It has been 50 years since budget travel pioneer Arthur Frommer published his celebrated “Europe on 5 Dollars a Day.”
Frommer’s books introduced the notion that work-a-day lugs could sip espresso along the Via Veneto or catch the ooh-la-la of the Moulin Rouge along side the rich and well-heeled. Until recently, Frommer’s travel guides were looked upon as quaint nuggets of a bygone era.
With the continued unraveling of the euro, however, it may be time to dust off your tattered collection of Frommers, and consider packing a bag for a bargain vacation in Europe this summer.
After a brief respite following the announcement last week of a nearly $1 trillion rescue plan for some of Europe’s most troubled economies, fear is building again that the stress among the Continent’s biggest banks will further hobble recovery throughout the entire euro zone.
A Double Knot
Although the Greeks just received the first $15 billion installment of the $136 billion in promised aid in exchange for their agreement to impose stronger austerity measures, the spread of the economic contagion may only have been slowed, not arrested.
The European problem is twofold.
Rising short term borrowing costs are forcing European banks to cut back on new loans, compelling them to call in the old ones. This reduced lending activity is putting a crimp in economic growth. The problem is compounded by the fact that seemingly safe financial institutions in France and Germany still hold vast amounts of bonds from their shakier neighbors, like Greece, Portugal and Spain.
Investors in and outside of Europe have a mounting concern that the debt of the weaker nations that use the euro currency may have to be restructured, further lowering the value of their bonds. This, in turn, will keep a downward pressure on the euro, which already saw a 19-month low at the end of last week.
Many analysts believe that in addition to the unprecedented sovereign bailout European finance ministers just approved, they soon may have to consider a broader rescue plan to prevent the continent’s banks from imploding.
Old hands like former Bank of England policymaker David Branchflower – now a professor of economics at New Hampshire’s Dartmouth College – believe that a bank bailout in Europe is inescapable. Without direct financial support of Europe’s most troubled banks, Blanchflower believes that the decline in the euro may be “unstoppable,” and that eventual parity with the dollar could be inevitable.
Paris May Become Affordable
Since July 2008, the euro has declined from a record high of $1.60 down to a low of $1.22 last Friday. Although Britain is not part of the European Union, during the same period the pound sterling also has been pummeled, falling from $2.10 all the way to $1.44.
Just as it has with the U.S. dollar, a lower euro will make exports from the euro zone more attractive. But if the Continent’s banks remain illiquid as result of their declining bond portfolios, the European situation could begin to mimic the deflationary cycle that has put a damper on the Japanese economy for nearly 15 years.
Right now, there are no easy choices for Europe.
After borrowing trillions to stimulate their economies and ease credit concerns in late 2008 and early 2009, European governments cannot borrow trillions more without risking higher inflation and shoving aside private sector borrowers. Critical steps, like raising taxes or cutting spending increases, could retard the beginnings of a recovery in Northern Europe and exacerbate the agony in recession-battered nations like Spain, where unemployment already has exceeded 20 percent.
You may not be able to slum it in Europe on five bucks a day. But if the euro continues its seemingly inexorable decline, you won’t have to go to Vegas anymore to see the Eiffel Tower. It’ll be cheap enough to see the real thing.
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com
