Why the Lucky Country’s currency is the key to your prosperity

Why the Lucky Country’s currency is the key to your prosperity

Australia is setting records for the longest run of economic growth without a recession.

Italy is doing the opposite.

The economy hasn’t grown since it joined the euro. A triple-dip recession is about to become a quadruple.

Why? What has led to the divergence in the wealth of nations?

I know the answer: Their currencies.

On New Year’s Eve in Germany in 2002, I was more interested in throwing firecrackers than the new euro banknotes. My mum tried to show them to me, but I was busy.

My aim was for an explosion in mid-air. This involved holding on to the firecracker for as long as possible and then lobbing it up into the sky at the last second.

Then one of our firework rockets tipped over shortly before launching. It took off towards our house.

My dad leapt over it, it ricocheted off some flowerpots in the garden, and then exploded over the neighbour’s house.

We emigrated to Australia on the subsequent New Year’s Eve…

Since then, the euro has dished out nothing but economic pain for much of Europe.

Meanwhile, the Aussie dollar rescued Australia from a recession during one of the worst global downturns in history.

How can a currency be so important?

In today’s weekend-edition Reckoning, you’ll find out…

Each time I went back to visit Europe over the years, I’d get a snapshot of the euro’s effects.

Thanks to my parents’ divorce, this was about twice a year for weeks at a time.

Visiting extended family and friends across Europe, I saw Germany’s economic doldrums during the Gerhard Schroeder years, housing bubbles in Ireland and Spain, and the sovereign debt crisis in southern Europe.

Add in the policies of the euro project’s masterminds at the EU, and I also saw Brexit and the migrant crisis play out first hand too.

Over the years, the only person benefiting from the euro and EU seemed to be me.

I could travel freely on my European passports and didn’t have to fiddle about with currencies.

But everyone I visited told me how the euro is causing them problems.

The exchange rate is too high or too low. Interest rates are too high or too low. The Germans are selling us too many cars, the Greeks are living off our money…

Everyone had a complaint.

Not that any of this is new. For more than 100 years, Europe has tried and failed to establish monetary unions like the euro. And the failures are remarkably similar.

Discovering this was probably the most surprising and interesting part of my recent research into the euro.

So, the euro’s failure would be nothing new.

Depending on how old you are, I might even say that you should be used to it by now.

All of the euro’s predecessors failed. And the creation of the euro failed at each step too.

The Currency Snake and the Exchange Rate Mechanism (ERM), for example…

Even if you disagree with my analysis, history alone begs the question how anyone could expect the euro to work.

Each time I came back from my trips to Europe, the contrast to my new home in Australia was stark.

Not that I understood why at the time. But today, it’s obvious…

The ‘Eternal Recession Machine’

Sharing a currency is like sharing a car. You’re stuck with someone else who wants to go somewhere else to do something else.

It’s an awkward in between. You don’t get where you need to go.

The tumbling Aussie dollar rescued Australia from a recession in 2008.

Similarly, the falling pound rescued the UK from recession after the Brexit referendum.

Meanwhile, southern Europe was stuck inside the euro, trying to deal with 2008’s fallout.

The common currency didn’t fall nearly enough for the likes of Greece and Italy because they had to share their exchange rate with Germany.

There’s a reason why Brits called the euro’s predecessor the ‘Eternal Recession Machine’. That’s exactly what happened to southern Europe.

Perhaps, if my family had stayed living in the mountains overlooking the European Central Bank’s headquarters in Frankfurt, I’d see things differently today.

Like my German family now, I’d be delighted to see my house rising rapidly in price.

Instead, when I listen to my German family today, I hear echoes of those family and friends living in Spain and Ireland in 2006, who told me about their booming property investments back then. Before they collapsed.

All that happened thanks to the euro.

The shared exchange rate and monetary policy pushed irrational exuberance in one part of Europe and economic misery in another.

The regions experiencing the two swapped over during the financial crisis. Germany became prosperous and southern Europe is struggling.

Meanwhile, in Australia, the RBA and the exchange rate can meddle around and wobble about as needed to keep the economy going.

But in 2018, something changed…

Will the Aussie dollar save us again?

If you listen to Europeans these days, everyone is grumpy.

The Germans are worried about the EU’s and European Central Bank’s bailout policies.

They were promised what’s happening to their currency and taxes would never happen.

Southern Europeans are scrambling for jobs and complaining about the austerity.

Nobody told them the euro would mean a slow-motion economic train wreck.

So, they elected Eurosceptics to challenge the system.

And in Australia, a housing bubble built on mass mortgage fraud has finally burst.

Will the floating Aussie dollar rescue us again?

Either way, all this leads to an opportunity.

All Australian investors have to do during lean years in the Aussie economy is invest overseas.

Well, in investments that are priced in foreign currencies.

When the Aussie dollar falls to try and adjust for economic strife, your investments should rise in value.

And that’s part of the protection strategy Shae, Jim and I are recommending all our Strategic Intelligence subscribers learn about right now. 

Until next time,

Nick Hubble Signature

Nick Hubble,
For The Daily Reckoning Australia