Euro

On January 1, 1999, 11 European countries came together in an attempt to form an economic and monetary powerhouse. Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain were the first members of the eurozone.

Today, 17 of the 27 members of the European Union (EU) are part of the eurozone, the name for the collection of EU countries that utilize the euro. Over the last decade, the euro has become one of the world’s most powerful currencies, used by more than 320 million Europeans in twenty-three countries.

In 2011, the United States exported $268 billion in goods to the eurozone and imported $368 billion, making it the America’s biggest trading partner. According to S&P 500 data, roughly 14% of all S&P 500 company sales come from Europe. Not surprisingly, economic deterioration in the eurozone would have serious implications for the U.S. (Source: “Trade in Goods with European Union,” United States Census Bureau web site, last accessed December 19, 2012.)

The European debt crisis cannot be laid solely at the feet of the U.S. financial crisis. There was a build-up of debts in Spain and Italy before 2008, but it had little or nothing to do with governments. The private sector—companies and mortgage borrowers—were taking out huge loans. When southern European countries joined the eurozone, interest rates fell to unprecedented lows, fuelling a debt-laden boom.

That said, the European debt crisis became critical after the U.S. financial crisis of 2008–2009, as the slowing global economy exposed unsustainable financial policies of certain eurozone countries. In October 2009, Greece’s new government admitted the budget deficit would be double the previous estimate and would hit 12% gross domestic product (GDP). After years of uncontrolled spending and non-existent fiscal reforms, Greece was one of the first countries to buckle under the economic strain.

Fast-forward to the present, and the European debt crisis is pushing the 17-country eurozone toward recession, helping drag down the global economy. Ten European countries have already slipped into a recession. Three more have needed to be bailed out in order to avoid default.

In Spain, where the unemployment rate is 25%, there have been general strikes and civil unrest. In France, the European Central Bank (ECB) injected more than a trillion dollars to rescue three of the country’s largest financial institutions. Seven European countries have changed leadership because of the crisis, and Greece reneged on $133 billion in debts.

The chance of an economic recovery for the eurozone has been fading. With huge question marks looming over the health of some of the region’s biggest economies, a near-term rebound for the eurozone seems very unlikely. That may have to wait until 2014, maybe even later.

While Germany and France, the two largest eurozone countries, are expected to avoid recession, the euro will need to weaken in value for southern European nations to eliminate their current deficits and cut reliance on foreign borrowing, or to export enough to return to growth.

The multiple sovereign debt crises of European countries have placed pressure on the euro currency. With general high unemployment rates and anemic GDP growth, avoiding a recession doesn’t look likely.

Long term, we do not believe the euro will survive. We believe that Germany, the sole growth engine of Europe, made a mistake in joining the euro currency. And, at some point, we expect Germany to either withdraw from the 17-country eurozone or simply ask the weaker European countries to leave the euro currency.

For Americans, the struggles of Germany and the eurozone are a constant reminder of the interconnectedness of the global economy. What happens with the euro will have a profound affect on the value of the U.S. dollar and the price of gold bullion. You can find regular commentary on the euro in Profit Confidential.


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