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I don't think I have a lot of friends in Brussels and after my recent interview with Bloomberg, it is unlikely that I have become more popular. The Euro is Doomed was the headline from Bloomberg that got the attention of CNN's Richard Quest and other media around the world.
Actually, I have rarely received as many reactions from one single interview as I did after this one. Questions from clients and other journalists included: Is it really that bad? Is it really the euro's fault? How will it play out? How do I protect against such an expectation? When will it happen?
Later this month, I will publish the book Europe: Integration Without Illusions by Vaclav Klaus, the Czech President and long-time eurosceptic, in Denmark. Included in the Danish-language version will be a lengthy afterword by me, in which I try to place the president's excellent analysis into a Danish perspective as well as an updated financial market perspective. I believe the book, which is already available in English, gives an excellent insight into the dynamics that are threatening the markets and tearing Europe apart. I will translate a couple of chapters for publishing on this blog later - and I believe this will answer the above questions in some detail.
But for now, let me try to comment on the questions briefly.
Yes, I believe the situation in the Eurozone is very bad. And yes, I believe the main source of the issues is the euro itself.
Having been introduced without any underlying foundation, the euro is a sandcastle. There is no common economic or fiscal policy, there is waning public support behind the project and the euro's impact on relative competitiveness and productivity has been devastating for many of the participants. The base of a common currency is simply not there and the willingness to deal with the consequences of its distortions, such as transfer payments to the countries losing out and common bonds, is non-existent.
As the most obvious canary in the coal mine, Greece has lost its ability to compete, while Germany has benefited greatly. This kind of disequilibrium is often seen inside national states, where some areas are more successful while others are severely challenged. But inside a nation state, the movement of labour from a weak area with few jobs to a thriving area with many opportunities is much simpler - and the willingness to support a poor area is substantial due to national solidarity.
Such solidarity and flexibility clearly does not exist between the member states in the Eurozone, nor could you expect it to. Even at the best of times, let alone during a crisis, a national government's primary responsibility must be towards its own citizens and not to distant countries seen by their voters as irresponsible spendthrifts. Therefore, the only historic way out for non-competitive economies has been external devaluation, which is extremely important to restore equilibrium from time to time. Competitive devalution has often been denounced as unfair and selfish by politicians. But, in fact, revaluation and devaluation is a normal state of affairs for all the major currencies, as well as a useful function of the markets. By removing that possibility, the sole option of Eurozone members is internal devaluation, a strategy that is politically impossible and unnecessarily painful for the affected populations.
The most recent example of this inherent impossibility is Italy. The European Commission has repeatedly promoted the idea that Mario Monti's technocratic government was respected and accepted by the Italians. But the first time he was exposed to public judgment, Monti was destroyed. And now both Beppe Grillo and Silvio Berlusconi regularly indicate that the solution for Italy could be to leave the euro. And they are indeed right.
The situation is the same for Greece, obviously, but also Spain, Portugal and, eventually, any other country that develops less competitively than Germany. Including France, it is really only a question of time, in my mind.
But for how long could this process drag on, even if the eventual negative outcome seems guaranteed? Well, that is a tough one. Clearly, immense political capital has been invested in the euro project and its failure will be a huge embarrassment to the leading countries and politicians. So I fully expect them to keep the euro alive as long as it is conceivably possible.
The only possibility to stop the madness will be massive voter protests - and that is exactly what we are beginning to see. In Italy, a rejection of the EU appointee, an unmanageable parliament. In the UK, the surge of the UK Independence Party looking also to go national now and, I suspect, before too long also in Germany, where discontent and mistrust of European partners are growing. And, of course, when German citizens one day refuse to pay any more bills (in spite of the significant advantages Germany indisputably has experienced as the only major Eurozone country), the euro will be finished in its current format.
The end could be a goodbye to the Club Med, It could be a full break-up, it could be a two or three-speed Eurozone, or Germany simply leaving the stage, leading to any of the above scenarios.
But in the meantime, we will experience short-lived quick fixes, presented as great achievements and solutions, new undermining of the Eurozone monetary soundness and frequent "setbacks" when reality hits. The current weakness is not due to Berlusconi. It is due to reality being obscured for a few months, only to be revealed again each time the voters (or the markets) get a chance to react. In fact, I believe we should be thankful for the Berlusconi effect highlighting the challenges - the sooner we get to grips with the reality, the better. The euro will ultimately have to go and all the money currently wasted on extend-and-pretend deals would be better used on an organised, well-structured and carefully planned elimination of the currency. But in all likelihood, the end will not be well structured, but rather a chaotic and destructive process.
How will such a disaster affect your investments? It is clearly going to be very ugly. It will also lead to a reduction of personal and financial freedom in Europe because irrational measures will be applied to try to avoid the inevitable. So be very cautious of trusting any kind of government or tax-related savings or pension schemes that lock up your money. The rules will very likely be changed to your disadvantage as the financial options for European governments run out. Be careful with sovereign bonds. They will have to drop significantly in value and probably also be restructured across large parts of the Eurozone. You will be even more aggressively taxed. And scapegoats will have to be found, so expect more bank bashing and hatred towards financial markets.
Privately, I moved to Switzerland three years ago, mostly because of concerns about the EU's reaction towards business and wealthy citizens as the crisis deveIoped. I have not regretted that for a second. And, in fact, things are moving faster in the EU than I feared at the time. But, of course, Switzerland is also under tremendous pressure by the EU, which sees an oasis of some degree of rationality in the middle of the chaos as a threat. So moving here may not be enough of a defensive move in the long run. But in the meantime, I am joined by other Europeans on a daily basis, seeking out Switzerland for its safe-haven status that still exists to some extent.
The future, sadly, does not seem to lie in Europe.
At least not in the short term. But I feel somewhat encouraged that we are finally seeing an awakening understanding of how bad the situation really is. Understanding reality is the first step towards accepting it and dealing with it rationally. European citizens are not buying the Bruxelles propaganda any more, so maybe there is still hope.
But of course, even if we got Europe back on a better track, we still have the bloated social welfare systems and immoral entitlement societies to deal with.
It is not easy to be European these days.
From:
http://www.tradingfloor.com/posts/time-w...y-62403948
Not that the US is any better, as long as it has reserve currency status, it can simply export its inflation. But China is unloading its dollar reserves, so the Fed is filling the money-market demand gap with purchases made by dollars Bernanke can create - almost like a genie straight out of Aladdin.
This is Keynesian economics at its finest. "If demand sags, and the economy retracts, it must be propped up at all costs." Little thought to the fact that demand is sagging because we've been putting off reality for over a decade, that there never was any real economic growth because most of it was based on easy credit for political purposes, some idea that if you turn everyone into homeowners, the whole economy becomes more productive.
The only safe place is to have your money placed in a country no one wants to invade and to place your investments increasingly in commodities, forward contracts and keep your eye on the mega-trends because mega-trends don't lie.
A year from now you'll wish you started today
