How fragile is the euro?

Activists of the Occupy Frankfurt movement have set up a fireplace near the Euro sculpture in front of the European Central Bank in Frankfurt, Germany Nov.3, 2011. The ECB announced to lower their key interest rate to 1.25 percent. AP Photo/Michael Probst

(MoneyWatch) Whether the euro will survive was the topic of the closing keynote speech at the Morningstar investment conference last Friday. It was delivered by William James Adams, economics professor and expert on the European economy at the University of Michigan.

Adams started by noting that countries paying more than seven percent on debt have historically not been able to repay that debt. That puts Greece, Portugal, and Ireland in this category.

Adams stated he had no crystal ball but examined two opposing views.

Anglo-Saxon case against the euro

Adams presented the "I told you so" theory which is based on optimal currency area theory and examines whether a region would benefit from a monetary union. The theory holds that the area must have labor mobility, price and wage flexibility, and the ability to use taxes as subsidies from one region to the other. With language and cultural differences, labor mobility is lacking. Since there is no fiscal union, each member nation has its own tax structure, unlike the U.S. where the federal government collects the lion's share of taxes. Proponents of this theory note the Euro was doomed from the start.

The continental theory why the euro will survive

Proponents of this theory assert that the history of the U.S. monetary union was not without similar issues. While the U.S. dollar dates back before 1776, it didn't become the sole currency until the Civil War. There certainly wasn't much labor migration between the North and South during that period and for some time after the Civil War. Finally, the U.S. Government didn't begin collecting taxes on a permanent basis until 1913.

Adams stated that it would not be in the best interest of the Germans for the euro to be dissolved, and that countries benefit greatly by the elimination of costs from the constant currency conversions that previously resulted from trade among the member nations.

The case for European stocks
Market says euro is just fine

Conclusion

Adams concluded by reminding the audience that he started the presentation saying he had no crystal ball. He seemed to imply, however, that the euro may be far ahead of the early years of the dollar. He gave a contrary view of the European economic growth and showed that, on a per capita basis, Europe was actually growing faster than the U.S. He concluded that the euro member nations face large issues but they may be no more challenging than those faced by the U.S.


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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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