I've been asked a million (or so) times about this very complicated subject and what better way to relay my opinion than this blog. I strongly believe that the Euro itself should NOT be dismantled but the European Union is another case altogether!!
First, a 101 ... The EU is made up of 27 countries, only 16 of which have adopted the Euro as their currency. These 16 make up the Eurozone .. easy enough. So, why am I wasting my Sunday night talking to you about this? Mainly because I think that this year was only a preview of what's due to come in 2011 in terms of issues with European Sovereigns and their ridiculous efforts at "band-aiding" and sometimes even covering problems at home! Everybody has heard about Greece going through problems and being bailed out by the EU and while that was going on, there were issues with the Irish banks and, as a result, the Ireland government, in a very hasty and, I think, brainlesss moment, decided to cover all the losses of some of its big banks aka .. nationalised them! This decision has come back to bite the Irish government in the rear since they themselves never had enough money to cover the losses. So now, after a lot of cajoling and mostly strong-arming by the other governments, they have agreed to a bail-out of sorts. So the obvious question now is: Who is next?
There is Portus Cale, now known as Portugal, which, in my mind, has been on the wrong end of history all along starting from the 17th century when they started losing all their wealth and colonies to their neighbors on the continent. Currently, Portugal is seen as the weakest link in the Eurozone given the amount of debt they have maturing in the next 2 years. Refinancing in the debt markets when investors see you as an irresponsible and now debile debtor, is almost an impossible situation that leads to a circular destruction of your economy. Portugal was put on negative watch by 2 ratings agencies and has now been downgraded by Fitch. If we have learned anything from the last 2 years, it is that the ratings agencies are always (I really mean always) late! A better indicator are the Credit Default Swaps (CDS) which tell you the amount of money debt investors are asking for as collateral to lend an entity any money. And the direction of CDS spreads on Portuguese debt is not something you want in your credit report. So while Portugal's situation, I believe, is dire, I think there is a bigger fish to fry for the debt investors.
In comes mighty Spain. In investment circles we like to say that Spain's issues are too big to be issues ... ummm Does that make sense at all?? Spain is a huge country in terms of how much space it takes up on a map; in terms of how much GDP it brings to the Eurozone; in terms of how much beautiful property it has; and in terms of how much debt it has to pay off in the next 2 years. Its no news that the property bubble helped Spain's economy tremendously. The bursting of the bubble, I think, is hurting them more than advertised. I believe that Spain's economy is on titters at the moment and the only reason it is not being talked about is due to the assumed "back-up plan" of Too Big To Fail. The only modification I would make to that plan is that Spain is actually "Too big to LET fail" and I think this is the actual assumption being made in the debt markets. Spain is way too important to the currently precarious world and we cannot afford to have this situation morph into a forced bailout à la Ireland!
So, finally here is where the title of this post comes in. I believe that we need Jose Luis Rodriguez Zapatero, the Prime Minister of Spain, to stand up and take the future of Spain, and arguably that of Europe, firmly in his hands. He needs to go to the markets with a list of reforms that he will institute for the medium-term. He needs to be clear about labor reforms even though he might lose the popularity contests with unions that support his party; he needs to make sure the forced mergers of cajas (regional banks) go through smoothly; he needs to push big banks and other institutions to declare their bad debts and continue deleveraging; he needs to ensure decisions relating to pensions reforms are taken in a thoughtful manner and last but not at all the least, he needs to ensure that the rating agencies don't smell any blood in his debt!
Now that I have established my opinion about the importance of Spain to Europe at this time, let’s address the original question about the viability of the currency and the Union. I don’t think the currency should be dismantled for 2 main reasons: primarily, the need for Europe to have a strong lever in the currency markets which are currently ruled by the US Dollar and the JP Yen and soon to be joined by the Chinese Renminbi; and secondarily, the costs involved with the transition from one currency to another for all the countries involved. But the German leaders and their citizens and other responsible European countries are getting frustrated with them having to repeatedly finance rescues of decrepit nations.
The only sustainable solution I can think of is the expulsion of countries from the European Union that have not been able to control their inflation, their debt, their exchange rate and their interest rates as laid out in the Maastricht Treaty. These countries have violated the rules set out by the EU and have still been able to benefit from their membership. This has led the incompetent leaders of these countries to over-spend, under-tax, and take the populist route when it comes to reforms. I strongly believe that if the Euro and the EU have to survive as capable entities, then they have to get rid of the weakest because it doesn’t matter how strong the strongest are, once the weakest links break, the Union ends!
