Saturday, 29 October 2011

'Le Crunch' - The European Endgame

I may be wrong but I get the feeling that the mists are starting to lift on the whole European issue this week and the picture about what is going to happen to the whole European project and debt crisis is starting to take shape.

President Sarkozy's comment that Greece should never have entered the Euro was the first open acknowledgement that the Euro just is not going to work with countries that have very differently structured economies. Seeing as nothing much has changed with Greece since it joined the Euro, other than that their debt has grown, it must follow that Sarkozy is implying that Greece should not be in the Euro now.

In the last week or so, there was also the spectacle of Sarkozy and Merkel grinning at each other when they were asked if they trusted Berlesconi. They are now openly showing and sharing contempt.

And then there was the story about Sarkozy getting angry with Cameron and saying, 'We are sick of you telling us what to do'.. Which must mean that Sarkozy is irritated that whatever it is that Cameron and others have been saying has now been shown to be right. Simple logic - people don't often get angry with people giving them ludicrous, illogical incorrect advice - they get treated with wry amusement or perhaps withering distain not anger. Anger is reserved for people who are annoyingly right.

My guess is that Merkel and Sarkozy have finally accepted what many financial experts have been saying for a very long time. They now finally accept that talks of more bailouts for Greece today and Spain, Portugal, Italy etc etc in the future are all just pointless temporary sticking plaster ultimately leading to more miserable conclusions. And they realise that politically they cannot be seen to throw more of their taxpayers cash at countries that simply don't have the productivity to pay it back and the political will to restructure their economies to be competitive inside the Euro. Countries like Greece are a million miles from being able to compete with Germany with currency parity.

So basically the deal is this. Each country is going to have to make a decision. They either stay-in the Euro and accept that a far stronger federal Europe will dictate their economic decisions i.e. effectively they cede sovereignty and become part of the Federal Superstate or they stay out and leave the Euro (if they are already in it).

There are no entirely painless ways to unravel the Euro but there are fairly simple ways of doing it. As one financial expert puts it:

Simply convert Greek euro debt into Greek drachma debt. One for one and then let the new currency float.

See how much the currency devalues – and that’s the haircut bondholders take. No need for complicated negotiations.

Put the new drachma into circulation. One for one, remember – so Greek wages stay the same. Only now, they get drachmas for every euro they used to get.

Sure Greek imports will suffer a nasty bout of inflation. The public will get squeezed. But hey – that’s what needs to happen. BMW and Mercedez-Benz imports get expensive… but at least they can sell their stock of second-hand Mercs back to rich Germans and pocket any currency gain.

And with Greek holidays costing less, tourism will bounce back, and Greek olive sales too.

Should Greece exit the euro club, then businesses and individuals with Greek euro debt may profit. If the debt gets written down into devalued drachmas, then there could be a one-off gain. It would be particularly handsome for anyone with Greek debt but foreign income.

And for Britain, rather than our government being continually pressured for a referendum to decide if we want to leave the EU, the Europhiles will be lobbying for us to join the Federal EU.

That's my bet. 'Le Crunch' is coming and it's coming soon.


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