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Hypocrisy_Central's avatar

Economic-minded Jellies, the Euro goes down in flames, so what, what will it hurt, or not?

Asked by Hypocrisy_Central (26829points) December 9th, 2011

You Jellies hip on economics. If the Euro falls, what is the big whoop? It isn’t like everyone is using it. If the Euro fell how is that going to ruin China’s, or Japan’s currency, etc, less screw up some exchange rate?

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11 Answers

zenvelo's avatar

If the Euro falls apart, it will affect the banks that hold European debt. That debt is held as an asset on the banks books and has to b written off, then those banks either fail or cannot lend any more money, causing the credit market to collapse.

When that falls apart it triggers problems all over the world. US banks, Japanese banks and Chinese banks, and investors in European markets, will lose money and their economies contract.

Europeans would not be buying anything made outside the Eurozone because of no ability to pay for it. That would all be a major hit to all economies.

marinelife's avatar

Everything including the dollar.

Imadethisupwithnoforethought's avatar

Finance people sell insurance against things. It is an economic idea called “hedging”. If it would hurt your business if the Euro were to go down, you buy insurance contracts against that happening.

These are not insurance contracts you are used to, these are insurance contracts that are written generically, called derivatives. You can buy as many as you want, you can sell them back. The value of them changes minute to minute on the exchanges. People make fortunes buying these currency derivatives when, for example, early in the day people think the euro is safe and the insurance is cheap, then later in the day, people worry that the euro may fail and the costs of the currency derivative skyrockets.

Over time, these derivatives markets have evolved into huge betting pools. In fact, some financial institutions play with their books to use these derivatives contracts as collateral so they can borrow money to buy more insurance contracts to make bigger bets.

This is what happened to the US economy when the banks all failed in 2008, they had been betting on mortgages.

The currency derivatives securities market has a theoretical value of $3.27 trillion. If the Euro fails completely, that market falls apart overnight, causing most big European financial firms who have been trading in those things to fail, immediately, and some US firms who have been playing with them as well. 3.27 trillion is more than the yearly GDP of Germany.

Sorry, getting to be a long story. But their banks all fail. Any US banks holding their securities fail. The US Government has to step and bail out our banks again which are exposed, and help them bail out their banks.

Their business can’t afford to buy anything from America for awhile, and anything they have bought from the US they have been paying for on credit, they stop paying their bills, and the American company pretty much has to write it off as a loss.

zenvelo's avatar

To add some color to what @Imadethisupwithnoforethought said, it’s not just Eurozone- US trade that falls apart, but also Euro-OPEC, Euro-Sino, and Euro-Japan trade that fails. While the idea of Europe not buying any oil would send the price of oil down below $50 per barrel (that would be great for US consumers), the disruption in the Middle East would be scary.

Remember that Saudi Arabia avoided any sort of “Arab Spring” by promising $130 Billion on various subsidies. Without that kind of cash, Saudi Arabia’s monarchy becomes vulnerable, and so does their oil supply.

It is a big Whoop!

Hypocrisy_Central's avatar

@Imadethisupwithnoforethought While the idea of Europe not buying any oil would send the price of oil down below $50 per barrel (that would be great for US consumers), the disruption in the Middle East would be scary. There has been disruption all over the Middle East, some with the help of us Yankees, the only difference is, it happened with “those” Arabs. Not the ones Uncle Sam is on his knees before sucking fluid from the pipe. ”Those” are the only Arabs Uncle Sam really cares about. Most Yankees I know could care less if Brits, Swedes, and Germans, etc, can’t drive because of no gas. As long as they can gas up the Hummer or equivalent with $2.60 a gal, their driving is all that matters.

@zenvelo*Remember that Saudi Arabia avoided any sort of “Arab Spring” by promising $130 Billion on various subsidies.* Isn’t it nice when you can bribe your way out of a revolution and still trample the civil liberties of your people with blessing from Uncle Sam.

Imadethisupwithnoforethought's avatar

@Hypocrisy_Central I think you meant @zenvelo, man. I hadn’t thought through the energy cost implications.

Hypocrisy_Central's avatar

^^ ^^ ^^
Oops, you were right, sorry ‘bout that.

HungryGuy's avatar

It’ll trigger the world-wide depression to end all world-wide depressions…

Hypocrisy_Central's avatar

@HungryGuy Eludicate. Some places are in a constant depression as it is, how can they be effected when they are not in the game really from the start?

zenvelo's avatar

@Hypocrisy_Central I wasn’t speaking of Arab spring type tensions, I am talking that the Middle Eastern oil market would fall apart, including the 1.4 million barrels per month we get from the Saudis. Saudi Arabia is our second biggest source of imported oil. Lose that and US gas prices will be above $6 a gallon in a week.

mattbrowne's avatar

It wouldn’t be any different from a scenario with the dollar going down in flames.

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