A great editor once told me that gigantic stories don’t break, they ooze. The demise of the Euro – the typical currency utilized by 17 of the 27 countries within the European Union – is solely one of these story. And every time it oozes, U.S. stock markets drop. The collapse of the Euro, a technique or another, is now inevitable, individually. When it happens, banks around the globe could be shaken and stock markets will plummet. Smart investors need to be braced for this — and in addition prepared to milk bargains created by any selloff.
This past week, a brand new spate of rumors of a Greek default made the rounds. And the highest German official on the European Central Bank resigned unexpectedly. As a result, the Dow ended last week down greater than 600 points from its level eight days earlier, when Greece’s situation looked momentarily better.
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Academics, journalists or even government officials have proposed quite a lot of schemes to save lots of the Euro – new European financial institutions, Eurobonds backed by all of the countries collectively or even a U.s.a. of Europe. But it’s clear that this sort of scheme to save lots of the Euro will find little political support today. The breakup it will likely be extremely painful. However the alternatives could be much more unpalatable.
To understand why, one has to take a look at why European countries went into the Euro within the first place. Set aside professions of solidarity and high-minded blather about Europe whole and free. The Euro came into existence as it helped to fulfill quite a lot of needs for a lot of countries. Yes, a typical currency made trade easier and eliminated some unnecessary transaction costs. And yes, it was a part of an admirable trend toward interdependence, co-operation and freedom of movement in Europe. But mostly, it was the way to solve practical problems.
Countries akin to Portugal, Ireland and Greece, for example, got to borrow quite a lot of money at low rates of interest to finance development. France got to maintain its highly centralized system by foisting bureaucracy on its economic rivals.
Germany may appear to be the great European on this whole affair, having given up its stable Deutsche Mark for the sake of continental unity after which paying a disproportionate share of the prices whenever things get it wrong. Nevertheless it too was primarily motivated by economic logic. Germany and some other Northern European countries, reminiscent of the Netherlands, are hugely successful exporters. For them, keeping unemployment rates low requires steady export sales – and that’s very difficult if their currencies appreciate. (Indeed, just this past week, Switzerland needed to put a ceiling at the value of the Swiss franc because Swiss products were becoming too expensive for foreigners.)
Germany’s clever solution was to tie itself to weaker economies throughout the Euro, which prevented the currency from appreciating an excessive amount of. In effect, Germany was subsidizing Italian, Spanish and Greek consumers in order that they could buy expensive German products, thereby preventing layoffs at German manufacturing firms. This made great sense so long as the price of propping up weaker economies wasn’t too big. But now, Germany is facing the possibility of huge, open-ended payouts so as to greatly exceed the industrial benefits.
Meanwhile, other Eurozone countries also may feel that the Euro has gone from a blessing to a burden, but for various reasons. Greece and Italy are being asked to make horrific spending cuts. France and Germany have even suggested that each one 17 Eurozone countries should adopt a balanced-budget amendment – a notion sometimes described as insane or fanatical on this country when proposed by the Tea Party.
The fact is, neither the strong nor the weak benefit anymore from a typical currency. But because the old song goes, breaking apart is difficult to do. As I see it, there are four possible ways this will play out, one way more likely than the others.