become too onerous.
Crazy times, wish we had more "experts" with their feet definitely on the ground compared to what it seems we have (or rather we haven't) right now, after all, parts of Europe have been through all this before (I'm from Eastern Europe, I should know), there should be some institutional knowledge about this type of processes.
If the USD falls and oil prices rise, we in America are screwed. We almost had it handed to us this summer.
Now I work very close to home, but when I didn't, I'd meet people commuting the other way. If it was no longer profitable to commute, we could either move to be closer to our job or switch jobs to be closer to home.
Are you asking about America? This summer, my wife's friend ($70k/yr) was considering a tradeoff between eating healthy vs supporting her mom's rent.
Going closer to work is not a choice for many as rents closer to work are prohibitively high. Further, a lot of driving is errands and healthcare. I can't even get something to eat without driving 5 mins.
How Americans could screw themselves so much and let this happen ?
Sure, for the fools who saw a couple years of two-dollar gas and decided they needed an F-350 to drive to their office job. It's hard to work up any sympathy for them, especially when most of them lived through the gas prices of the Bush years.
In Ireland: ~1.50/l for Diesel -> 2.20, now back down to 1.89 or so. In northern Europe, I saw anywhere between 1.79 and 2.26 late July early Aug. (Including 2.26 and 2.02 on opposite sides of the motorway)
Those are the tradeoffs. Need for indoor heating has a lot of stretch. In Europe, there's a ton of stretch on personal mobility too, since there are viable alternatives for the car.
Europe can weather this crunch a lot better than America.
Someone who actually believes the "just put a sweater on" rhetoric that even those who tried foisting it on the public quickly gave up on.
Be sure to give your sage advice to the Germans and other Europeans who are this winter going to see gas bills rise 200-1000%. We've had, in the past month, a German minister stating that becoming dependent on Russian gas was a "grievous mistake", and that his country is begging for turbines from Canadian custody "with a heavy heart". His government stating that entire industries might "collapse". Rationing of gas announced. Local municipalities planning warm buildings that those without heat in their homes can visit during the winter. These are just a few of the many things that have happened that are part of the greatest German (and thus European) catastrophe in 80 years.
>Those are the tradeoffs. Need for indoor heating has a lot of stretch. In Europe, there's a ton of stretch on personal mobility too, since there are viable alternatives for the car.
It was obvious from your earlier stupendously cringeworthy "Ten years from now, Europeans will drive electric (if they'll drive at all)" comment that you are of that peculiar species known as Homo redditus, the type that believes in everything you read in /r/politics and /r/worldnews, but the above reinforces it.
(No, Virginia, Europe isn't some sort of magical wonderland of public transportation everywhere from Ireland to Estonia to Greece to Portugal. Be sure to tell the rural Spaniard or Frenchman or Irishman how he no longer needs an automobile or two, and to the people commuting into Frankfurt or Milan or Antwerp by car that there's no reason why they've been doing so all this time so need to stop ASAP.)
>Europe can weather this crunch a lot better than America.
This is so, so wrong in every single way that it's hard to believe so much wrongness can be contained in ten words.
I haven't used heating in 5 years in Berlin, at the coldest it was 17c in my flat, having grown in the mountain that's my comfy zone
People want to live like kings for 50 euros a month, reality is catching up
Or are you just saying “if oil gets more expensive”? If so, I don’t really see the relevance of mentioning USD exclusively. Either you’re separating the currency from the commodity or you’re not.
That's before looking at how much of that €€€ was thrown at long-distance trains. While commuting was an afterthought.
If you deposit $100 with bank A, and they give a loan for $80 to person B, you have $100 to spend and person B has $80, so $180 can float through the economy.
The $80 debt should cancel out person B's surplus, but it kind of doesn't if interest rates are low enough because they'll never actually pay it back.
That's my potentially poor understanding of it.
I suspect it's because that's all they can really do. They are a one trick pony.
Neither sounds like they decrease inflation.
Some people might be able to finance a $500k house, at 0% interest rate for 30 years. However, with certainty there are fewer people who are able to finance a $500k house, at 10% interest rate for 30 years, as this costs much more. This means, as interest rates rise, fewer people will be able to secure and offer $500k for a house. As fewer people are offering $500k for a house, sellers will struggle more to sell a house for $500k, and eventually, there even comes a point where prices are forced to drop. As for how high interest rates need to get and how long they are in place to cause a decrease in prices, is mostly a guessing game, but eventually it will cause an effect.
Now, that said, initially people might try to raise their prices to offset the increase in financing costs, (and therefore adding to inflation like the parent post thought), but like I said, eventually there comes a point where they just won't find anyone who will buy their higher prices, because no one can afford those higher prices, and therefore prices must come down if transactions are to continue happening at all, and some transactions will surely continue to happen, as some money is better than no money, when you got a liability to pay.
And this also applies to food prices, along with most everything, in very similar but indirectly complex ways, mainly because most transactions in the economy happen via credit, then with actual money/cash. Let alone the fact that all money originates via central bank loans.
I can also see how they can crash any large purchases financed by credit: cars, machinery, etc.
I can see how they can stop growth, how they can crash companies that have overextended.
But I cannot follow how the prices of goods and services come down. I'm not even arguing that they don't come down, I just can't follow the logic.
ELI5:
Inflation is directly proportional to the money supply. The more money is circulating, the more things cost.
Money supply is inversely proportional to interest rates. If I could borrow at 0% APR, I will happily borrow a trillion dollars, even if I had no idea what to do with it.
And now the important thing: In modern economies, when people borrow money, that money is magically created out of thin air and added to the money supply.
This means that when interest rates drop, money supply goes up, and inflation goes up.
When interest rates rise, money supply goes down, and inflation goes down.
There's a lag to these effects, and there's a limit to how much interest rates can affect inflation, and there are other factors at play, but this is the bare bones of it.
- Lets say you have a lot of euro. Interest rate is 0 and the US interest rate is 2%. Then you might think of selling euro and buy dollar to get the 2%. Especially if you think that euro/usd will decline further.
- Now let's say your interest rate is even higher now at 10%. A lot of houses in Germany produces something like 3% yearly revenue. So now you might start selling the houses with the same argument, since you could get 10% risk free compared to 3%. Housing prices go down, if you can't raise the rent.. Same effect on business that are doing just small revenue compared to the capital. It doesn't make sense to operate them. They quit -> consume less resources.
- Other effects like people spend less since saving becomes a bit more interesting. Firm's invest less, since the investment has to beat the interest rate.
PS: All that leads to a stronger currency. So your imports become cheaper and that helps a lot to fight inflation.
But the current rise of the Dollar started 15 years ago.
Over these 15 years, it has become more and more apparent, that software is eating the world. And the US keeps extending their lead in this area.
I would not be surprised if that contributes to a long term trend in the EUR/USD ratio.
(I'm sitting in a cafe in Germany, writing this text on laptop made by a US company, running an operating system maintained in the USA, into a browser made in the USA and posting it to a website of a US company.)
In Europe you can't do fracking
In Europe you can’t do innovation, or it’s an order of magnitude more expensive.
Your argument is just plain wrong and can be disproven with a few examples.
Australia has the E-3 visa and Canada and Mexico have the TN visa.
I think it’s intrinsic to the models. The U.S. pays top performers better. But the average European has a more-stable lifestyle. The same regulations and labor protections that grant that stability slow down growth, so apart from an internal restructuring it’s tough to see the situation changing.
Remote work is kind of in the process of dissolving the crystallization for software.
But they don't. They're too cheap, or perhaps EU style managers can't stand the idea that some people in the same company as them make half as much as they do.
The point about the market I agree, the EU market is way too fragmented still, but it's slowly getting there.
[1] https://www.xe.com/currencycharts/?from=USD&to=EUR&view=5Y
Stock market growth is also something that isn't necessarily benefitting the country where a stock is listed. A european investor can buy Apple stock and participate the same was an an American one.
Same if industries just gets more competitive, the economy can go way up with no change or with a loss in profit.
"Tech" is a force multiplier, whether that tech is factories, steam engines, gunpowder, chariots, printing presses, or software. The people who have the best mastery of the currently-most-useful force-multiplier tech at a given time tend to do very well.
Software, broadly, just currently happens to be the most useful force multiplier. That may change to the subset of software that is ML, or it may change to robotics, or something else entirely like synthetic bio.
Over the past 15 years, Europe experienced:
* The Great Recession. * A Sovereign Debt Crisis which lasted well into 2014. * Increasing competition from new economies in Asia, mainly China. * Brexit. * The Pandemic. * And now an unprecedented energy crisis.
Also, the EU had expanded swiftly in the '00s allowing many of the former Eastern Bloc countries to join the union. Arguably, one does not simply integrate national economies in a single market zone under a single currency. It takes years to align towards common policies, while dealing with the many challenges posed by cultural and political differences.
Let's not forget that the initial raison d'etre of the EU - such as it was conceived by Schumann and Churchill - was to ensure sustained stability and peace across the continent in the wake of World War II. In a way, the EU has been instrumental in protecting the continent from worse consequences given the turbulent waters the bloc has navigated over the past 15 years. But it hasn't come out of all of that unscathed.
In order for the EU to recover, it needs to invest in infrastructure and people. A massive challenge which is encumbered by the significant debts most European nations have been shouldering thus far.
You, on the other hand, using American technology to connect with the world and assert that "software is eating it", well, that's - historically - just one expression of American hegemonic power after World War II. In regard to the EU that's expressed military - through NATO - and economically through countless trade agreements which have led to tight integration (see: https://policy.trade.ec.europa.eu/eu-trade-relationships-cou...). Proliferation of US technology across the continent is just one expression of that relationship between the EU bloc and the US.
* The US had a single national language (despite regional linguistic minorities). In the EU, the closest would be English, which is the universal second language but very few people’s first language.
* Relatedly, the US in 1789 was very culturally homogenous by modern standards. Europe is not.
* The wealth disparity between countries inside the EU is absolutely massive. Federation would lead to unfathomably massive wealth transfers from the North and West to East and South. This would lead to resentment and rekindled nationalism that would create extreme political strife and tear the whole continent apart.
Culturally, EU is quite homogenous. There may be 1-2 small countries with moderately different approach, but if you compare to the rest of the world, it is basically the same.
The wealth disparity in the US does not cause what you describe, so why would it happen in EU?
Most European powers are involved with weapon deliveries and target of economic warfare as well as targetting Russia. Several European states are targetted with cyberwarfare attacks.
There is a lot of hyperbole about Ukraine, not least because of Russia but so far it is not intrinsically disruptive outside of Ukraine's (and Russia's) borders beyond the disruption to Ukraine's exports (e.g. wheat). The disruption to gas supplies on Europe is mostly self-inflicted and not an intrinsic consequence of the war.
If Europe wanted, they could simply go back to business as usual and ignore the war entirely.
It's surprising that people forget that the EU initiated the financial war with Russia
There is very localised war in Ukraine, which objective impact so far only concerns what Ukraine exports, mostly wheat at this point.
The war does not intrinsically disrupt Russian exports, including gas, to Europe.
Europe has made decisions based on various considerations and those decisions have resulted in disruption.
I think it's useful to sort consequences we're seeing depending on the level of control or leeway parties have on them.
Wheat and a few million people who had to leave their country, but yeah, wheat...
It obviously is a major crisis in Europe and has many ramifications, if all your neighbours mysteriously die in the same week it won't affect you personally but you surely will feel down or threatened. If it was just about wheat nobody would care, Ukrainian wheat isn't even exported to EU countries
People left early in the war because of panic and because Russia was trying to invade the while of Ukraine. But if we look at the situation now, arguably there is no reason to have refugees outside of Ukraine.
Second thing is that, in any case, the Ukrainian refugees are not disruptive at continent level, though they might be in specific areas near Ukraine.
Of course a war, any war, is disruptive and horrible for the people involved. But we're looking at the macro impact on Europe here.
Huh? Until Feb you might have said this if you did not believe the intelligence reports on an invasion being prepared, but now when they are actually deeper in Ukranian soil, and scratched near Kiev itself, are you to say they won't try again?
This premise relies on a mysterious, unknown cause though. It's more like your neighbors fighting your other neighbors.
I'll never understand. If anybody knows the train of thought, please tell.
If Germany was more energy independent, Russia would be crushed this winter.
Meanwhile the ruble is stronger than it's been in 4 years.
For people in the EU/UK, how has this currency slide impacted your day to day?
Not at all?
I mean, I guess you could argue which caused which but the real problem here in central Europe are gas and energy prices. Those legitimately doubled and affect personal budgets.
Because I'm sure all the US-based services will soon be updating their prices to match our rapidly weakening currency.
1: https://www.theguardian.com/business/live/2022/aug/22/cinewo...
Oil and gas are expensive, but the strong dollar isn’t the main factor.
https://www.cbsnews.com/news/russia-ukraine-ruble-currency-r...
How could you buy it, if it can't be sold? Also that article is from June, a lot has changed since then.
Average Daily Volume Traded 100 Days: 514
Average Daily Volume Traded 200 Days: 24602
You can buy it from Russia, but you can't sell it to Russia. That is how you can buy but not sell.
What am I missing here?
I don't think there's a big pile of Rubles outside of Russia. If I had Rubles I would've offloaded them many months ago because there's a chance they could be completely worthless in the medium-term.
I'm living in Germany, the biggest problem is the inflation caused by energy prices. It's still lower than in the US or the UK, but people are starting to struggle. Business is going well as Germany is mostly export-driven, but companies don't want to give out rises.
Half of Russia’s reserves are sanctioned. They’re earning bumper returns on their energy exports, mainly oil, despite the ~20% discount they’re forced to offer. And they’ve been seizing exporters’ hard currency.
They say they’re down 10% (20% sanctions adjusted) from February [1]. That’s a decrease, but it’s not burning. (Obvious disclaimer: they’re probably lying.)
[1] https://tradingeconomics.com/russia/foreign-exchange-reserve...
That sounds like burning to me, even at the improbable 10% level.
Fair enough. It’s a steeper drop than I expected before looking it up.
The only way to get Rubles to buy your imports is to give Russia gold at the rub-gold exchange rate set by Russia.
This peg, iiuc, is one-way. As in, Russia gives you X rubles for Y gold. You can't, however, redeem your rubles the other way around.
So... is the Ruble really strong? idk.. it all sounds very artificial given exchange is only in one direction.
I don't have plans to go on holiday to the USA in the next year or so, don't plan to buy a Tesla, maybe a new Mac which is going to go up in EUR.
I worry about the long-term effects the war will have for us. Europe is resource poor and constantly rising energy prices will hit our industry hard as we cannot easily find domestic sources of energy. I do hope that switching to renewables gets accelerated and will provide us with both cheap energy and new opportunities for industry.
All that is left is the petro dollar. This is the result.
(yes, I know there's more content and "this week's currency summary" sounds less fun and I should chill out)
Exchange rate was 1 EUR for 1,95583 DM
I don't think so, the same happened for the old Lira in Italy, 1,936.27=1 €, that everyone rounded to 2,000=1 €, or for the Portuguese Escudo, around 200=1 €, it should be just a coincidence:
https://en.wikipedia.org/wiki/History_of_the_euro#Currency_t...
The conversion was based on exchange rates on 31 December 1998 for the initial Euro members.
EUA was exchanged 1:1 for ECU, then 1:1 for EUR, so that's a nice continuation.
> EUA was exchanged 1:1 for ECU, then 1:1 for EUR, so that's a nice continuation.
Interesting, I didn't know that. We did something similar here in Brazil to get rid of the hyperinflation: the Real (which started at 1:1 with the USD) was preceded by the URV, an accounting measure which was used to denominate all prices; during that time, the prices continued to inflate in the former currency, but were mostly fixed in URV, so when the currency changed from Cruzeiro Real to Real (at 1:1 with the URV), the prices stopped inflating so much. Of course, that was not the only thing the Plano Real did to get rid of the hyperinflation, but it got rid of an important "inertial" component of the inflation, in which prices inflated daily because they had always inflated daily.
Each transition saw a 1:1 conversion with fluctuation - usually to benefit the EUA/ECU/Euro - along the way.
https://finance.yahoo.com/chart/EURUSD%3DX#eyJpbnRlcnZhbCI6I...
No, not AFAICS. Because if that were so, then "this historic event" could only mean one single event, the most historic event ever. That's obviously nonsense; there are / have been many historic events. And if there can be many of those, there can also be at least several historic lows.
Parity in this context just mean a ratio of 1-to-1, doesn't it? I guess it could be synonymously replaced with ‶numeric equality″.
The key takeaway given that is that the market is either losing confidence in the eurozone, gaining confidence in the US, or most likely; both.
> The key takeaway...
Yes, and that's the useful information.
They are salable assets with a price that people are willing to pay to acquire them. It is no more abstract than a hypothetical report on how a house in New York City is now worth less than a house in Wichita. Numerology implies some kind of mystical force. This is simply observation of measured human behaviour.
It's more like saying "a building in New York is now worth less than a business headquartered in Wichita".
Sure. There's no difference. A salable asset is a salable asset is a salable asset. They are all freely traded amongst each other. You can trade that business in Wichita to acquire the building in New York (along with some extras to reach parity in the transaction), just as you can trade your USD to acquire EUR (with some extras to reach parity in the transaction). If two assets have value parity, the trade can take place without any extras.
Comparisons of similar assets (currencies in different countries, houses in different cities) tends to be more interesting for reporting, though. If you are vacationing in a different country you're probably not going to trade your house for the foreign currency. You're typically going to trade your own locale's currency. Likewise, if you're moving to another city, you're probably going to trade your house in your origin city for one in the destination city, not your collection of comic books.
You could trade your house for foreign currency needed while on vacation and your comic book collection for a house when you move to New York City, but it is not nearly as common as trading similar assets when moving about the world. The media needs to attract a wide audience, so common behaviour is significant. Unfortunately, the beloved Comic Book Collector's Homebuying Guide Weekly didn't find the readership necessary to remain in business.
Yet the article does not explain how a "gas crisis" leads to a weaker currency.
What does lead to a weaker currency? On the EU side, central bank accommodation in the face of inflation ripping higher. Germany recently logged a 37% YoY annual increase in producer prices:
https://www.reuters.com/world/europe/german-economic-outlook...
And the ECB has done basically nothing about it. Deeply negative real rates and little indication that the ECB has the stomach for any substantive action.
On the US side, there have been sizable interest rate hikes, which will continue at least until the midterm elections get underway. Real rates are still deeply negative.
That difference in rates attracts a lot of capital that might otherwise be parked on the EU side.
The US doesn't need to be a pillar of financial responsibility to attract the world's capital. It just has to be the cleanest dirty shirt in the hamper.
Ergo, you can safely bet both your kidneys that nothing's going to happen.
It's crazy how hard it is to make 1 European country agree on finances these days, all the EU member nations agreeing to seriously tighten is about as likely as the President of the US declaring he is an alien.
Returning several million net-negative economic migrants to their home regions would also be necessary.
This is why the EU is a stupid idea. When it is the south, they should suffer, when it is Central Europe, everyone should come together and sing kumbaya
Anecdotal: My dentist was from Rumenia. I'm sure they need dentists too but he can make more money in the Netherlands.
is the cultural problem an important factor? as someone who's also from the south, yes, i think it is. is it the only one (that matters)? no.
the eu (and the euro) works mainly to provide a cheap-access market for the stronger economies to a series of other countries. it's extremely difficult for poorer economies to compete with the stronger ones (due to regulations, size and how those two interplay). it's even more difficult for those economies to provide the same quality of life (i.e. higher salaries, same level of social care, etc.) when they themselves don't have full control of their economy/market.
That is totally to forgot that Italy has been cost reduction/ austerity since the 90's. Precisely when it's started to do that, its economy stalled.
Spain had its debt going from 30% to 70% after the 2008 crisis.
Even in Germany, parts that lost industries decades ago are still borer that the rest of country. France and Belgium have similar problems and Italy north-south split is even older.
Nobody know how to reverse it or at least succeeded. This is not easy.
There are pending issues related to management, but also north-enforced market control (milk cuotas come to mind) that definitely have affected the economy.
I really wish the south acted like the north is acting now when Germany was considered the sick part of Europe in the 90s. We would have avoided so much trouble.
The euro just cannot work in the long run. The sooner people up top admit this the better for 300m europeans. But they will never admit defeat.
https://www.dbresearch.com/PROD/RPS_EN-PROD/A_European_trans...
If you mean transfer in a more abstract fiscal sense, not even individual EU states themselves are homogeneous regarding their internal fiscal policies. Some are federal, such as Germany, and some are highly centralised, such as France. Then you have the case of Spain where all 17 autonomous communities (≈pseudofederal states) have a small leeway regarding income tax and must follow the baseline central policy, but two regions in particular—the Basque Country and Navarre—have fully devolved powers regarding taxation due to "fueros", i.e. historical rights.
Almost every economist said in 98 that the euro is a bad idea. And it is for the south of Europe. It's great for the north and Germany especially, but for the south it is and has a killer.
In my opinion, the Euro will ultimately break the current EU.
Rich countries in the north especially Germany put in place policies akin to dumping and were shielded from the effects it should have had on their money by the economic gap with the poorer countries in the south. Southern countries found themselves handicapped by an overvalued currency. Meanwhile politicians in the north refused any form of transfers and keep popularising the idea that southern countries are poorer because they lack discipline.
Currency fluctuations don’t allow for global trade. That’s why after WW2, the Bretton-Woods system was established with fixed exchange rates. After that came to its end, Europe created a new system. Rates were not pegged to gold but to other European currencies (only 2% deviation allowed, 6% for Italy and Britain).
That created a problem for countries that couldn’t keep up with the German economy: Stabilizing the exchange rate was getting very expensive for those countries. Germany started with zero gold reserves after WW2 and now has second place because of this system.
The solution: a common currency. Germany gave up the privilege of getting paid for their strong currency so weak currency countries could stay in the system. A lot of money for an economically integrated Europe. Italy gave up some sovereignty over the money supply and pledged not to spend too much.
Even without the euro, Italy had an “overvalued currency” that held it back because it kept devaluing its currency with no economic growth and, yes, no financial discipline (although, of course, Italians don’t lack discipline). The introduction of the euro relieved Italy of much of the burden.
While I agree that there was a lot of populist rhetoric in the northern countries, pretending that the euro is bad for Italy and good for Germany is also populistic. The reverse is true.
If you mean fixed exchange rates (going back to the 70s) are bad for Italy then one can discuss that. (But there’s a lot of economic literature against that – just imagine California and Kentucky had different and free-floating currencies and how trade would be impaired)
> Currency fluctuations don’t allow for global trade.
I’m glade to learn every country in the world with their own currency can’t participate in global trade. Obviously fluctuation is not an issue for trading.
I’m guessing that by the pegging to each other you are mentioning the ECU and European Exchange Rate Mechanism. Its goal had very little to do with trade. It was mostly an attempt to avoid speculation and large monetary fluctuations which made debt management more costly for countries. It collapsed extremely fast and the southern countries were amongst the first to exit the system for reasons which are very close to why the euro is so poor for them.
> The solution: a common currency. Germany gave up the privilege of getting paid for their strong currency so weak currency countries could stay in the system.
A strong currency is detrimental to a country export. I’m not even addressing the rest of the paragraph as it doesn’t make much sense. Why are singling Italy by the way? The problem is the same for Spain, Portugal, Greece, in some measure Ireland and even somewhat impact France.
You are also completely failing to address the distortion of the German economy which are a large part of the issues especially after Hartz IV. If you take a look at the German wage levels, saving rates and trade balance, you will see that their money should be much stronger than the euro is.
Luxembourg GDP Per Capita: 114,370
Ireland GDP Per Capita: 83,990
-----
Romania GDP Per Capita: 12,510
Bulgaria GDP Per Capita: 9,850
vs:
New York GDP Per Capita: 93,463
-----
Mississippi GDP Per Capita: 42,411
Yes, NY transfers wealth to Mississippi but the scale of transfer and the relative number of wealthy states vs poor (there's like 5 in the deep south) means the dynamic is completely different. Without significant development in ex-Soviet states I'm not sure how the EU can hold together longterm.
https://tradingeconomics.com/romania/gdp-per-capita
https://tradingeconomics.com/estonia/gdp-per-capita
https://tradingeconomics.com/bulgaria/gdp-per-capita
> What does lead to a weaker currency? On the EU side, central bank accommodation in the face of inflation ripping higher. Germany recently logged a 37% YoY annual increase in producer prices:
The producer prices are rising because of the gas prices
Much more expensive gas means the German economy goes kaboom, which is exactly what is now happening (afaik Germany recently had the biggest trade deficit in 30 years or something). The EU economy as a whole largely, largely depends on the German economy. The Euro is the currency behind most of that EU economy.
One thing I find weird (a touchy point?) is that the UK left. Yes, that was a few years ago, but my point is historical EU / Euro pricing is now diminished overall, in its up/down cycle.
COVID threw this asunder, so we did not see true fiscal results from UK leaving. And the UK left over a few years, making the departure less dramatic.
The UK comes in right after Germany:
https://www.investopedia.com/insights/worlds-top-economies/
and:
https://en.wikipedia.org/wiki/Economy_of_the_European_Union
Comparing the EU (18T) to the UK (3.4T) shows some impact here, around 20%. If the UK was still in the EU, I'd say the Euro wouldn't have dropped below parity.
Parity is an "OMG!" marker, and can cause cascading changes in perception to the strength of fiscal objects.
the europhiles in the UK attempted the first steps of joining (ERM1), which pegged the pound with the deutschmark
it was forced out when George Soros and friends attacked the peg on Black Wednesday
immediately prior to this the ERM was known an the Eternal Recession Mechanism (which is now exactly what the euro is)
Maybe check the facts first.
> Yet the article does not explain how a "gas crisis" leads to a weaker currency.
It wasn’t clear (at least for me) why gas has such an impact on the economy as a whole because many articles concentrate the debate on the private households heating only.
But currently, most of the gas is used in the industrial sector (chemicals, power supply, food preparation), also for electricity generation and for producing materials such as ammonia, plastics, methanol and hydrogen.
You can't have positive real rates AND pump up the real estate bubble.
There are two parts to growth - population and actual growth.
The majority of "actual" GDP growth for the last 20 years in the West has been people paying more money (inflation adjusted) for the same land.
Why? Because you could! Interest only went lower.
Positive real yields mean people need to actually work instead of speculate on real estate. Most people would rather just speculate on real estate. It's so much easier.
Unfortunately, it's a zero sum game. The losers are renters.
That said I'm curious how things will develop. Now that U.K. expects up to 18% inflation I wonder if the price-salary-real estate spiral in the metropoles can keep up its momentum.
Negative cash-flow real estate (anywhere with absurd Price-to-Rent ratios) has DESTROYED the S&P 500 (on leverage) for the last 20 years because of abnormally high appreciation (leveraged) due to interest rates perpetually decreasing.
Most R/E is leveraged.
Historically, you did not need positive cash-flow in R/E to make a fortune, and a lot of the fortunes amassed came from negative cash-flow R/E that consistently become more and more negative cash-flowing...
It doesn't really make any sense unless you believe interest rates will perpetually get lower. Anyone who took that trade over the last 20 years did very well.
the only real solutions are:
full fiscal union (the EU decides Germany/France/...'s budget, with redistribution)
or collapse of the euro
"[current geopolitics] leads to price going [up or down]". Even with a survey of big players markets don't always have a simple interpretation
For Germany, apparently gas flowing through Nordstream-1 is ideologically pure, but gas flowing through Nordstream-2 is evil.
The West will continue to celebrate its hawkish Ukraine policies as a success. Looks like Taiwan will be the next success.