“The Euro Is Finished”
Mike Krieger of KAM LP
There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt.
- John Adams
What lies behind us and what lies before us are tiny matters compared to what lies within us.
- Ralph Waldo Emerson
The Euro is Finished
To regular readers of my pieces over the last several years this may not seem like a particularly poignant statement. After all, I have referred to the Euro and the U.S. dollar both as worthless political toilet paper for years. The reason I bring it up right now is not to state the obvious long-term macro conclusion that the Euro is a foolish, unnatural creation that only political types twiddling their thumbs in a room could come up with. No, rather the reason I say it now is because I believe the Sword of Damocles is now hovering right over it.
The only question in my mind at the moment regards the specifics of how it will end. I would say that the majority of those that think there is a strong likelihood that the euro falls apart envision the PIIGS countries leaving or being thrown out. While I certainly think this is a possibility, especially if Greece just calls it quits and then successfully transitions to its own highly devalued currency since this would for sure start the ball rolling and before long many of the other financially weak nations would also bail. In such an event, I suppose what is left of the euro could be comprised of stronger Northern European nations and in that case what is left of the common currency could in fact strengthen materially versus other fiat currencies for which no such “restructuring” has occurred. However, I am not convinced this is what happens. The reason I am not convinced is because I don’t believe that the desired austerity measures will ever really go into effect in these nations and even if they did it would merely collapse those economies and the problem would not be solved. As many have stated over and over (including myself) there is no conventional solution to this crisis. There is far too much debt and there is no way real GDP growth can grow fast enough to counter this. The debt will be defaulted on via restructuring/default or a dramatic destruction of the purchasing power of fiat currencies. Nevertheless, the bureaucrats in Europe have such a deep love affair with their preposterous experiment they will turn a blind eye to all the transgressions of the PIIGS and continue to just pretend they have solved something with every new bailout scheme.
So that brings us to the other, and I think increasingly likely, outcome. That is namely that the ECB continues to transfer wealth from the prudent and fiscally more sound nations (mainly Germany) to the periphery until the populace of Germany snaps. I think that moment is very, very close at hand. Once that tipping point is reached there will be no turning back. The popular anger at the ECB and Euro will be so profound and so long festering that it will overwhelm all attempts to keep things together. Germany could leave the Euro. Or it could make it so difficult for the PIIGS that they are forced to leave. Either way, Germany is EVERYTHING. Nothing else in Europe matters right now besides the sentiment on the German street and it has become pretty clear lately which way that is going. I am 100% convinced that Germany will play nice until that crucial moment is reached where it really is put up or shut up (we are close). At that point, I have no doubt that Germany will do what is best for Germany. In the event that Germany was to leave, the Euro would be gone forever. It would become pure confetti overnight. This is not my base case but it could happen. Anything can happen right now.
The Fourth Turning is Global