x Abu Dhabi, UAESunday 23 July 2017

Europeans beat path towards their own currency destruction

Reading into current market investment conditions, you are long past the point where panicking might have been useful.

In The Hitchhiker's Guide to the Galaxy, by Douglas Adams, the book of the same name is described as having the words "Don't Panic" in large and friendly letters on the cover.

Reading into current market investment conditions, you are long past the point where panicking might have been useful.

A lack of consensus over whether declining market events have petered out is driving caution, with the laissez-faire attitude having already sped across the Rubicon. And who can blame these latter-day gnomes of Zurich?

For those seeking a relatively stable currency haven, the Australian and Canadian dollars beckon. Both countries avoided the worst of the sub-prime cataclysm. Boring banks from a balance-sheet perspective look positively bionic today.

Both economies are primarily commodity driven, with a young and educated population being supplemented by influxes of emigrating professional classes from the economically diseased world. By comparison, Europe, and the euro, is waning.

Only three countries in the European Union fundamentally complied with the initial joining criteria, and two of those (UK and Denmark) didn't join the united currency. This one-size-fits-all approach at inception doomed the euro with a precariously dangling Damoclean legacy, its bungee-like movements to date reflective of the competing demands of its disparate membership. The eurozone is not just facing the well-publicised issue of members unable to fund their deficits, but a resurgent Germany and inflationary pressure caused by loose monetary policy. This is likely to force the European Central Bank to raise interest rates.

Individuals already teetering will likely fall, but the true damage will be done in the commercial property sector, currently sheltered by institutions due to low interest rates.

The second act of this recession will then begin.

Four outcomes are possible.

First, the euro club remains together and soldiers on, with Germany absorbing ever more pain. Second, Germany decides to leave the euro, allowing the currency to devalue naturally without its anchor member. Third, the PIIGS (Portugal, Ireland, Italy, Greece and Spain) leave the euro, and since Belgium might be joining them, a new anagram will be needed. Or finally, the euro disbands entirely.

Options one and two are equally bad for recovery and condemn the bailout countries to a generation of economic misery. The effect on international trade would be to stifle global recovery.

Options three and four would have an immediate negative effect on the global banking system due to almost certain defaults on national debt.

A former CEO friend of mine remarked how he found the European niceties of negotiation protracted, poisonous and pointless. In the US, he said you had ferocious rows.  The relevant parties reached a decision and got on with matter - quickly.

In other words, options one and two are European in nature, while options three and four are American. Since time is the universal healer, the route to economic normality would appear obvious. If you doubt this, Iceland lowered its interest rates on December 8, 2010.

The euro - one for all, and all for one? That appears to be the decision, so far. Having made a firm choice, international markets would again be in a position to take a lead rather than showering monetary dissatisfaction into the current vacuum.

The only other region in the world close to starting down this yellow brick road is the GCC. There has been relatively little relevant discourse for such a substantial change other than where the central bank would be located. The linking of all but one of the regional currencies to the dollar means a de facto currency zone already exists as indeed does a customs union.

Launching a single currency would require much work from a legal and legislative standpoint. Planning and implementation would drive economic activity while generating a GNP-friendly global media hum as the process progresses.

Should the GCC be worried that it could replicate the travails of the euro?

History has a tendency to repeat on itself, but never exactly in the same way. The area involved is smaller, the cultures closely related and all share a common language. Economically, no one country can be called a laggard and politically and socially there isn't 1,500 years of nationalism to choke on. The underlying product output of the region is in perpetual demand, with only the UAE forging a wide road of diversified offerings.

Is a common currency even required? This commentator cannot think of a cogent economic case for one.

David Daly is the chief financial officer at The Sifco Group. Look for his bi-weekly column on micro and macro factors in the market that could affect your bottom line