The End of the Euro?

It's a euro-mess, as Germany reluctantly prepares to bail out the teetering Greek economy and S&P downgrades Greece and Portugal's government debt to junk status. Grim futurists like NYU's Nouriel Roubini are predicting the fall of bigger dominoes, possibly including Spain, Italy, Ireland and even the entire Euro as a cohesive monetary unit.
The dire situation is exacerbated by the colorful personalities and politics of the countries involved. In Greece, which owes $300 billion at interest rates that rose to 13 percent this morning, public unions staged a strike and threatened riots at the first sign of wage cuts or tax hikes. If there's any hope, the country will have to get way more austere. In Germany, meanwhile, less-well pensioned workers threatened to throw their (how do you say bums in German?) elected officials out if they give one more hard-earned euro to Greece. It's as if Germany is the stern, long-suffering dad, and all of the fun kids keep needing to get bailed out. He may be angry, but he's probably not going to let his kids sleep on the street. Especially with all the other parents in the IMF pushing him to keep up the neighborhood.

What does it all mean? Not total collapse, or the value of the Euro would have declined even more than it has. And if Citibank is too big to fail, then so is the entire European Union. But consider this:

  • It still costs more than $1.30 to buy one Euro. In 2002, it only cost 87 cents. There's still a huge amount of faith in the economies and currency of Europe, vis à vis the United States. That may be because while the U.S. could unilaterally devalue its currency and pay off its debts with cheap money, Greece, Portugal et al can't just can't just print money on their own. Over time, as the U.S. economy strengthens and Europe struggles, the dollar could gain against the Euro. But it's probably not likely that the Eurozone will implode.
  • Usually we just muddle through. That's the long term lesson of economic history. It's rare for nations to default on their debt, and rarer still for a strong and powerful currency to fall apart altogether. With the IMF, Germany, and the rest of the world willing to keep bolstering Greece, but the Greek economy still a big mess, the vulnerable economies of Europe are likely to struggle (choose your verb: shlep, struggle, limp) along and improve eventually.
  • We're talking years, not months. The latest German plan calls for a steady stream of loans to Greece all the way through 2012. So whatever happens, it's not going to be a quick fix.
  • U.S. investors could get whipsawed. As the euro swings broadly against the dollar, foreign stock and bond funds could swing with it. That's because some foreign stock and bond mutual funds hedge currency risk and some don't. (Read your prospectus or call your fund company to see if yours does.) If it doesn't, and you bought in during the years when the dollar was falling and want to sell now when the dollar is strengthening, you could get hit twice on the exchange rate. Of course, you could always try to hedge yourself by buying or selling some shares of a currency ETF, but who knows where the Euro's headed now?
Photo by lesum on flickr.
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