The inevitable death of the euro

On Thursday the European Central Bank’s Mario Draghi was moved to defend the euro, after Spain’s government bond yields rose dramatically through the 7% level. And when Valencia asked the central government for a bailout, followed by indications that other cities and regions have similar problems, it became clear that Spain is in deep trouble. We have got used to the concept of too-big-to-fail; now we have too-big-to-rescue.

We normally talk about Spain and also Italy in terms of government debt and budget deficits, forgetting they are only part of the problem. To these must be added regional and local governments, nationalised and subsidised industries, and off-balance sheet guarantees for other entities. Forget, for the moment, future health and welfare costs, which statistically dwarf everything: they are not the immediate problem. This still leaves us with rescues, without even considering commercial banks, amounting to perhaps between two and four times the headline government debt. People think Spain can be rescued, but when you take everything into account, including the prospect of a policy-induced slump from macro-economic mistakes, it is simply too big.

The failure to face up to financial reality is essentially political. Spain’s President of the Government, Mariano Rajoy, was elected with a clear majority last November, and has failed to cut spending. Instead of reducing the burden of the public sector on the economy, he has chosen to penalise the productive private sector through extra taxation. If anyone had an opportunity to face up to reality with an electoral mandate it was Rajoy, but he failed to do so either because he deemed it politically impossible or because he is simply too weak.

Perhaps it is political reality: this is certainly echoed in all the other crisis-hit states. France’s electorate has cut out any argument by electing a socialist president intent on increasing both public spending and taxes at the same time. The result is that Europe faces economic collapse sooner than it might otherwise, escalating the burden principally on Germany of bailing out impecunious states.

Germany is becoming isolated, and no longer is Chancellor Merkel able to pretend that, deo volente, it will come right in the end. Instead Germany faces a crippling bill, now recognised by the rating agencies. In a GoldMoney podcast released last Wednesday, Philipp Bagus estimated the total cost to Germany to be four times her total tax revenues. That implies personal taxes of over 100% of private sector income. How do you carry your electorate along with you, simply to keep the euro project alive, with that sort of cost?

You cannot. Bagus sees no alternative to money-printing, and that is effectively what Draghi now says he is prepared to do; but unlike other fiat currencies, the euro has no single government backing it. Therefore the effect on the euro of Draghi’s money printing could be catastrophic.

It would be quite an event. We have not seen a major fiat currency collapse in recent decades, though there are those in Germany who remember the misery it brings. The speed at which the euro weakens could be very surprising indeed.

This article was previously published at GoldMoney.com.

2 Comments

  • Paul Marks says:

    Legally speaking there is no formal connections between fiscal problems and monetary expansion – which is why Jim Rogers (like Peter S. before him – with the U.S. Dollar) kept being baffled by the monetary expansion.

    However, POLITICALLY we live in age where bankructcy does not seem to be allowed. Not of “regions”, not of government sponsoned entites (such as the credit major “banks” – which are still treated as if they are commercial enterprises, even though they are not allowed to go bankrupt and their lending judgements are made according to political instructions).

    So rather than allowing (for example) Spanish and Italian “regions” to go bankrupt (i.e. Regional governments to shut down – their offices sold and their services no longer exist), let alone national governments allowed to go bankrupt (with formal defaults on various National Debts), bailouts are ASSUMED.

    How to finance the bailouts of the various Welfare States?

    As this article shows it is IMPOSSIBLE for German taxpayers to finance the Welfare States of other memmber nations of the Eurozone (the burden on the German taxpayers is very high already – and the German Welfare State burden will just get worse).

    This (as the article points out) leaves only monetary expansion.

    I repeat – there is no legal reason why the Union Central Bank should engage in an orgy of monetary expansion in order to bailout X, Y, Z (indeed there are supposed to be legal provisions in place to PREVENT this).

    But POLITICALLY yet another monetary expansion orgy by the European Union Central Bank is very likely.

    Bottom line – although the markets respond to talk about “I will do anything” by going UP, one should sell Euros.

    As long as one does not sell Euros to buy Dollars or Pounds or…. for other places are caught in the same “no major thing shall be allowed to go bankrupt” trap that the Eurozone is.

    The fiscal position of the United States government and such governments as Britain and Japan is hopeless – but real reform is politically impossible. So expect more fiat money collapse in these places also.

    Also even governments that are not in a hopeless position have (in an act of fanatical establishmentarianism) committed themselves to insanity.

    For example the actions, some time ago, of the Swiss Central Bank (declaring loyality to the Euro – even though there is no legal link what-so-ever between the Swiss Franc and the Euro) shocked even me.

    The Swiss establishment elite seem to hate their country as much as the British chapter of the establishment elite hate this country.

    The agenda behind the removal of the old Swiss Constitution (with its monetary protections) and its replacement with a toothless “we celebrate our diversity” Constitution (some years ago), is now clear.

  • Mr Ed says:

    Here is the ECB press conference, explaining their plans for dealing with speculators attacking the Euro.

    http://www.youtube.com/watch?v=s27Oq5ot0ZI

    Or have I mis-understood his pronounciation?

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