A More Perfect Euro-Union

At first the Euro seemed so logical.

The southern European countries got sound money and low interest rates. The northern European countries got expanded markets and cheap labor. What could go wrong?

The low interest rates encouraged a housing bubble in Spain and overconsumption in Greece and Portugal. Expanded markets fed a Teutonic sense of destiny, and German shipments to the rest of Europe grew from 45% to 65% of all exports. But overproduction and overconsumption have run their course, and the adjustment will be difficult.

Two bipolar solutions present themselves One model has the two regions going their separate ways. A new currency in the south will lead to default, devaluation, and depression in the north, where a strong Euro causes overpricing and a lost decade or two as Germany’s export-driven model struggles to replace the Club Med.

The alternative is the development of a single, integrated sovereign bond market as the forerunner of a pan-EU fiscal federation. This would be like US Federal guarantees of State debt, something that has never flown here. If we can’t do it, how can the Dutch and Italians trust each other?

Still, America has a tradition of dual-sovereignty and federalism while Europe has always been more statist and universal. And the alternatives are pretty clear: increased union or depression. This is just the next step in a process that began in 1958 with the Treaty of Rome.

Whichever path Europe follows, we’re in for some interesting times.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-05T18:50:49+00:00 May 5th, 2010|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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