August 20, 2012
How Will the Euro Break Up?
by Martin Hutchinson
PrudentBear.com
.
.
.
If Greece had been thrown out of the euro two years ago, the crisis could probably have been stopped there. Portugal and Ireland would have needed bailouts, but the prospect of life with a currency sharply devalued against its neighbors’ would have put the fear of God into PIGGY governments in Spain, Italy and France and made them undertake austerity programs that actually bit. However, we are not in that position, and it thus seems highly unlikely that even a Greece-less euro can remain intact.
.
.
.
The two largest problems by far are Italy and France. Italy has failed to address its structural problems, which are primarily those of over-powerful public sector unions. While the replacement last autumn of Silvio Berlusconi by Mario Monti may have pleased The Economist (which sees Italy as remaining in a smaller euro while Spain departs), it has in reality made matters worse because no significant reforms have been carried out and the Monti government has no legitimacy and must be replaced in new elections next March. Since Italy has the highest government debt in the eurozone (now that part of Greece’s has been written off), it is far more likely than Spain to be the trigger for a eurozone breakup. Even though Italian GDP declined in the second quarter by 0.7%, more than Spain’s, the markets do not realize this; they currently trade Italy’s 10-year government debt on a 5.68% yield compared with Spain’s 6.64%. The markets are wrong.
The markets are even more wrong about France, whose 10-year bonds trade at only a 2.16% yield. While France’s GDP was flat in the second quarter, that does not reflect the damage being done by the new Hollande government. This has reversed the modest reforms in pension age carried out by Sarkozy, has increased the already onerous wealth tax and plans to introduce a 75% top rate of income tax on the rich. Given that most wealthy Frenchmen speak English and often German, this will cause not only capital flight but emigration over the next year, reducing France’s tax base and its GDP, and causing a massive government funding crisis. Even if France survives Greece’s exit from the euro, and the inevitable Italian crisis, it will itself need to leave the common currency within the next year, since there are no funds large enough to bail it out.
.
.
.
So that’s the probable final score – two separate euros, one stronger one weaker, both fairly well managed, with France and Italy remaining independent as befits their large size and poor fiscal management. Greece, Cyprus, Britain and a few East European countries would remain part of the EU but no longer aspire to membership of a common currency.
More: http://www.prudentbear.com/index.php/thebearslairview?art_id=10698
Gold is $1,581/oz today. When it hits $2,000, it will be up 26.5%. Let's see how long that takes. - De 3/11/2013 - ANSWER: 7 Years, 5 Months
| 