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BY DR. RAINER ZITELMANN
Last week, the Euro lost substantially in value as it clearly undercut the mark of 1.40 US Dollar. The example of Greece goes to show that the Euro has a fundamental problem. The European Union has put no effective mechanism in place to coerce budgetary discipline from the member states. Obviously, a joint currency without a joint budget and financial policy remains a questionable experiment whose outcome is entirely open.
From the start, the Euro was not an economic, but a political, project. This explains why the Euro was introduced even in countries that have never demonstrated budgetary discipline and that schemed and connived in order to meet the criteria for accession. At the moment, the other member states are feigning ignorance in an effort to make believe that there was no way to foresee or even suspect as much.
The next candidates are already lining up: Portugal, for one, has piled up debts equalling 80% of the GDP, which might soon cross the mark of 100%. Italy and Spain, too, have vast problems with their households and economies. So will the European Union assist Greece in any way? Doing so would further weaken the Euro, substantially so, not least because it is common knowledge that this same option would not be available to bail out larger countries such as Italy and Spain.
Even now, the Maastricht Treaty, once heralded as the guarantee for a stable Euro, is no longer worth the paper it was printed on. Year after year, the member states (Germany included) take turns violating the so-called convergence criteria with impunity, having no sanctions of any sort to fear.
If you take a game where none of the players have any qualms about breaking the rules and where no independent umpire enforces the rules, the rules of the game factually cease to be effective.
If the US economy was not in such a desolate state, the Euro would have lost much more ground against the Dollar. Even slight signs for a recovery of the situation in the United States will boost the Dollar – as happened last week. This demonstrates once more that a diversification of investments is of the essence not just in regard to asset classes, but also in regard to currencies.
Both the Euro and the Dollar remained relatively stable vis-à-vis a third currency, namely gold. Although the Dollar recovered, the price of bullion failed to drop in proportion, the way it used to. The gold price continues to slightly undercut 1100 Dollars or 780 Euros, respectively.
What conclusions should investors draw?
1. The long-term stability of the Euro should not be overrated. The strength of the Euro in recent years was merely owing to the Dollar’s weakness. It remains sensible then as now to invest some of your money in US Dollars. Your best bet is commercial US real estate, which offers a modicum of inflation hedging.
2. If the financial crisis was to repeat itself – and no sensible person can rule this out – the present financial and currency system would run the risk of disintegrating altogether. Governments no longer have the means to shoulder another bale-out on the same scale as during the previous financial crisis. Their coffers are depleted. At the moment, we are travelling at high speed without a spare tire in the trunk. If you wish to prepare for another serious crisis of the financial system, you should ensure that your portfolio includes no less than 50% in real estate and no less than 10% in actual bullion. To be sure, this is by no means an investment recommendation for dyed-in-the-wool sceptics, pessimists and doomsday prophets, but sage advice for any prudent investor. True alarmists have long started recommended buying a farmstead rather than real estate or bullion. Come to think of it, if things were to get as bad as this latter group fears, you could still opt for a career as agricultural estate agent.
Dr. ZitelmannPB. GmbH is Germany's leading company for the positioning- and communication consulting of real estate and fund companies.
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