In the very near future we will finally know the answer to the question, “Is the euro a currency or an experiment?” The changes required to answer that question will be wrenching and horrifically expensive. There are no good answers, only difficult choices about who pays how much and to whom.
By John Mauldin (mauldineconomics.com) from an article* entitled Thoughts from the Frontline – A Five-Year Global Financial Forecast: Tsunami Warning.
Europe: A Ticking Time Bomb
…After all these years of struggle, the structural flaws in the EMU’s design remain; and now major economies like Italy and France are headed for trouble.
I see the deepening of the Eurozone crisis as a 90% probability. The euro is not a currency; it is an experiment. It will not be a currency until France has a true crisis in which the European Union has to decide whether to keep the euro and create a fiscal union or to dissolve into competing currency environments that will allow for adjustments among different countries. Either path will be horrifically expensive.
Finland, Austria, the Netherlands, and Germany
There is a growing recognition in Europe that they need some sort of quantitative easing but the monetary policies that are suitable for…Finland, Austria, the Netherlands, and Germany (FANG), are not the same as those needed by the peripheral countries…[and, as such,] this is opposed tooth and nail by the FANG countries.
Mario Draghi has promised for several years to do “whatever it takes,” but the markets are beginning to believe that he is long on rhetoric and short on the wherewithal to pull it off. The European Central Bank (ECB) is controlled by a complex voting system. You have the five larger countries sharing four votes (on a rotating basis), the other 12 countries sharing seven votes (again on a rotating basis), and six appointed board members who are, as best I can determine, parceled among various countries, but the usual suspects seem to have secured permanent board positions.
If it came down to a vote, Signor Draghi could probably win; but he would not have a consensus, and the ECB is nothing if not a consensus-driven machine. This lack of unanimity is a problem, as a number of ECB voting members are essentially no more than city states. Luxembourg, Malta, and Cyprus are all marvelous places, but they each have fewer than one million citizens. Five other countries in the euro currency area have fewer than ten million (and several just two million). I am hard-pressed to believe that Germany would feel comfortable with the idea that countries that have less population than a decent-sized German state or even a city should have a controlling say in monetary policy.
…If Draghi gets his way on QE, however, (I would take the “over” on this bet) the euro is then likely to weaken, and the crisis may be postponed for a few years. If he doesn’t, it is entirely possible that the euro will strengthen even as the Eurozone economy weakens, and that interest rates in countries with outsized government debt and economic problems will see their interest rates begin to rise.
Throw into the mix the Greek election on Jan. 25, which is likely to give control of the government to a party that wants to significantly devalue (or completely do away with) the Greek debt, and you heighten volatility. The simple fact of the matter is that the Greeks have 175% debt-to-GDP; and as I said four years ago when the problem was said to be “solved,” the Eurozone’s bailout of Greece merely kicked the can down the road to the day when the Greeks would end up defaulting on even more debt. It now seems we have come to the end of that particular road. The Germans and the French say that if the Greeks don’t want to pay they can leave the euro. The Greeks rightly point out that physically, mathematically, they can’t pay – but they don’t want to leave the euro. Try and figure this one out. It’s not an economic decision; it’s a political decision. Predicting what politicians will do, especially in Europe, is particularly problematic.
I want to thank Paul Krugman for calling to everyone’s attention in his recent New York Times column my contention that France will be every bit the problem that Greece is. Of course, he said that in the context of pointing out that France is now borrowing long-term money at 0.8% and that (at least so far) I have been wrong. “Where is the French time bomb?” he asks. My reply is that it is still there, ticking away quietly in the background. If you have a neo-Keynesian ear, you can’t hear it. I hope he will be equally diligent in drawing attention to the outcome of my call in four or five years. Actually, I hope that I am wrong about France. The world will be better off if I am: France matters…
While Spain, Italy, and the other peripheral countries all have growth concerns, I think the linchpin to the entire eurosystem is France…France is ranked #62 globally in terms of competitiveness, some ways behind Albania. The reforms being proposed in France are simply tinkering around the margins. The absolute best the country can hope for this year is about 1% GDP growth, but it seems more likely that it will slip back into a triple-dip recession. Without a credible ECB quantitative easing program to help keep interest rates low, when French interest rates begin to rise, they may do so slowly at first; and then they may do so all at once. Then France will indeed look like Greece. Will Germany then finally allow a QE program to shore up their most necessary partner in the European Union? Can they do so without requiring some kind of fiscal union? This all suggests to me a period of great volatility and slow growth.
The French dilemma is further exacerbated by the growing strength of Marine Le Pen and her National Front Party. Under the guise of “economic patriotism” (whatever the hell that is), they are openly protectionist and believe “protectionism makes the state stronger.” They believe in large government. If Marine Le Pen is the answer, France is asking the wrong question but, given the recent tragic events in Paris, it is the answer they may get. Note the following from a recent Telegraph column: “…unless the mainstream political establishment finds a way of regaining the initiative on law and order as well as the economy, it is no longer inconceivable – though still unlikely – that she could one day win an election. This would be catastrophic, not just for the business community and for investors, but also for everybody else in France, in Europe and around the world.”
…Given that the potential crisis in Europe is controlled by political decisions in Germany, there is no real way to develop a timeline, but I sincerely doubt that the next Eurozone crisis can be postponed for five years…
[The above article is presented by Lorimer Wilson, editor of www.munKNEE.com and www.FinancialArticleSummariesToday.com and the FREE Market Intelligence Report newsletter (sample here – register here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. This paragraph must be included in any article re-posting to avoid copyright infringement.]
*Original Source: http://www.mauldineconomics.com/frontlinethoughts/a-five-year-global-financial-forecast-tsunami-warning (Copyright 2015 John Mauldin. All Rights Reserved. See for yourself why over 1 million investors and financial professionals turn to John Mauldin and the Mauldin Economics’ team every week for economic insight. Go to http://www.mauldineconomics.com/subscribe to subscribe. Visit www.mauldineconomics.com/important-disclosures for further details.)
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