Make no mistake: The euro is the new subprime.
That’s not hyperbole. The similarity between the currency of the world’s largest economic zone and bad mortgages in the United States that brought the economy to its knees in 2008 is downright eerie.
When the euro was introduced in 2002, member nations included the financially responsible nations of Europe such as France and Germany.
As the euro expanded, marginal countries like Greece were added.
Once these “junk” countries were added, default became increasingly likely. As we now know, Greece was hiding some of its debts and overstating its tax revenues. Imagine trying to buy a home by overstating your income and understating your existing debts. It’s that practice that fueled the run-up in housing prices and the inevitable crash.
Three recent developments point to the destruction of the currency itself:
First, yield curves have flattened in countries like Greece, Italy and even France. This indicator points to a major slowdown, and possibly a recession. This slowdown will stall revenue and expand deficits, adding fuel to the current fire raging in Greece and Italy.
Second, Germany has lost its safe-haven status in Europe. That’s understandable. So far, everyone has expected the Germans to bail out all their deadbeat neighbors. But last week, Germany failed to sell more than a third of its 10-year bond offering. Failed bond auctions generally indicate a lack of confidence.
Third, European banks need a massive bailout. These financial institutions hold substantial amounts of bad debt from deadbeat countries. Their failure will fan the flames of default throughout the Eurozone, if not globally.
The issue isn’t about foreign exchange. It isn’t really about politics either.
It’s about the intersection of political fantasy with economic reality.
The reality is simple. The current monetary structure of Europe just doesn’t work. It worked as long as member nations were allowed to lie by overstating their assets and understating their liabilities. It worked as long as the economy continued to grow.
But now that the truth is out, the potential disaster has grown so large that the euro cannot survive in its current form.
For the time being, politicians will try to “extend and pretend” that the euro is still a functioning currency. Most likely, this means policies that substantially dilute the value of the currency. That means the death of the euro in its current form, at least in terms of a strong currency competitor to the U.S. dollar.
Prepare for a rough ride ahead. If you’re gutsy, short the euro against the U.S. dollar.
Although the dollar has its own problems, a breakup of the U.S. isn’t one of them, and in any flight to safety the U.S. dollar rallies.
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