Comments on: Links 7/23/08

By: Richard Kline

Richard Kline — Thu, 24 Jul 2008 11:23:00 +0000

To PureGuesswork, I don't dispute anything you say, but rather agree. Furthermore, the regulatory framework for the euro is fragmented, a problem as large and larger. —None of that would stop the euro from shifting into a reserve capacity. Something to bear in mind is that the fragmentation of the euroe we see now is what we see, now. This context will change. We are likely to get a more consolidated regulatory framework out of the ECB, at least tacitly, in consequence of shifts in exchanges. Also, the irresponsible governments in the EU such as Spain and Italy are going to very nearly need bailouts from the ECB and the EU as a whole. Those are going to come with conditions regarding raising revenue &etc. And those foreign sovereign bondholders are going to diversify their bond baskets rather than be all long on Italy, for example; that issue is more managable than portrayed. But if investors cry in unison, Give us a Blocked-Euro, we will see this sooner still.

Treasuries may be more liquid, and are surely more numerous, but if they prove more porous and sinking change can come mighty sudden and stick. That is my personal observation reading the history, but Flandreau puts a further shine on the idea.

By: PureGuesswork

PureGuesswork — Wed, 23 Jul 2008 16:55:00 +0000

A problem for the scenario of the euro taking over from the dollar is that there is no region-wide govt debt instrument. Instead there are euro bonds issued by various countries. The German bund is the closest think to a US treasury for the euro. Yet the liquidity in bunds is no match for the liquidity in US treasuries. As long as there are separate sovereign bonds for each nation in the euro zone, how can the euro compete with the dollar as a reserve currency? I doubt any Asian CB is going to want to hold reserves in Italian 2 year euro notes, they are going to want bunds. And the supply of bunds is a function of the German economy, not the euro zone economy as a whole. There just ain’t enough of them.

By: Richard Kline

Richard Kline — Wed, 23 Jul 2008 13:43:00 +0000

Flandreau’s article at VoxEU is particularly interesting, though unfortunately he does not delve deeper there into the kind of properly weighted trade fundamentals he mentions which might or might not shift global capital away from the dollar elsewhere. I look forward to the full research article of him and his co-author when it is available.

And the antidote du jour is anodyne indeed: What if they held a revolution and we slept through it under the table?