The Euro is Done

The November issue of National Geographic tells of the recent discovery of the Staffordshire Hoard – a treasure of gold, silver, and garnet military objects from the early Anglo-Saxon era that had been buried in the English countryside for 1300 years.

According to the article, after Roman colonizers withdrew from Britannia around A.D. 410, Britons solicited Germanic troops from the continent to defend them against Scotti and Pict tribes invading from the west and north.  Naturally, people rarely get what they expect.

Before long the Germanic warriors were piling into Briton in hoards.  Soon the Scotti and Pict tribes were no longer the menace…the influx of people from modern Germany quickly outnumbered the natives on the island.  Then, after crowding into the island, they turned on their local allies and created their own kingdoms.

The sixth century British monk, Gildas, described the island wide bloodshed that followed in his treatise, On the Ruin of Britain.  “For the fire of vengeance…spread from sea to sea…and did not cease, until, destroying the neighboring towns and lands, it reached the other side of the island.”  The surviving Britons fled or were enslaved.

The Difference between a Becker and a Papadakis

These days Germany is being called on once again to bailout its neighbors.  This time the call beckons not from across the North Sea, but rather, from the southern inhabitants of the continent along the northern shores of the Mediterranean Sea.  It is an epic crisis years in the making and it is the burden of today’s contemplations.  But before we get to the present we must back up several years into the past for proper perspective…

Here we’ll begin with a critical insight: All nations in the European Union are not the same.  No doubt, this is so obvious and apparent it seems ridiculous to even mention.  Yet where credit markets were concerned over the last decade, this insight was completely missed.

In Germany, for instance, people say what they mean and mean what they say.  German borrowers nearly always pay back what they owe according to the terms of their loan.  In Greece, on the contrary, there is a fine art to the untruth…and there is a fine art to how one stiffs their creditors.

German borrowers could traditionally demand lower lending rates than Greeks.  They’d earned a high credit score after years and years of prudence and diligence.  Greek lenders, on the other hand, required higher borrowing costs to compensate them for the less rigorous attitudes toward debt obligation that prevailed along the Mediterranean.  In short, the historical experience of credit markets showed that the risk a Becker won’t pay what they owe is nearly nonexistent compared to a Papadakis.

Still, despite the historical precedent, the beginning of the Eurozone era took what everyone knew to be true and stood it on its head.  Suddenly, with nations united under a common currency, the cost of sovereign borrowing for all Eurozone nations became priced at rates only Germany deserved.

The Euro is Done

For whatever reason, following the establishment of the Eurozone, lenders brains went soft in unison.  Credit markets came to the implicit notion that Germany’s financial resources would back other European Union countries should there be a risk of default.

Predictably, Greece, and other less credit worthy countries like Spain, Portugal, Italy, and Ireland, couldn’t handle the cheap money.  They borrowed and spent far more than they’ll ever be able to repay…but that’s just the half of it…

For every euro borrowed by Greece, Spain, Portugal, Italy, and Ireland, there was a lender. Moreover, over half of the debt taken on by these countries was provided by the banks of other European nations.  What’s more, the banks that are most exposed to the bad debt of these near bankrupt countries are centered not in southern Europe, but in northern Europe.  If the European Union does not continue the bailouts, these banks will go bust…perhaps all of European finance will blow up – or worse.

Over the weekend, and into the beginning of this week Eurozone leaders have gathered in Brussels, Belgium, to figure out a solution to the European Debt Crisis.  At this point it is understood that bailing out Greece – again – won’t do the trick.  How to recapitalizing the banks and ensure they have sufficient reserves to weather a Greek default have become the critical points of discussion.

But, alas, there’s a problem…

After Greece implodes…Italy is next.  Then Spain and Portugal.  After that France’s solvency could be called into question.  What this means is the Eurozone leaders haven’t begun to even consider the problem.  What this means is the euro is done.

Germany should flee while they can.

Sincerely,

MN Gordon
for Economic Prism

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