The World can and often is a scary place to navigate. It’s as if dragons are lurking around every corner and magicians take up residence in the middle of major thorofares to demonstrate their powers. Such seems to be a good analogy for what is going on inside the European Union and their ongoing debt crisis by member countries. The latest and most challenging to date - Ireland.
A recent article titled Euro Dominos Will Fall Until Currency Is Split by Matthew Lynn paints the picture of “What Could Be…”
The euro has turned into a bankruptcy machine. Once the markets have finished with Ireland, they will simply move on to Portugal and Spain, and after that to Italy and France.
There is a domino effect at work, and, with each rescue, the fault lines within the euro grow wider and wider. This process isn’t going to stop until the euro is taken apart…
In each country, it will be a different trigger that causes a collapse in financial confidence. The root cause is the same, though. When the euro was launched, it was a big bet that sharing the same currency would make a group of very different economies converge, and so allow the European Central Bank to operate a single monetary policy for all of them.
It was an interesting theory, but it turned out to be wrong. The economies are just too different to allow a single central bank to manage all of them. Interest rates are always wrong everywhere. How that expresses itself varies. In Greece, it was a fiscal crisis. In Ireland, a banking collapse. In Spain, a construction bubble that burst. In Germany, a massive trade surplus. But, like a river looking for the sea, it always comes out somewhere.
This crisis will keep moving from country to country. The only permanent fix is splitting up the euro into more manageable currency areas. Until the euro-areas leaders recognize that simple truth, every bailout they come up with is only going to shift the attacks elsewhere.
Back in May in an article titled Another Fine Mess - Spain, I wrote:
The formation of the European Union took decades to create and may take only a couple of years to destroy. The foundational concepts behind the Euro were solid, and generally worked well in improving Europe’s position in the World marketplace. However today, everything appears to be unfolding.
What is maybe most intriguing is that the formation of the European Central Bank and the creation of a single currency was to simplify things. In the end, the role the central bank plays has made it increasingly complex for member countries to navigate, much less prosper. And maybe this is the big take away. When Simplicity is trumped by Complexity, problems of magnitude will emerge. And the magnitude of this problem appears to be growing exponentially.
