Too late for the Euro?

Have the Europeans lost confidence in their own currency, the Euro? Consider this…in parts of Spain unemployed workers have started to use barter to trade goods and services. In other words people are trading haircuts for rides to town or food for house repairs.

Today in Spain workers age 16 to 24 face an astronomical 53.3% unemployment rate, which forces these young people into barter because of lack of a jobs and cash At first his sounds very resourceful and it is, but it is really a bust to GNP and economic growth since no money changes hands. This pushes more of the economy underground and out of the view of tax collectors and the country back in time developmentally. Unfortunately, barter eliminates borrowing which helps people to start businesses and make large purchases.

In Greece hundreds of people in one town use a currency called the TEM instead of the Euro. It is a local alternative financial currency. Amid flagging faith in efforts to shore up the euro, Spain is witnessing a surge in local currencies as well. “It’s increasingly hard for anyone in my generation to have much confidence in the euro or the authorities controlling it,” says Eduard Folch, 28, a Web page designer in the Catalonia region. A couple of months ago, he and some friends decided to launch their own currency, the eco. Desperate for money of any kind, a score of businesses and two town governments in the area have agreed to accept the eco (Moffit & Brat, 2012).

This gets to the heart of what makes a currency work. What makes a money unit like the euro (and the dollar, for that matter) work is the faith of the people using it. Do I trust that this unit of money will have the buying power when I need it tomorrow? If not, I won’t use it and I certainly won’t save it.

Banks and companies are financing themselves locally and not from borrowing Euros from other European countries whom they don’t trust. The flow of money across borders has dried up because the banks are afraid of suffering losses. If banks and companies are already preparing for the collapse of the Euro, at what point does that become a self fulfilling prophesy.

Healthy banks are moving their money out of the countries that are in crisis. Likewise individual depositors are withdrawing their personal deposits from banks at a rapid rate. For example $75 billion Euros have exited Spanish banks in July alone. Thus banks are unable to finance themselves through usual banking means and so the government loans them money (that they borrowed) to operate.

At the core of the economic stability and recovery of Europe is the Euro as a monetary unit. There is great fear and the assumption that Greece will default on its loans and thus exit the Euro. Many fear this will cause a domino effect leading to other European nations to exit from the Euro which would throw all of Europe into a painful, but maybe healthy economic reset.

Yesterday 1.5 million people from the Spanish region of Catalonia, whose economy is bigger than Portugal’s and accounts for a fifth of the Spanish economy rallied for independence from Spain. The saga continues…as stated previously in my 2012 economic forecast, “There will be economic changes to be sure. However, we must have confidence as Noah did that whatever is coming, God will prosper us on the other side.”

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