No Way to Hold Eurozone Together

Posted by Jeff Rubin on December 7th, 2011 under SmallerWorldTags: , ,  • 9 Comments

Will the PIIGS sink the euro or will the European monetary union jettison the PIIGS? As the stakes get ever higher, we are rapidly approaching the end game for the European debt crisis.

With the spectre of default now hovering over major European economies such as Italy and Spain, the potential liability for German and French taxpayers becomes staggering. This is why they are now insisting on a rewrite of the terms for the monetary union. Having already lost their monetary sovereignty, the debt laden PIIGS will soon be asked to surrender their fiscal sovereignty as well.

German taxpayers will never agree to common issuance of Euro bonds with profligate and undisciplined spenders unless they have direct control over those countries’ budgets. Nor will they cough up anywhere close to would be required to bail out Italy or Spain if either loses access to the bond market.

But Italians, like their Hellenic neighbors, will soon realize the futility of complying with these demands. Since Italy’s problem is its outstanding debt as opposed to simply its current budget deficit, there is no fiscal course of action it can take that will satisfy the bond market.

Even if Italy could miraculously balance its budget in a contracting economy, the accomplishment would make a negligible difference on the country’s sky-high ratio of national debt to GDP or the amount of money it has to borrow next year.

The idea of Germany and other creditor nations dictating even harsher deficit reduction measures for countries such as Greece and Italy may sound reassuring to market, but for people in the streets of Athens and Rome, it sounds like nothing short of serfdom.

As that option is politically rejected, bond yields on Italian and Spanish debt will once again rise to thresholds their governments simply can’t afford to pay.

Unless the European Central Bank is going to engage its own form of quantitative easing and start printing billions of euros to buy up long dated Italian and Spanish bonds, the end is in sight for the European Monetary Union as we know it.

The longer creditor countries try to save the PIIGS, the closer the debt crisis is coming to their home markets. Standard & Poor’s has already put the remaining six AAA rated countries in the European monetary union – Germany, France, The Netherlands, Austria, Finland and Luxembourg – on credit watch, which is normally a prelude to a downgrade.

As interest rates in creditor countries start to rise, the appetite for further bailouts will diminish just when huge borrowers such as Italy and Spain turn to their Eurozone partners for funding.

The end game seems pretty clear. The European monetary union will, of course, survive in some form. But the next time you go to Europe, don’t be surprised if you see the drachmae and the lira back again with a new lease on life.

  • Oasis

    “Unless the European Central Bank is going to engage its own form of
    quantitative easing and start printing billions of euros to buy up long
    dated Italian and Spanish bonds, the end is in sight for the European
    Monetary Union as we know it.”

    Jeff, I think this will happen in some form or another. I think it has already started. Maybe through the IMF, with backing from Bernanke and Draghi. They may still boot out the weak members (Greece, Portugal, Ireland etc), but in the end, they will have to print billions of euros, just like Bernanke.

  • Unc

    Jeff , the only way out of this ongoing night-mare will be to switch to a global currency, I beleive it is closer, than anybody thinks.this menagerie of debt to gdp and other so called rating agencys warnings is a  crock of crapp!. I say one curencey and one barrel oil price standard,the rest is horse – shit. unc fsj.

  • Rojelio

    I know many people forsee one world currency, which presumably means the entire world would be governed by unelected bankers. I guess that’s what we have now, but your vision would require even more centralization. I’ll even admit this looks like the trend right now.

    However, I don’t see how this would work for some key reasons.

    1. Globalism and more centralized banking control requires ever increasing amounts of debt (under the current model anyway) and ever increasing amounts of energy. Neither trend can continue based on reality.

    2. The world is waking up to the banking scam and it is collapsing.

    3. It seems like the world is becoming kind of bipolar preparing for WW-3 with US, Europe, Israel, Japan etc… on one side and the Chinese, Russians, Iranians etc… on the other side. How do you get all sides to pledge loyalty to a single central bank?

    To those people who believe the comic book politics that Bilderbergers and their buddies have a master plot to depopulate the earth and dominate the world with one global currency (maybe they do), please explain how they get the Chinese & Russians to go along with all of their diabolical plots.

    But what do I know? Maybe that’s how this all ends, all of us in a police state with an RFID chip in our forehead and high fructose corn syrup tablets handed out on Friday…

  • Guest

    Uh … If the Euro is a failure with 17 countries, how much of a failure would a global currency become with, what, 300 countries. The opposite is much more likely. When the Euro collapses, voters will simply demand the return of local currencies.

    The only soft landing I can come up with is the introduction of a new parallel currency, which should be linked to a basket of metals. While debts that were taken in Euro’s will remain in Euro’s, wages and benefits will be paid in the new currency, and therefore the new currency will be slowly introduced into the economies.

    Banks will not be allowed to convert Euro savings into the new currency. The idea is to let the Euro, and therefore the debs and savings, rot away, while the economy steps over to a rock solid currency.

    How do employers get this new currency. At the beginning, they will be allowed to convert Euro’s for the new currency, but for wages only. This until enough new currency comes in circulation.

    The Netherlands did something similar when they introduced the “Zilverbond” in 1914 after there was a run on the banks at the start of WOI. Zilverbonds was paper money which had a value of a specific amount of silver. The reason for issuing Zilverbonds was that there were not enough silver coins in circulation. It could only be introduced through wages. After WOI, people were forced to trade in these bonds, but , believe it or not, with a profit. During WOI, both the “Gulden” and Zilverbonds were official currencies. Therefore, there was a parallel currency system.

  • Fekhar

    “please explain how they get the Chinese & Russians to go along with all of their diabolical plots”     why diabolic plots?? I ve lived in both countries and they re really decent people, or does ambitious mean diabolic? they re not invading other countries as far as I know, what do we call the current plots undertaken by the US and its NATO allies ?

  • Rotschildt

    Good gonna buy so much euros soon. Everbody way to pessemistic about the yuro the dollar is gonna be the biggest loser. 

    I know all you so called gurus have your arguements but i am the contrarian in this 1.
    And this bad boy is gonna fuck a lot of people.
    The rabbit will be pulled out the head also with your qe thats already going on look better you morons.

    Whe gonna rip

  • unc

    She is a nasty bizz,this talkin about this and that,some-times it is good to have a break and come back into the didi with rest of the mind.try and feel fresh and such.unc

  • UNC

    I done figured you cooked your goose,you in my mind are a little fart in a windstorm that has never worked a day in your life,cause you think you are entitled,up yours,you little baglicker,come and earn a real days pay with people lucky enough to have a job.the likes of you, use less culls will be apparent up and coming. you parasites will find the true bannas and i only hope idiots like you understand the full meal deal,what an arshole! you are.UNC.

  • Michael Russell

    I have followed your prescient information for quite some time and I continue to be impressed with your ability to explain the seemingly complex nature the global economy presents to the layman. 
    The silver lining as you have described so well, is the return to more regional economic activity and that, it would seem, ultimately brings back the manufacturing jobs lost to the overseas manufacturing sector.
    I look forward to reading your insightful essays and now all we have to do is figure out how to get you elected Prime Minister…smile
    You are a true Canadian asset…
    Stay well
    Michael Russell