Clem Chambers, CEO of financial information site ADVFN and author of ‘101 Ways to Pick Stock Market Winners’ discusses five possible outcomes of the Euro crisis.
Will the Euro currency break down completely? Could there be a partial break-up of the Eurozone? Will ‘Merkosy’ convince financially renegade countries to accept tighter control from Brussels over spending; or can everything, somehow, gradually return to ‘normal’?
In this outcome, Germany does nothing but block the European Central Bank from creating the inflation Europe needs to wheedle its way out of its immense debt woes. The weak countries default and bail out of the Euro, setting off a tidal wave of contagion that breaks the back of even the most economically sound countries such as France.
A rupture in financial trust creates a lenders’ strike, in which most of the Western world is unable to finance state deficits. Austerity goes out of control, becoming a black hole of deleveraging. Rolling, global defaults and general bank failures create a complete economic collapse throwing everyone back to a financial version of the Stone Age. Recession, depression, and wars follow. Old curmudgeons with gold, tinned food and desert compounds in the US hinterland celebrate being right at last.
2. The Weak Leave
Faced with austerity and no democratic platform to enforce it, GIIPS countries (Portugal, Ireland, Italy, Greece and Spain) simply default on their Euro bonds and reintroduce home currencies. This is drastic for them but at least they can then get back to business as usual, borrowing large but manageable amounts of money with the chronic tool of inflation to right-size the resultant mountain over time.
The market – not being stupid – lends at a high rate to a margin perceived as sustainable, while financial repression does the rest. It worked before, and it will work again. New, local, currencies crash and local lifestyles return to older patterns and prices. A period of local dislocation is replaced after two-three years with an economic performance resembling something looking normal.
When it comes to defaults, lenders have short memories. Russia defaulted in 1998, so what? Perhaps in ten years, re-entry to the Euro occurs. This is the model current Euro currency levels suggest is most likely. If the weak leave, the Euro will remain strong and get stronger still. The Euro is strong, so this is a big hint that the weak will leave.
3. The Strong Leave
Europe wants inflation, Germany doesn’t. Why not leave the Euro and leave the rest of Europe to have the inflation? From the outside, this seems crazy, but then, so does the German’s point of view that any inflation is bad.
Why not simply bow out of the euro currency and let the economic rabble print their way out of obligations? The fly in the ointment of this outcome is that if it was a significant likelihood, the Euro’s value would have already gone off a cliff by now. However, the Euro remains strong.
4. Tighter Euro Integration
Germany and France somehow get everyone around the table. They then explain why each country should give up their central spending authority, undertake central supervision by Brussels meanwhile convincing each and every premier there is no need to get a referendum passed by their population.
Because the economies of Europe are all looking into the fires of hell and the prospect of losing their jobs in any event, they see sense in this ‘Merkosy’ steamroller of tighter EU integration – a long hop towards the United States of Europe.
Any such head-lock on borderline countries such as Greece has to be enforceable while somehow not violating democracy or creating peace-shattering nationalistic movements. Germany then effectively guarantees the debt of the whole of Europe. In return, it would receive influence over the spending policies of the GIIPS.
5. Return to normality
So what has really happened so far? Greece – a country everyone knew for years was broke, is broke – and it has upset some private government bond lenders, in turn freaking out most European lenders. It can no longer borrow and has had to cut back on its playboy lifestyle.
Italy and Spain, too, are starting to have to pay 7% interest to keep up appearances. However, these rates would once have been considered normal. Another bad boy, Ireland, who was paying 14% – an interest rate level that the UK and Sweden have suffered in the last generation, is now paying 8% – a lot less than even a few weeks ago.
Maybe it is not the end of the world. Maybe interest rates are simply returning to long-term normality.
If the politicians can keep talking long enough, they will have got their budgets in better shape, have sneaked in sufficient inflation to start grinding away at debt levels and have been working hard enough on balancing cheque books to reassure scared borrowers. By then, lenders will have realised they can’t keep all their money in gold and tinned food and that living in a desert compound in Nevada is no fun, especially when the US is probably in worse shape.