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Up until a few months ago, many analysts were predicting the demise of the dollar, to be replaced by the euro as the new global reserve currency. Well, one huge Greek debt crisis later, and many are questioning the long-term viability of the euro. My personal opinion continues to be that by the year 2020 we will not recognize the euro in its current form.
The devil is in the details
The concept of the euro may seem utopian. Having a single currency that binds numerous nations in economic harmony sure sounds good for a continent that was ravaged by two major wars in the last century. The problem is that – as it is for most utopian ideas – in practice it doesn’t work.
Due to an implicit guarantee by strong member nations to support weaker ones in times of trouble, smaller nations such as Portugal, Ireland, Greece and Spain (referred to as PIGS) spent money recklessly as they were able to raise money at low interest rates. They spent money as if they were much larger economic powers like Germany or France. Now that their collective irresponsibility has left them all on the verge of economic collapse and bankruptcy, they are calling for the union to bail them out.
According to Philip Bagus of the Ludwig von Mises Institute: “When the global financial crisis broke out, deficits of both strong and weak euro-zone countries widened. Stronger countries had their own problems, and people started to doubt that they would support the weaker countries in an emergency. Furthermore, the difference between the interest rate that Greece had to pay on its bonds and the rate Germany had to pay increased.”
“Today, the question is will Greece be bailed out by the rest of the countries? The officials of the weaker countries tend to emphasize the solidarity of the union, while the stronger countries make it clear that there will be no bailout,” he adds.Austerity
The clear solution for Greece and the rest of the PIGS to extricate themselves from the economic mess they are in is to drastically reduce the size of government and the amount they spend. While I am no expert on anything European, I do know that the chances of this happening are near zero.
Clearly, disgruntled citizens will take to the streets and protest loudly against these austerity measures. (With May Day fast approaching, will we witness the mother of all protests?) Not only will the economy grind to a halt during these protests, but chances are that the government will cave in and forgo spending cuts. It seems hard to imagine that the stronger European Union nations will agree to a bailout.Investment & Business News
says: “Some say Germany will eventually rescue its indebted neighbors. But, politically, that would be hugely controversial in Germany, where the citizens, who have gone through a period of austerity and cut backs, will feel reluctant to bail out countries that have not been willing to make the same sacrifices they have made.”
Keep in mind that this is not just about Greece. The other PIGS, as well as Italy and some Scandinavian and Baltic countries, are all running huge deficits. If a huge bailout isn’t in the cards, then the path to survival is to print money like it’s going out of style, and that could result in surging inflation.
So what does this all mean for the future of the euro as a single
currency? I don’t think in 10 years it will look like it does now. The
strong nations may force out the weaker, more problematic nations. Or
the stronger nations – i.e., Germany – may decide to opt out of the
union and go it alone. Or the real possibility exists that the whole
endeavor will fall apart.
I am no prophet, but this is the way I see things playing out.
Investors who have exposure to or are thinking about investing in
Europe should speak to their financial advisor to see how the current
crisis could impact their decision email@example.comAaron Katsman, a licensed financial
adviser in Israel and the United States, helps people who open
investment accounts in the US.