The Euro entropy.
I am of the opinion that the world has changed.
Many of us are looking for some sort of mean reversion, but it’s not going to happen.
European Union, for one, is a wild thing.
It was originally a French project, which is what people tend to forget.
After World War II, the French looked around and said – hey, where did everybody go?
The Brits had gone home, the Spanish were languishing under their own dictatorship, Germany and Italy were divided and occupied, and the Soviets were considerate enough to drop an iron curtain, which basically blocked half of Europe from interaction, so the French realized – hey, this is a competition we can win!
So they created the Union as a platform to project political power over Europe (the initiative had a different name back then).
Well, they didn’t like 1989, when Germany reunited and quickly took control of the business.
For starters, they moved their parts suppliers to Eastern Europe, where the wages are three times lower, but competencies are not.
It’s kind of globalization, but only within the area. An excellent 8-speed automatic transmission is built in Romania and shipped to South Carolina to be bolted to a BMW assembled there, sold to American clients and still considered a German car.
If you’re in Eastern Europe or you are Germany, you’re selling to the Chinese and the Americans, and you make off like a bandit.
But when you look at France, Spain or Italy – they can’t play that game.
They’re not big export countries, they are consumption economies.
If somebody is running a surplus, then logically somebody else has to run a deficit.
Now, if you don’t allow them to run deficits, as the austerity policy requires, then the only way to react to it is to permanently constraint their economies, meaning shrinking them.
So basically the French, the Italians and the Spaniards are forced into austerity policy, so the German, the Poles or the Romanians can make money selling to the rest of the world.
Do you think that may push the National Front over the edge one day?
The big problem with Euro is that there is no unified European debt that should be a basis for the currency (the money now is debt based, not gold based, but the mechanism is the same). Each of the member countries prints their own Euros, and their national debt (bonds of each country) guarantees the currency.
Or, as they say elegantly in textbooks – the currency is guaranteed by the ability of the government to tax its citizens. And if you need a moment to regain your composure after that sentence, take your time.
Problem is, the national bonds have widely different interest, or rather they would if it wasn’t for constant interventions by the European Central Bank in the bond market. Their balance sheet now equals to 40% of GDP of the Euro zone. And there is no plan how to exit these positions without triggering a mother of a crash. This is the proof, if you still need one, how bad of a design the Euro is.
So here is a suggestion for the brave boys and girls at the ECB in Frankfurt– buy a big paper-shredding machine, put it in the basement and start trashing the bonds you sitting on.
In my view, there never will be a unified European debt - the Euro will fall first. There is a simple reason for it – unified debt will sell at interest that is some amalgamation of rates that member states get in the market.
For countries like Germany, this would mean that the cost of capital would go up, perhaps way up.
Try to sell this to the German industrial elites – good luck with that Frau Merkel.
I will slow down now.
You don’t get to replicate the past. The very thing that you lived the past means simply that the past can’t come up again. The world is always a world of becoming and you live it forward into the unknown. As humans we like to see patterns where there are none, because the world is actually much more random. And it can be brutal, I know.
Welcome to the Masterpiece, but remember - you shape it too, it will never be the same without you.
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Tom Kubiak is the author of The Traveler