I believe that the Euro Currency and indeed the whole European Union are headed for a Titanic-sized crash. I think this crash will happen in the 2012-13 time frame. I believe that there are no solutions to this crisis without a large amount of pain involved for the people of Europe, and the entire global economy.
First of all, a couple quick explanations are in order. the Euro Currency is the regional currency used by most (but not all) countries in the European Union. the European Union is a political grouping of European nations. There are some E.U. countries that still use their original national currencies instead of the Euro (Britain and Sweden are examples of this).
Europe has multiple economic problems because a lot of their national economies are grossly inefficient and unproductive. Greece is a perfect example of this. A lot of professions in Greece are known as ‘Closed Shop’ professions. This means the hours and days they can be open for business, the rates they charge, and a variety of other business practices are fixed and set by the Greek government. Think about what this means. A truck driver will receive the same pay regardless of whether he delivers on time or not. A lawyer will receive the same pay regardless of whether his legal advice is top-notch or shoddy.
European economies structured like this are why Portugal, Ireland, Italy, Greece and Spain ( the so-called ‘PIIGS’ nations) are ALL in dire economic straits and in need of sometimes multiple bailouts. Europe is now faced with either the prospect of the richer, more economically productive nations (mostly just Germany these days) constantly having to bail out the ‘PIIGS’ , or cutting the PIIGS out of the Euro currency and letting them return to their original national currencies, like the Greek Drachma.
Both options are grim. The Germans are already getting tired of having to bail out other countries (the Finns are also getting tired of this, which helps explain the rise of the ‘True Finns’ party since Greece started showing up in the economic news a couple years ago). The Germans and Finns have valid points. Why should they sacrifice to help out other nations who are not as productive as they are. Eventually, they will wise up and stop bailing others out. The PIIGS have so far been incapable of making the changes needed to be more productive. The Greeks are now rioting and burning down parts of Athens the minute they hear ‘Austerity’.
In hindsight, the Greeks should have never been allowed into the Euro Currency. They were allowed in to promote vague ideals like “European Harmony”. Ideals are nice to have (and to strive for) , but when those ideals threaten the economic stability of entire regions, they need to be discarded upon the ash heap of history.
The Greeks have a interest payment of about $15 Billion on their government debt due on March 20th, 2012. It is a open question if they will be able to make the payment. If they do, great, they have prevented default for a month or so. If they don’t, then they default. One of the ways they have eliminated some of their debt obligations is by telling the holders of their bonds that they can only expect around 30 cents of return for every $1 the investors bought of Greek debt. Yes, this will lessen Greek debt levels, but it comes at a very heavy price. If Greek bond investors know they will be forced to swallow a loss on their investments, then they will simply invest in some other countries bonds in the future. It is that simple. The world is a big place. There are plenty of countries that investors can buy debt from where they will get their full investment back with interest. If there are a lot fewer investors willing to buy Greek debt in the future, then who does the Greek government (and the other PIIGS nations) turn to? The European Central Bank (the equivalent of the USA’s Federal Reserve bank) is really the only entity who has the balance sheet capable of absorbing all the Greek debt the government has to auction for them to keep the government operating. This choice has bad implications as well. First of all, the European Central Bank (ECB) may have a large balance sheet, but it is not unlimited, They will eventually hit the wall on how much Greek (and other PIIGS) debt they can have on their books. When that happens….then what? This is truly the Billion Euro question.
I do not know what the answer is. But it is this very uncertainty that makes me think that Europe’s economic future is dark and getting darker by the day. Even if a miracle happens and the Greeks figure out a total solution to their debt mess, Europe will still need to figure out solutions for Portugal, Ireland, Italy and Spain. Maybe one miracle is possible, but five in a row is impossible.
What will this mean? Once again, I do not know what the final endgame is, but it will probably be real bad for a long time in Europe. The time for easy, painless solutions ended a long time ago (the United States faces the same grave debt issues, but this will have to wait for a future article).
I can be contacted at chicagodudewhotrades@gmail.com. I welcome any questions, comments, or disagreements. You don’t like what I wrote? Feel free to contact me and argue your side. I write because sometimes I learn as much as I teach. I welcome any opinions. Thank you for your time.
Guest Editorial: Europe is Toast: Why There are No Good Solutions to the European Debt Crisis
