By John R. Taylor, Jr., CIO of F/X Concepts

Dead Man Walking

May 6, 2010



One of the incidents that I remember from my youth was the first time I saw a chicken slaughtered and running around headless for quite a few minutes before it keeled over and died. The euro is at that stage. Its life is finished, but it will be around for some time before it becomes a subject of historical analysis. Actually the euro was always a short term solution, even on the day it was born. There were only two possible outcomes: the euro would blow up, or it would lead to an EU with taxing and borrowing authority. Theoretically those two choices are still possible, but the euro’s disintegration is moving so quickly and the political barriers are rising so fast that the chances of a much closer and ever tightening political bond between the internal surplus countries and the internal deficit countries is basically non-existent. Fifty years ago, Europe had some great leaders in Robert Schuman and Claude Monnet, who had the vision to start the common market, but it does not have the visionaries necessary to take the next step. Building Europe has always been done from the top, by the politicians and the corporate chieftains who had the most to gain from it. In the beginning, the man on the street went along with it because it cost him nothing and it would keep his children out of the next war. Most of the time, there was no cost to the average European, only benefits: more products to buy, better roads and holiday destinations, and the feeling of being a global leader. The farmers got mad in the 1980’s but the Common Agricultural Policy exploded with butter and other mountains growing larger and the farm lobby was paid off. When the euro came along, interest rates dropped everywhere south of the Alps and this meant that things bought on time – like cars and appliances – were cheaper and houses were easier to own. Despite some gripes about inflation as prices were rounded higher, the changes were pleasant, not painful. All of that has changed. Now having the euro and being a member of the European Monetary Union will be hard on almost every voter – for as far as the eye can see. The United States dollar was forged in war, but even that wasn’t enough. The country had to go through another six or seven years of disjointed financial sovereignty, somewhat similar to the current euro structure, suffering internal dissention while continually being threatened from outside before it made the change to a more centralized (but still not modern) system. The critical actor who served as midwife at the dollar’s birth was Alexander Hamilton. A headstrong leader, Hamilton, had the power and foresight to deal and compromise his way to success. The European equivalent is nowhere to be found.

Europe is dead. The European nations are the victors, and the way ahead will be one hell of a mess. Without taxing and borrowing power, there is no way to square the inter-euro trade balances between the countries except ‘internal devaluation,’ which means years of deflation and poverty for the voters – and protestors – of the deficit countries. Our pencil pushers and Excel experts have made lots of projections on the Greek situation and can find almost no possibility of success. The EU/IMF team projects Greek debt at 149% of GDP when this rescue ends, but their nominal GDP estimates are incredibly optimistic when salaries and jobs are cut dramatically. We see a 20% decline over the three years as a good outcome, the debt would stay the same, and the ratio goes to 186% of GDP. Almost like Japan, but foreigners own the Greek debt – no way! This rescue reminds us of Bob Rubin’s rescue of Russia in July 1998, which lasted about one month before the whole house of cards collapsed. We knew that one couldn’t work, and this one can’t either. It might take longer, but the euro is finished.

Goodbye euro, hello drachma, peseta, lira, and the others. The world had hoped for more, none more than the Europeans themselves, but now we are all left to pick up the pieces.

h/t Teddy KGB