If you read between the lines, recent statements by Greek officials are pointing toward a showdown in the European Monetary Union. Basically, without blatantly saying so, the Greek government is preparing to default on its sovereign debt unless it gets a bailout from the rest of the European Monetary Union.
On the other side, the German government has been steadfast in its insistence that the European Central Bank and its member nations not rescue the Greek government from the self-inflicted dire fiscal straits in which it finds itself.
In order for their common currency, the Euro, to function, member nations must adopt fairly consistent fiscal policies regarding inflation, budget deficits, and internal interest rates. The European Monetary Union allows a three year grace period for nations that fall out of compliance with any of these requirements to get back in line. Greece’s budget deficit is beyond the limits by such an extreme amount that the country’s government says there is no way it can meet the standards within three years.
The European Monetary Union has no provision for the departure of any member nation. It also lacks any rules for possibly coming to the assistance of a member government. Whatever comes to pass now will be blazing new territory.
As a currency, I don’t think the Euro can survive unless there is a strict policy to eject countries that are not fiscally prudent. But it seems to be the attitude of many officials that no nation will ever be allowed to leave the European Monetary Union. Obviously, the management policies of the European Monetary Union cannot work both ways at the same time. It is also just as apparent that the Euro could fail as a currency–for either reason.
If Greece leaves the Union, there is a risk that Spain, Ireland, Italy, and Portugal may also depart. Latvia, which had originally planned to adopt the Euro at the beginning of 2008, is now stating that it may not be ready until 2012. But that country’s fiscal problems are so extensive that it could actually create problems for the Euro right now. Even the deteriorating financial problems in the United Kingdom, which is a member of the European Union but not the European Monetary Union, could have a negative impact on the continued existence of the Euro. If one nation exits from the Euro, there’s no telling how many dominoes will fall.
With all these monetary problems in Europe, the US dollar looks temporarily more attractive as an alternative. Since December, the dollar has been stronger, which has helped drive down the price of gold as measured by the dollar. However, the price of gold recently hit an all-time high against the British Pound (ignoring inflation) and is near record levels against other European currencies.
As investors and consumers grow more fearful about the prospect that the Euro currency might fail, they will seek safe havens. That will almost certainly translate into higher demand to own gold, leading to even higher gold prices.
Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes “Liberty’s Outlook,” a monthly newsletter covering rare coins and precious metals. Past issues can be found online at http://www.libertycoinservice.com/ Pat Heller is also the gold market commentator for Numismatic News. Past columns online at http://numismaster.com/