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The Euro: "There’s no stopping what is now a downward spiral."

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February 27, 2009 – Comments (5)

"There’s no stopping what is now a downward spiral"

That's what one  savvy investor recently said about the European Union.  Many people believe that the EU and in turn the Euro are doomed. The theory behind this is that there are too individual economies to manage with just one currency. If for example, Italy or Greece had their own currencies they would be able to do much more easing than other members of the EU like Germany will currently allow.

Bloomberg had an interesting article on this subject this morning. A firm called Hayman Advisors LP, which raked in half a billion dollars making bets against U.S. subprime mortgages, believes that the EU is doomed.

The company's a managing director for global markets, Richard Howard recently stated that he believes Germany may choose to fix up its own economy rather than using its money to help bail out fellow EU members like Austria, Italy and Spain. The theory continues that if any of these countries begin to default on their debt, which is a distinct possibility without aid, that Germany might decide to "renounce the euro." The likelihood of it focusing on itself rather than fellow union members is made even more likely by the fact that this is an election year in Germany. Howard went on to add “There’s no stopping what is now a downward spiral.”

The cost to insure against European defaults, has soared six-fold since last summer. Credit-default swaps on Ireland have risen to 395.8 basis points from a below 50 basis points as recently as September. Austrian swaps are now at 265 basis points, versus below 25 half a year ago.

The spread between 10-year bonds for the haves like Germany and the have-nots like Greece, Austria, and Spain are the largest that they have been since the creation of the Euro.

Recently German officials have reiterated their support for the weaker countries in the Union and the savvy investor George Soros said several weeks ago that he does not believe the European Union will break up. European Central Bank President Jean-Claude Trichet recently was quoted as saying "there is no weak link of the euro area."

Still, many like Howard believe that given the depth of the current recession and the likelihood that things will get worse before they get better that the stronger EU members like Germany and France may be hesitant to bail out weaker countries like Spain and Italy.

Time will tell what is going to happen. This certainly is an interesting test for the EU. I certainly am not personally ready to say that it will collapse yet, but nothing would surprise me right now.

A lot off intelligent investors hang out here on CAPS. I would love to hear all of your thoughts on what the future holds for the European Union.  Thoughts?

Euro Area Risks Breakup on Bank Woes, Subprime Bear Hayman Says 

Deej

5 Comments – Post Your Own

#1) On February 27, 2009 at 9:30 AM, GNUBEE (26.83) wrote:

Employment will be key to the Euro's survival. As long as the big players can keep enough people employed at close to recent pay levels, the Euro may survive.

Did you know that many German companies encourage workers to work less than full days?, Their pay shortfalls are then partly subsidized by the Government. So an employee still gets say 90% of their paycheck, working half of the time. Wonder how long Germany can keep paying that bill?

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#2) On February 27, 2009 at 10:33 AM, EHoyle80 (< 20) wrote:

Another thing I think will be very important to the survival of the EU and the Euro, is the situation in certain eastern european countries. A lot of those eastern european countries owe money to other major european countries and if they can't pay I anticipate the results to show a big negative effect on the Euro.

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#3) On February 27, 2009 at 11:04 AM, CycleFreak7 (23.13) wrote:

Probably a little off the topic of your post, but ...

This, I believe, is a glimpse of the future for the U.S.  The more entitlement spending by the government, the more taxes are increased and the less competitive the U.S. will be on the world stage.

Jobs that actually produce something tangible will become a thing of the past.  Tax rates of 50%, you name it.

The bigger our government gets, the more we are doomed to become like many European nations.

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#4) On February 27, 2009 at 12:49 PM, TMFDeej (99.46) wrote:

Here's John Mauldin's take on the situation in Europe for anyone who's interested.  I don't have sound on this computer, so I don't know if what he's saying is any good, but I love his newsletter.

Deej

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#5) On March 01, 2009 at 2:01 PM, nesselsdorf1187 (40.62) wrote:

I am from so called Eastern Europe and this article seemed to me unreal of what is really going in European Union. My country has still its independent currency, but if it had euro, current economic crisis wouldn't have impact on its abolishment. Neither any other country that I heard of in EU seriously considers abolishment of euro, which doesn't mean that it couldn't come to that in the future.

I just think that the thing (and by that I mean so called Eastern European crisis) as it is presented by US media is way overstated, and I wouldn't bet against euro based on this. I'd rather listen to that economist that warns of coming U.S. dollar collapse and hedge against it in foreign currencies leaving only small amount in dollars.

 As for Germany, the country is still very financialy strong and tries to be helpful for other EU members though tendencies that were mentioned in the article exist, and are strenghtening. 

 

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