Which brings me to the last question of the day: Will the euro survive?
Had you asked me the question a couple of months ago, I would have said almost certainly. But two months is a long time in a crisis of this magnitude. And those with the power to make changes are not exactly making the right choices right now. But, if you would allow me to paraphrase Sir Winston Churchill for a moment:
“You can always count on them to do the right thing after they’ve exhausted all other alternatives.”
The problem in a nutshell is that it is Germany, not Greece, which is the problem. Let Greece go down the drain and the market will move its attention to Portugal and Spain. Let those countries go and Ireland, Italy and probably also France will be next. It is quite simply a horror scenario.
It is the fact that there is no easy solution that drives down the euro in the currency markets at the moment. I fully expect the EUR/USD exchange rate to reach parity before the end of this crisis but will admit that bearish sentiment on the euro has now reached extreme levels which suggests to me that a (dead cat) bounce may be imminent.
If Germany were to pull out, it would spell the end of the euro so, true to Churchill’s words, they will probably go through the entire catalogue of alternatives before conceding defeat. One option apparently being considered at the moment is an extension of all maturities on Greek sovereign bonds combined with a significant reduction of coupons (at least this is what I hear through the grapevine). This would mean a drastic haircut for investors such as you and me but, interestingly enough, not for European banks which, under prevailing rules, would be permitted to mark those bonds at par. Voila!
Such a solution does not, however, address the underlying problem (Germany being too competitive for most eurozone members) which is why it is akin to wetting your pants to stay warm, as we say in Denmark.
My best guess at the moment, and it is only a guess, is that the euro will eventually be replaced by a new euro (neuro?) with Germany, Austria, Finland, the three Benelux countries and potentially also Denmark and Sweden (neither of whom have adopted the euro) as founding members. One or two old East bloc countries may also be invited to join. Poland? Slovenia? The Czech Republic? I am less convinced that France will be welcome in this club. The rift between the Germans and the French continues to grow with the French no longer even bothering to hide the fact that, at the end of the day, they only really care about themselves.
However, whether it will be the euro, the neuro or something else which prevails, there will continue to be a European currency, because there is a need for one. Allow me to finish just as I began this letter – with a quote from Woody Brock’s May 2010 research paper:
“Indeed, while it is easy to deride the whole euro project as pretentious and unrealistic, the fact is that a third global currency is sorely needed. After all, Europe consists of a large number of contiguous states that constitute the largest economic bloc in the world. There is much to be said for this bloc to have its own currency. This point is rarely emphasized but it is as true as is the claim that the euro is unworkable!”
Niels C. Jensen
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