“A CONTINENTAL CURRENCY, WITH A DUAL METALLIC AND FIDUCIARY BASE, RESTING ON ALL EUROPE AS ITS CAPITAL, AND DRIVEN BY THE ACTIVITY OF 200 MILLION MEN: THIS ONE CURRENCY WOULD REPLACE AND BRING DOWN ALL THE ABSURD VARIETIES OF MONEY THAT EXIST TODAY, WITH THEIR EFFIGIES OF PRINCES, THOSE SYMBOLS OF MISERY.”
– VICTOR HUGO, 1855

For a few centuries, the elites in Europe have tried to create a common currency between nations. In the past, it was done by trying to peg the currencies so they would not fluctuate and trade would be stable. For example, there was the Latin Monetary Union in 1865, the Scandinavian Monetary Union in 1873, the Bretton Woods Accord in 1944, the Snake in 1970 and the European Monetary System (“EMS”) in 1979. All these systems worked for a period of time, but failed once the cost to defend the peg became too great that one or more countries had to devalue their currency. This is the same thing that happened to Argentina, Brazil and the Asian countries in the 80’s and 90’s.

Despite these failures, the elites in Europe wanted to give it one more try. After the EMS collapsed, the elites realized that the only way to make such a union work was to have a common currency with a common government (i.e, the United States of Europe). However, they also realized that if they were to ask the citizens of Germany, France, Spain and others to vote for one common government, the union would not have passed. The solution was to create a common currency where the cost to leave would be so high that the countries would have to agree to a centralized government and centralized bank. One only had to listen to Wim Duisenberg, the first European Central Bank President, one month before Euro notes and coins were introduced – “the process of monetary union goes hand in hand, must go hand in hand, with political integration and ultimately political union. The EMU (European Monetary Union) was always meant to be a stepping stone on the way to a united Europe.”

Why would Europe want to create a more centralized government? In their mind, it would get them closer to the status of the United States as well as make it a global competitor to the US dollar. Commodities and trade would be done in Euro’s, not dollars. The countries also would benefit from reduced costs in currency translation among themselves. This is how it was sold to the populous – the loss of sovereignty was never mentioned. The United States first became a centralized government based upon common beliefs. A common currency came later – in 1793 to be exact. History tells us that establishing a centralized government doesn’t work as long as the belief systems between countries are different.

The next step to creating a centralized European government is to establish a Eurobond. The Eurobond would be sold like US Treasuries with the proceeds to be doled out to individual countries. This is one of the proposals now being floated as a solution to the European debt crisis. When the Euro was first established, yields on bonds issued from the PIIGS dropped dramatically and were just slightly higher than Germany’s interest rates. The past two years has seen the cost of borrowing for the PIIGS rise significantly more than the cost of borrowing for Germany. A Eurobond would help bring down interest rates for the PIIGS because Germany would now be on the hook for their bonds. Germany’s interest rates, on the other hand, would go up. Imagine how you would feel if you were told that interest rates in the United States were going to go up because we were now issuing bonds with Mexico. Good luck to Chancellor Merkel selling that to her people. The losses her party has suffered over the past year will dwarf in comparison to the losses she will see if she agrees to a Eurobond.

The idea of a Eurobond presents Greece with some challenges as well. The people in Greece are living in depression-like times. The human toll is weighing heavily on the populous. In our opinion, we don’t think the Greek people can stand anymore austerity measures or tax increases. By being tied to the Euro, Greece can’t devalue its currency in order to spark economic growth. It is a debt spiral it cannot get out of. Many Greeks have taken pay cuts (in Euro’s) over the past several months. This hurts because their bills – especially their mortgages – have not changed. If Greece had its own currency, it could devalue it without cutting workers pay. In this case, prices on ordinary items such as food and clothing would go up. However, mortgage payments would remain the same and be easier to pay because there would be no pay cut.

Tying sovereign countries to one currency is an experiment that causes economic dislocations that eventually will be corrected by the markets. Greece is in the headlines today, but the dislocations are throughout Europe. A good example of this is Ireland. Prior to joining the European Union, Ireland’s economy was booming – in fact, it was running a budget surplus. At that time, it should have been raising interest rates to cool down its economy. However, interest rates fell when it joined the EU, supercharging its economy – especially its housing market. Now that Ireland’s economy is suffering, it should be lowering interest rates. It can’t though because it is tied to the Euro. European countries are different economically and culturally. We believe the powers that be will do everything they can to try and save the Euro. We don’t see how they can change the economies and cultures of the seventeen different countries that are tied to the Euro to create a centralized government. The stock market will continue to be volatile as this grand experiment unravels.

SUSY HISCH

In our ongoing effort to introduce you to THOR’s team members, we are highlighting Susy Hisch in this Newsletter. Susy joined THOR as a client service specialist in June of 2010. Prior to joining THOR, she worked for a major property and casualty insurance carrier as a network administrator and at Riverbend Music Center as the sponsorship coordinator. She graduated from Bowling Green State University with a degree in communications where she was a member of the varsity swimming team and Chi Omega Sorority. Susy and her husband, Tim, reside in Pierce Township with their two children, Savannah and Adam.