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World Government Bond Forecasts: The Ecu


Why the Euro will be a strong currency

As the European monetary union (Emu) deadlines grow nearer, there have been increasing doubts from, among others, the German population, about the wisdom of entering into Emu. Much of it is an opposition of principle. The average German does not object to the concept of Emu so much as its practical implementation and the effect that this would have on the value of his or her savings. We believe these concerns are not valid. Furthermore, bond markets are now fully pricing in the early advent of Emu and perhaps are not giving full consideration to the many uncertainties that remain about Emu's bond market implications.

The root of fears about the future value of the Deutschmark lie in the observation that the Dm/Ecu exchange rate has fallen by about 10% over the last five years. In other words, if the Deutschmark is part of Emu, it will be replaced by a currency that is much weaker than itself. A secondary aspect of these worries is that the European Central Bank (ECB) will not be as vigilant about maintaining price stability as the Bundesbank has undoubtedly been and that real bond returns have once again become uncertain.

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