Will the Euro exist in 3 years?

Before scoffing at the question, consider these facts:

Italy and Greece have quickly growing public debt of about 100% of GDP and shrinking tax revenues. Without independent currencies, Italy and Greece can’t devalue and inflate away their debt. Investors are still willing to finance such high levels of borrowing at single digit interest rates under the assumption that as members of the EU, Italy and Greece are safe from both inflation and default. What happens when investors start questioning the long-term solvency of these governments? What happens if they face a sovereign “bank run” as investors flee to safer sovereign debt?


As this graph (courtesy of John Mauldin) shows, the process has begun. The sovereign debt spreads are widening in a self-fulfilling process that threatens to turn exponential. If credit spreads continue to widen, at some point the costs of remaining in the EU will outweigh the benefits. The source of the problems for Italy, Greece, and the other weaker EU members like Spain, Portugal, and Ireland is primarily that their labor costs are much higher than the stronger EU members. This is causing rising unemployment, already double digit in Spain. Politicians may soon find the pressure from labor to be overwhelming. Their constituencies are demanding jobs and the only way to provide them is to boost export competitiveness by leaving the EU so they can devalue their currencies.

There are some alternatives. While the IMF’s remaining reserves would just be a drop in the bucket, they could issue special drawing rights or insure loans to temporarily sweep the problem under the rug. Germany could start buying the sovereign debt of weaker EU members and establish a symbiotic balance of payments relationship like that between the US and China. None of these are particularly attractive options though as they just put off the adjustment that will eventually have to occur. History has shown that currency imbalances can persist for decades, but they must eventually reverse; the longer they’re put off, the more spectacular the fireworks.

So will the EU exist in its present form in 3 years? Probably. But there is a serious risk that investors will pull capital out of the weaker EU members and create a self-fulfilling crisis in the near future.

Originally published at Risk Over Reward blog and reproduced here with the author’s permission.

6 Responses to "Will the Euro exist in 3 years?"

  1. Luis   February 17, 2009 at 2:42 pm

    Sorry to say, euro weakest members with regard to whom? Spanish public debt is lower than in Germany, the UK or France, not to say the US. Articles like this one demostrate that anglos and nordics are a bunch of hypocrites. Up to know the only banks that have been either bankrupt or nationalised happen to be in the UK, Germany, Belgium, the Netherlands or the Scandinavian countries. Who are the weakest?

  2. Andrew G. Bernhardt   February 18, 2009 at 4:57 am

    Here’s why we’re on the brink of a total financial catastrophe and economic collapse of the United States of America (and other countries), and what I describe as a global Greater Depression…A) The Executive Branch, George Bush, he wrote 750 billion dollar deficits per year (taking the federal gov. debt outstanding from 4.8 trillion to 10.6 trillion; which still excludes state, county, municipal, metropolitan, city, and local debt, corporate, agency, and private sector debt too). This crowded out investment, crowded out borrowing, and incited a credit crunch, and diverted money away from the real estate markets, both residentially and commercially (as well as other markets, including the currency market, stock market, CMO and CDS markets, and commodities markets). Oh, and if you include 5.4 trillion dollars of debt the US Gov. has assumed of the failed GSEs then the total debt is now 16 trillion, up 11.2 trillion over the Bush Administration (from 4.8 trillion to 16 trillion)!!! If you calculate it this way, including the GSE failure (government sponsored enterprise failure), then 1.4 trillion was borrowed annually during the 8 years of the Bush Administration. Doesn’t this crowd out investment and borrowing?!?!?!B) The totally financial negligent Congress, (all 435 imbeciles, senators, and representatives) they validated, ratified, and approved of Bush Administration’s massive deficit spending spree— for a war against a terrorist, Osama Bin Laden, hiding in a cave in the mountains of afghanistan, and also the sovereign state of iraq.C) Eventually, with the severe crowding out of borrowing, this diverted enough money away from the securities markets, CDSs, CMOs, the US dollar, stock markets, and especially real estate. And on a global basis!!! I guess the world is awash in the Treasury market— everyone and even the grandkids own them now, or vice versa, everyone and their grandmother owns them now!D) The negligent Congress also created a new rule change, and allowed the banks to lend zero percent down style. Lame. Anyone that could take their thumb out of you-know-where, and if they could point at a house, they could have it, zero percent down! Why didn’t anyone decide (but only of course if they had, no income, no job, and no assets) to purchase zero percent down style, 5th Avenue, 6th Avenue, and 7th avenue for example, in downtown lower Manhattan?? Secondly, other totally stupid rule changes included FAS and FASB rule changes, involving how large time entities and corporations valued various types of securities, forcing them to use something called “mark to market” type accounting. This dramatically changed the balance sheets. Our future will also be riddled with reckless, hasty, stupid and most likely totally ridiculous new rules, and rule changes, regulations, and legislation regarding anything savings and investment related, including banking, brokerage and finance type laws— enough to make anyone’s stomach ache! The Congress sure introduces and creates a bunch of BS eh?E) With real estate depreciating rapidly now, banks are being smashed across the board, because they collateralized the mortgage risk (something else the Congress allowed them to do), and traded it, from themselves to each other, and with their losses materializing rapidly, their income statements, balance sheets, and cash flow statements turned sour rather rapidly. Losses most likely will surface around $4-trillion-five-hundred-billion. Investors, panicking that the vast majority of all banks globally would fail (after seeing the materialization of their disgusting income statements, and balance sheets after Q1 of 2008), panicked and liquidated their stock holdings, dragging down the stock indices globally, at rates not seen in a very very long time! Volatility also increased rather rapidly to highs never before seen. The losses have been, are, and will be enormous! People have and will lose all confidence in the banking sector, and the Government.F) The Congress now pretends that borrowing more money in Economic Stimulus Packages, T.A.R.P. (troubled asset recovery program) funds, bailouts, capital infusions, capital injections, backstops, etc. will somehow be good, and also will amount to more than $1 dollar of GDP growth for each $1 of Gov spending! Stupid!!! Each dollar costs money, and is borrowed funds, if borrowed at 4%, then each dollar borrowed is reduced to only 0.96 per year of GDP at best! The gov. spending (denoted as “G” in the GDP equation) is spent and taxed also, taking it from 1.00 to maybe 0.70 at the corporation (who hordes money for taxes due to uncle sam himself) that won the Government Contract, where or how do they claim that each dollar is 1.57 e.g. of GDP growth!?!?!? Regardless these rather hasty government reckless spending sprees, they merely crowd out investment, and crowd out borrowing even more, exacerbating the problem further. How does borrowing more, help to solve a problem induced from too much borrowing in the first place?!The Government is to blame— no one else is! There is on one else to blame literally. The President writes (and wrote) the Federal Budget! The Previous Administration, George Bush, and his lame budgets, and the entire Congress, and their inability to discourage the President from writing huge deficits (over the past eight years) was the entire source of the economic mayhem and total capital market’s catastrophe we’re currently experiencing globally. Duh, deficits matter folks! It’s (always) the economy stupid! Deficits matter, inflation matters, real gdp, and nominal gdp growth matters, interest rates matter too, and numerous labor force figures matter also, even wages and productivity matter! Even the total government debt outstanding matters, as does the debt service. I would claim the entire world’s economic and capital markets chaos is a rational and logical response to the Bush years, and the federal budget deficits they brought— for the entire world to finance, and hence lend to the USA. We’re not borrowing from the future generations, we’re borrowing instantaneously from the foreigners who lend to us, and then we owe them streaming income (in Treasury bill, note, and bond) interest every six months. With nearly 11 trillion of debt of the Fed Gov. alone, that’s a lot of interest to pay constantly!!!I would even claim that the fertility rate (which has fallen off a cliff in the past 30 years), birth rate (which has fallen off a cliff in the past 30 years), and age of first marriage matters (which has risen significantly in the past 30 years)— and no one else really cares. Weird to me. The family unit has deteriorated over the past 30 years, divorce rates are sky-rocketing too. With the popularity of intra-uterine-devices and birth controls widespread usage among the younger age stratum women have become more interested in university diplomas seemingly— and jokes about viagra, levitra, and cialis and how maybe they’ll want it when they’re 90. Another thing I have noticed is that apparently the department of education has failed again. Just look at how idiotic, imbecile like, and moronic the entire Congress (judicial branch and executive branch too) is— with their advanced degrees from, ha, ha, the world’s best and most prestigious educational institutions! Also, the cost of an education is enormous!… if people only didn’t go to college, if they saved it, lets say 80k of tuition and living expenses (rent and food, and tuition over just four years!), and if they were plumbers, historians, laid the concrete for the federal highway, air traffic controllers, court reporters, or even garbage men/women, ultra sound technology therapist, at a salary of $56,000 of earned income (for even garbage collection), then think of the savings they’d have!!! And if people used their noodles and knew the income levels of the other occupations I listed above they’d pull all their hair out and scream! They’d sure be better off!!! They’d be much more well off than their college graduate, and/or graduate school counterparts. Apparently, the benefits of a so called education are seemingly so costly, I wonder a lot how much time it takes the average individual to catch-up and actually reap the benefit of getting their degree(s). If they attend graduate school, law school, or graduate school for an MBA, or PhD, or for medical school, the opportunity cost of such a decision is even more enormous!!! The cost is further complicated, more complex, and more costly if e.g. recessions strike and investment results are negative (as they have intensely been as of late). Sure makes the case for Treasuries— and I like TIPS best, treasury inflation protected securities; with principal that’s adjusted to the CPI-U, and the real yield is then applied to the adjusted principal, making for increased principal over time and even increasing coupons over time, assuming inflation over the long run, which historically since 1929 to the present has been approximately +3.26%, or historically from 1950 to the present has been approximately +3.88%— with the current real yield curve where it is, who wants equities?! Who wants regular Treasuries compared to TIPS?? If people only used their “noodle,” and invested money that otherwise would have been diverted away to colleges and universities (usually borrowed money at that), and if their kids had only become garbage men/women, think of the difference in savings and investment, debt levels, and their kid’s earned income! College can be 80k, law school 171k, and seven years down the toilet too! Garbage men in NYC make nearly 80k to 100k, and seven years of that is 560k to 700k and they’d have no educational debt either! The difference is a mere 950k, and the educational institutions try to claim that a million dollar difference happens in income if you do not attend college, when the reverse is actually true!!! Maybe there’d be some kind of “rotten” baby boom too for these garbage people! More babies is good for social security— more people in the labor force to tax at the payrolls level.Total Default here we come, a default not only of the US Dollar, but also of the US Debt (the USA’s government bills, notes, and bonds), and soon! All the banks, brokerages, insurance, and reinsurance companies will fail miserably and are totally insolvent— bringing about the failure of everything else, as economic activity grinds rapidly to a total and complete halt! We’re in for a doozy of a recession, bartering, maybe some riots, a dramatic increase in the crime rates, a rebellion, a civil war, maybe a revolution, and a global financial capital markets catastrophe— bringing about a global depression, famine, starvation, and dehydration. Eventually, maybe the USA will be invaded by the Mexicans, the Canadians and peacefully, to keep the peace, deliver food and water, in a huge humanitarian effort for all 300 million poor Americans.Americans were in the past among some of the highest per capita GDP in the world, but not because they know or knew how to make money, no no, no no, they are only good at borrowing money (from Japan, UK, Cayman Islands, Luxemburg, and China) and schlooshing it around, from themselves to each other! Makes me wonder why foreigners lend so readily to the USA!!! If they only kept their own hard earned capital and savings for themselves, think how great their own nations would be?!I guess we (the entire world’s people we) can literally just thank the previous administration, George Bush, for basically, borrowing too much money (from foreigners- Japan, the UK, Cayman Islands, Luxemburg, and China) for bad causes— and for creating this economic, financial, and capital market chaos. Bush was basically, up to no good! Seems as though George Bush, republicans, and maybe even MBAs (since George W. Bush has an MBA), maybe they all want to practice socialism, and to socialize everything, and make it state run and/or government run, rather than free market capitalism. How lame! I much prefer free market capitalism. Perhaps, Republicans have always just stood for war, regress, and recession, and reckless spending sprees, and for doing the wrong thing? Perhaps, the Republicans want to ruin everything possible that’s important and then coincidentally the government feels as though it has to “take it over” rather than let it fail— also a mistake. I say let it (where “it” is risk takers, banks, other ailed corporations) fail!!! Merging a bunch of failing corporations is not good either, it is bad, it does not bring about competition, and competition is good, mergers brings about monopolies, which I think are bad sometimes. I like spin-offs, divestitures, not mergers and acquisitions. Otherwise, we should all get Government Bailouts! Just kidding, I have a major laissez-faire approach! This government taking over everything in a bail-out mindset is practically communism, and totally financially negligent to me! The government with its bailouts, is fostering the conditions which have created the next Great Depression, what I call The Greater Depression and/or The Greater Slump. And why do all the banks themselves get to have their losses reimbursed?! Why can’t all the people have their losses reimbursed?!What will become of the fallout of the Bush administration?! Will there be malicious maniac heads of state abroad, in foreign countries, that rise to power, in the near future, in tough economic times, going through this economic depression (I call it “the Greater Depression”)? Hitler, Stalin, Mussolini, etc. come to mind. Will World War III begin? I fear for out future. Clearly, the fallout of the Bush Administration will be long lasting and may last at least ten years!I hope we can find change, in that the USA and its people may someday, be able to foster the conditions and environment of legislative responsibility and congressional responsibility!The next shoes to drop include, A) Munis, B) States, C) Sovereign entities, D) Dividends, E) PEs are I’m afraid way too high in the USA at the current 12 to 15, they need to be more like 6 to 7— and earnings are decreasing still!, F) Corporate defaults. TIMBER!!! Dow Jones Industrial Average 4k here we come!!!I would like to know why the Congress has done the following?A) Limited executive pay… great, now even more talent will leave the country— is this limit adjusted for inflation??B) Why doesn’t the Congress limit its own pay? They incited the entire economic mayhem by crowding out investment and borrowing— why not limit their Congressional pay?? The entire congress, and the president should have to be “dime men” again, like they were after WWII (since they borrowed so much). They (the Congress) should have to limit their own pay to a single dime per year.C) Why did they validate the constitution, the right to bear arms is lame as hell! Coincidentally, so is the entire constitution. It should be torn up! The violent crime rates threaten the coherence of the USA.D) Why did the congress validate, ratify, and approve of the previous administration’s federal budget deficits for wars against a terrorist in a cave in the mountains of afghanistan (osama bin laden) and the pathetic sovereign state of iraq?E) Why didn’t even 1 congressman or woman, why didn’t they start a debate about George Bush’s crowding out of investment and borrowing, in his massive deficit spending spree?? Why didn’t anyone get angry with the previous administration’s BS regarding “deficits don’t matter!” Why did the Congress so readily approve of the previous administration’s deficit spending?F) Why is the solution of the current administration and congress, why is borrowing more money, for bailouts (and other terms for it, like TARP, etc), why is borrowing more money (from foreigners) the solution to too much borrowing to begin with?? Why more deficit spending?? Why are they rewarding idiocy, and failure companies?? Why are banks being reimbursed for losses?? Why can’t the people the reimbursed for their losses??G) Why doesn’t the government try laissez-faire, and stay out of our lives?? They incited the entire economic and capital markets failure— why look to them for help??H) Why do foreigners so readily lend money to the USA?? Lets face it, it’s NOT the taxpayers problem for all these bailouts! It’s the foreigners, who will now have to lend, even more money to the USA. Pathetic. Why do they lend so much all the time to the USA??I) Why did the Congress terminate the downtick rule? Why did the congress (the legislative branch) allow 0% down on real estate?? Why did the congress approve of rule changes regarding FAS and FASB rules relating to the quantification of level III assets (on the balance sheets) of large time entities and corporations and institutions?? Why does everyone look to the congress for some type of solution for our problems, when they have destroyed everything themselves.~ Andrew G. Bernhardt, St. Louis, MO… See this for more of my comments:http://www.google.com/search?hl=&q=+site:www.rgemonitor.com+Bernhardt,+RGE

  3. Guest   February 20, 2009 at 8:27 am

    The author seems to confused about the difference between the EU and the Euro. I don’t think anyone expects any of these countries to leave the EU, even if they were to leave the Euro.

  4. Andrew G. Bernhardt   February 20, 2009 at 3:49 pm

    Another important question to consider is, will the US Dollar exist in three years?? People say the Euro is under pressure, and the dollar has gained a lot of value versus the Euro; what a buch of BS!!! The Euro cost roughly $0.82 in October of 2000, gee, now the Euro costs roughly $1.28— this is a mere +56% increase in the value of the Euro on an exchange rate basis, since 2000! Maybe the better question is will the US Dollar exist in three years? How much more value will the US Dollar lose?? Trillion dollar deficit spending spres, of bailouts, reminds me of the previous Administration and it’s financially negligent Congress.

  5. Jaime B   February 22, 2009 at 1:16 pm

    The author should also check recent debt issues instead of CDS spreads when measuring sovereign debt risk. I must also agree with Luis that the only countries who’ve suffered severe financial trouble:- The UK (almost half the total large banks have disappeared)- Germany: Don’t even know how many Landesbanken bankrupt, Eurohypo, LB Sachsen…- France: a few credit mutuels in big trouble, all large banks reporting massive losses- Belgium: Fortis, Dexia…… and the story continues.It would be more interesting to say why despite all the doomsayers not a single Spanish bank has even been forced to recapitalize, Italian banks look miles ahead of the UK and even Portugal can teach Germany a lesson.Now we have Germany taking about nationalizations, like the United Soviet States of America, already bankrupt. Reporters should try to write about something more interesting. The above really is quite a weak article in its conclusions.

  6. Andrew G. Bernhardt   February 26, 2009 at 11:50 pm

    What Wrecked the Economy and What Went Wrong:U.S. 110th Congress (and other congress) & Legislature has done the following:Changes Rules, Changes Regulations, and Devises new rules including: (below are rough estimates of the years of the rule changes, I can’t remember exactly…)1. Generally Accepted Accounting Principals, 19992. Sarbanes-Oxley, 20013. Allows 0% down on real estate, 20024. Validates, ratifies, an approves of 8 HUGE Federal budget deficits 00-085. Abolishes the downtick rule, 2007 (a rule that never should have existed)6. Mark-to-Market Accounting, of Level III assets on Balance Sheets, 20067. Validates the Constitution annually. Which is despicable! It includes shameful idiocy e.g. “the right to bear arms,” “sovereign immunity,” “due process,” “checks & balances,” and other direct causes of the incoherence of the USA— Consequently there are on average 20,000 to 30,000 murders per year, giving the US an extremely high violent crime rate- including murder, homicide, armed criminal action, bank robbery, and aggravated battery.The Executive Branch & The Legislature Are Effectively:Designing and implementing rule changes, and new rules that make the USA more chaotic than it already is, wrecking the solvency of financial institutions, and this challenges the coherence of society at large. They have destroyed the solvency of banks, brokerages, insurance, and reinsurance companies, sovereign entities globally, and consequently the economy and capital markets have suffered. Large amounts of investment capital has been lost globally, and the gap between the rich and the poor has unfortunately narrowed sharply. By borrowing trillions of dollars (for a war against a terrorist hiding in a cave in the mountains of afghanistan, and the sovereign state of iraq) they have crowed out borrowing, crowded out investment, and incited a credit crunch. They have diverted money away from good social causes like the currency, the stock market, the real estate, CMOs, and CDSs. They have incited two recessions. They are responsible for causing directly what I describe as “The Greater Depression.” The Congress and the current and previous administrations are a disgrace. Economic development and economic activity has ground to a halt. Political and civil unrest has erupted abroad, and I wonder a lot why it has not in the USA. The economy is weakening substantially, and the credit markets have seized up, loans are difficult to obtain despite low interest rates. The people are losing on all fronts, including the securities markets and homes (real estate).So, ‘What Can I do?’ ‘What Should Happen?’ You may ask—On a behavioral economics note, everyone should act like those in L.A. California! They should pretend that their home is worth $15-million-dollars, and that it rises at +20% per year! Then speculators would re-emerge and good times would come out of the wood work. People could then act like their home is an ATM-machine, and they could effectively take money out of it, with some mortgage equity withdrawal for consumption! We need unfounded, unwarranted, baseless, idiocy when it comes to real estate pricing and real estate speculation.Secondly, we can wait for the War to end! The war will be declared over on month number eighteen of the Obama administration (June of 2010).With real estate potentially reversing and/or holding steady starting about then, and with the war declared over and victorious in June of 2010, I see these two catalysts, as major catalysts for a bull run on the stock indices.~ Andrew G. Bernhardt