The European Single Currency or “euro” has been in circulation in seventeen European countries for ten years and a few days now. Introduced on 01 January 2002 with national currency coins and notes phased out until 28 February 2002, the “euro” replaced all previously used currencies throughout EMU countries (European Monetary Union).
To be found in people’s wallets doesn’t mean that something is a real currency though. Surprising as it was in 2002, that thing appearing to be a currency at first sight lacked a vital ingredient of a working currency: a correspondingly unified bond market. During the run-up to the introduction of the “euro” it had always been very clear that a common European bond was hard to agree upon. Very different approaches like a “soft” and a “hard” version of the upcoming single European currency put forward by poorer countries in the south and richer economies in the north of Europe kept competing against eachother, and it became painfully clear at that point already that there might be dire straits ahead for an artificial half-currency as introduced in 2002.
Spurred by an economic crisis unfolding after the burst of the Fed-induced housing bubble and its subsequent burst in the U. S. in 2008, these not-so-unexpected troubles for the “euro” started materialising as an apparent consequence of that event. In fact, the U. S. housing bubble itself had been brought about by the Fed’s reckless monetary policies throughout the 2000s and, indeed, the stock market bubble of the 1990s the post-1987 recovery, the post-70s recovery and, initially, the de-coupling of the U. S. dollar from gold under President Nixon back in 1971. This means that, on top of the U. S. having to pay back a debt dating back at least 41 years, the Europeans will have to find a way to deal with the results of a failed four-decades-old worldwide monetary policy at the same time.
And with seventeen different national governments, each having different local priorities and demands from their domestic political systems , at that.
In light of the purely political situation it does not even matter if the “euro” is financially in a (somewhat) better shape than the dollar or not. When it comes to mere paper currencies, trust for such a currency is generated by economic as well as political trust. While it is already hard for one government to maintain that trust, it appears to be impossible for a conglomerate of seventeen of them. A European “Union” that is not really a union — and is not meant to be, as its people do not want and never wanted anything beyond a simple “common market” and freedoms of trade or settlement — will have a very hard time proving any credibility at all that will be accepted by worldwide markets. Central planning is inferior to Free markets and cannot be forced upon reasonable market participants, no matter how hard European bureaucrats try.
Forming “A more perfect union” is what the United States did, although it was meant differently.
Tested by history and in light of traditions and different cultures existing, a “Union” was neither wanted nor legal in Europe: there is not one piece of paper providing authority to force one upon the electorate — except for one “paid for” attempt in Ireland where voters have been literally “bought” with subsidies from Brussels. That voters generally do not want that “Union”, let alone “deeper integration”, has again been obvious from Britain’s recent decision to not give any additional powers to the Uberbureaucracy.
It must be doubted that any rescue attempts based on bureaucratic action and “improved” regulations or any “stability facility” will be very successful.
Let the “beauty contest” between the tumbling dollar and “euro” continue, but we got a pretty strong feeling about the outcome.
Too Little, Too Late
European Union member countries are trying to force on new “safety” capitalisation requirements for banks. These new requirements, known as “Basel III”, would require an increase in the portion of “high-quality capital” reserves against lending capital.
These proposals touch the very essence of what “modern” banking is all about, namely creating money supply out of thin air AKA Fractional Reserve Banking. The idea of Fractional Reserve Banking is usually described as being based on 10% of lending capital actually in the banks’ possession (ideally as in the form of cash funds deposited into savings accounts by clients). Once the general public understands only that part of the idea, this usually already raises eyebrows. In real-life, the implications of Fractional Reserve Banking are far more severe as they multiply many times over throughout the entire system of money supply — the true problem lying at the core of the current “financial crisis”, but one that nobody knows (or dares) to address.
Current capitalisation requirements are exponentially more reckless though as is explained in the mass media like this:
“Once enacted, Basel III would require lenders to increase their highest-quality capital — such as equity and cash reserves — gradually from 2 per cent of the risky assets they hold to 7 per cent by 2019.”
To be very clear, this means that it is common today to have 98% of hot air on just 2% of “good” capital.
Very Fractional indeed.
An the hailed “Basel III” requirements would gradually bring that “down” to, eventually, “just” 86% of hot air on a 14% (more or less) real-money basis by 2019.
Hardly assuring, and certainly not enough to solve a “financial crisis”.