"Long the "Euro" ( € ) !" : The Euro-bond and the movement toward EU Federalism may appreciate the Euro

The rescue plan by the European central government to save Greek economy has been put into practice in return for the collateral agreement between the assisting side, Germany and Great Britain, and Greece. Greece has also already incurred Geek bonds to inject a fiscal stimulus into Greek economy to fill the current budget deficit. The IMF has offered loan to the EU in order to assist Germany rescuing Greece.

Many economists have already predicted that Greek economic depression will not be ended, and the deflation spiral goes on permanently. The part of reason is that Greece is no longer able to use the own monetarist policy, which increases the money supply to finance to fill the budget deficit and/or provoke the price inflation to reduce the net present value of the cost of borrowing. Pro-Europeanists have strongly suggested that the fiscal budget of the member states should be collectively controlled by one European federal government in order to avoid the instability such as a currently ongoing fiscal crisis in the Eurozone economy.

However, at the fist stage of establishing the Europeau Union, the fast full integration into the European Federation was denied. Many European states required for a slow pace of the integration process. Pro-Europeanist monetalists (distinguished from the Euro-Sceptic monetarist such as Prof. Milton Friedman) assumed that sharing a common currency encourages trade among these sharing economic regions, and therefore the system automatically harmonises the business cycle in these regions. Many Pro-Europeanists were convinced by this theory so that the current Eurozone system was adapted without a strong federalism. But, the currently ongoing crisis contradicted the assumption claimed by the Pro-Europeanist monetarists.

Although many people once expected for the appreciation of the Euro. These people imagined that the Euro would be the world leading currency instead of US dollar because of the weakening position of US economy. This is not based on a rational hypothesis; this is totally a mobs' irrational exuberance! Although US economy has lost an initiative which the USA used to hold, the situation will be neither the USA becomes collapsed nor the Eurozone economy becomes dominant to overwhelms the world economy. The USA still has her military power financed by the half of the world total millitary expenditure. This fact implies that the USA still has a capacity to gain her finance and resources split from those spent on military. Furthermore, the USA still has a huge human capital assets which are technology, higher education, and work ethics. These human capital assets will assist US economic recovery in spite of the pressimistic prediction of US economy which many anti-US modests have ranted on. In addition, even though the Eurozone economy may become a much stronger economic region than the current situation, the Eurozone will not become the super-power nation which the USA acted as during the cold war period. The globalisation after the end of the cold war has encouraged many emerging economies to catch up to become the advanced economy. The Eurozone may be still capable to exist as "one of" the centres of the international trade. Nonetheless, it is impossible to become one dominating economic super power. The post globalised world shall not have a super power state holding the economic dominance. The world will be more globalised, but it will not be based on the autocracy of one nation. The post-globalised world will be more pluralistic than the pre-financial crisis period.



Many people now started to expect the Euro will be depreciated and then fail so that the Eurozone system will be fragmented as same as the time when the all member states had their own currency. These mobs' irrational exuberance is often disappointing. Although once they expected that the Euro would be appreciated further, they now start saying that the Euro will cease. They seem to be unable to analyse the economic situation more rationally. My perspective is "Euro-sceptic", and contradicts the over-estimation of the Euro. However, I bet on that the Euro ( € ) will still exist.

There are still a lot of sceptical aspects about this European integration under the role of European federalism. Nonetheless, it will be the fact that European federalism will be reinforced due to the mistake learnt from this crisis. Pro-Europeanists are now confident with the further European integration. Almost all of us now have realised that the current Eurozone system does not work stably. The Eurozone can only decide to do either going back to the old system or going toward the European federation.

According to the political, rather than economic, situation, majority of Europeans tend to prefer being integrated further into one European community. Therefore, they seem to prefer keeping the Euro as one of the symbols of European integration.

In order to avoid the currently ongoing financial crisis inside the Eurozone, the collective responsibility on the fiscal policy among these member state is inevitably required. The European Union will share the common fiscal policy (tax, public expenditure, and national debt).

Greek national debts will keep depreciated further. Greece herself has not a capability to repay her debt back. Although Germany and Great Britain assist Greece, Greek economy does not have strong industries and human capital assets which stimulate a boost of economic recovery to overcome from this depression spiral. Therefore, it means that Germany and Great Britain make a loss from investing on expecting for Greek recovery. It seems to a fate for Greek economy to default. When a national economy default, there are many different cases happen by means of each different situation. In this case scenario, this national economy will be "purchased" by someone. It is less likely to be bought by one individual who turns Greece into the dictatorship. As Europeans tend to think of Greece as a birth place or the origin of European civilisation and her history the EU central government is very less likely to isolate Greece to hand her to a certain dictator. Thus, the agent purchasing Greece will be the EU central government.

The situation that Greece is purchased by the EU central government means that the European central government will be in charge of Greek fiscal policy and legal system. As it happens to Greece all the other member states will be eventually looked after by the European central government to be fair. All the Eurozone member states will be enforced to relinqush their right to incur their own national debt.

Under the currently going Eurozone system, Maastrich treaty technically prohibits incurring national debt more than 3% and owning national debt more than 60% of their GDP (But, realistically not many nations follow this agreement). The reason to put such a restriction is to avoid causing a disharmony of the price inflation among the member states and the budget deficit caused by fiscal inefficiency and corruption by government bureaucrats. Allowing these states to avoid this agreement and to set their own more flexible fiscal policy relatively works well unless they keep their own monetary policy (I have mentioned a lot in the other entries in this blog).

However, this current system is highly restricted to stimulate the Eurozone economy by fiscal stimulus when the economic crisis hits all over the Eurozone member states. Some relatively well-off EU countries have agreed to spilt their government finance to rescue Greece. But, these countries are also in the recession as well! Therefore, under the current Eurozone system, helping the most deprived member state induces all the member states to be collapsed!!

If the European central government plays a role as the European federal government which is the only institution holding a right to incur a national debt (i.e. the same system as the USA), it will provide a more efficient and effective fiscal stimulus without harming the Eurozone economy. The EU is planning to call this bond as "the Euro-bond", which is not still installed but will be inevitably introduced. This idea is far more effective than the current system because the EU is simply able to issue the Euro-bond to fund for the all member states simultaneously while the recession hits all over the Eurozone. As this bond is based on the value of the whole Eurozone the credibility of this bond will be stably high. Therefore, many other national governments and many individuals will buy the Euro-bond, and the golden role will work out. All in all, it is easier to provoke the recovery which enables the Eurozone to repay back the debt if the Euro-bond is introduced.

Under this new system recommended by European federalists is more flexible to control over the whole Eurozone economy. The reason is that the larger proportion of the fiscal stimulus will be fund by the European central government than the current system, the expenditure plan in the member state has to be monitored by where the funding source is coming from. In addition, the EU central government will make sure that all its fiscal stimulus is efficiently spent to stimulate the member states' economy so that the legal system in these states will be revised and amended by the EU central government.

The opposing opinion against this European federation and the Euro-bond is that roles of the fiscal policy in all the member states have to be enforced to follow and censored very strictly. This means that all the member states will be no longer sovereign countries. They will be the states of the European federation.


If this case scenario becomes true, although the countries which are already the Eurozone member states will be integrated into the EU federalism further, the advanced non-Eurozone nations, such as Great Britain and Scandinavian countries, except for Finland, will keep a distance further in terms of their economic policy. There will be a clear distinction between members in inside and outside the Eurozone in the EU. The EU members in outside the Eurozone may avoid the censorship on their fiscal policy by the EU central government as they still keep their own monetary and fiscal policy unless they decide to join the Eurozone in the future.

Great Britain has such an independent business cycle from the Eurozone member states and has a strong own initiative of her financial market in the global market. These factors of Great Britain detests the EU fiscal integration which disturbs British business cycle. Joining the Eurozone discourages the initiative of British financial market because the power of financial market will be more concentrated on Frankfurt because Great Britain will be enforced to harmonise her business cycle to the continental Europe. Great Britain is able to keep her own market initiative as she keeps her own role of acts in financial market. Liberal Democratic party is quite happy to abandon the traditional market initiative to be integrated into the European federalism. But, due to British voting system (First Past the Post) will always elect either the Conservatives or the Labour which prefer keeping a marginal distance (not the complete Independence from the EU though) from the EU.

Scandinavian countries have a quite rigid labour market and a strong trade union power, which strongly requires a tight monetary policy to keep the price inflation level to be low. As it has been seen in the last oil price shock in 2008 the central banks in Scandinavian countries frequently changed their interest rate in order to carefully set the rate not too high but not too low. If it is too low, it perpetuates the stagflation (stagnation + inflation) caused by both the oil price and the wage bargaining. If it is too high, it discourages the economy and then induces the recession. The economy with a rigid labour market is more likely to increase unemployment. As a matter of fact, the Eurozone economy supports the flexible labour market, which means less rigid labour market (less labour right, someone may say), in order to make the wage level to be adapted to the market clearing rate. If Scandinavian countries decided to adapt the Euro, the common currency, they have to discard the rigidity of their labour market. This is one of the reasons why Denmark and Sweden do not have the full EU membership and Norway is not a member of the EU at all.

If Scotland independent from the United Kingdom, Scotland will either join the Eurozone or keep a distance from the EU as same as Scandinavian countries. But, Scottish Nationalist Party (SNP), the party insisting on Scottish independence from the UK, has not made a clear consensus to decide which way Scotland should follow.


In conclusion, it might be worth-off to long the Euro( € ) in the long run although it seems to be better to short it in the short run. It is difficult to see the best time to decide whether long or short the "Euro" ( € ). The prediction is that the value of the Euro( € ) will not be zero because of the strong political support from the European people regardless of its economic aspect. Altough the Euro( € ) will be depreciated further for a while, it will appreciate again when the Euro-bond is introduced. Ummm, difficult to make a decision. If you are willing to actively but carefully trade often in the foreign currency market, you had better short the Euro( € ) in the short run and long it in the long run. If you are bothered to cautiously watch movements and European political situations all the time, then I may recommend you to long the Euro( € ).