Assault on the Euro

Many years ago, when the European Economic Community (ECC) was established, I thought that a common currency, the Euro, as a bad idea.  So did the British.  The ECC is made up of a number of highly disparate economies and to think that they could be fiscally regulated with a common currency was fanciful.  The currency would be propped up by Germany and France and would be constantly undermined by weaker economies--like Greece.  It now appears that the very underpinnings of the Euro are coming unstuck.  Spain, Portugal, Ireland and now Italy are showing signs of fiscal weakness.  It is only a matter of time before Germany tires of bailing out weaker economies.

Like the US, most of those weaker economies tried to spend themselves out of recession and must now pay the price.  Britain and Germany (and to a lesser extent France) have bitten the bullet through austerity measures that will, in time, bring their economies into balance.  The weaker economies were weak before the recession and are on life support after the recession.  Bloated with overpaid public sectors and subsidies, it is now hard to draw back without a great deal of civil unrest.  Any bailout will insure that the bad times will be strung out over many years.  Austerity measures will mean less money for consumers to spend thereby leaving those weak economies in limbo for decades.  Allowing the weaker economies to default will create an assault on the Euro probably in favour of the US dollar.  The US is trying to keep its dollar low in order to encourage imports.  A higher dollars is not part of its economic recovery.

In times past, it was not uncommon for countries to default.  Sovereign bondholders were paid so much on the dollar and the world went on.  Now, default will bring significant downward pressure on the Euro so that Germany will suffer along with its profligate associate countries.  The Euro may fall and each country going back to its own currency.

Some of my investment friends tell me that it's now time to go short on the Euro and long on US dollars. I hope not.

Bernie