The Eurozone continues to be in the news and its affect on the stock market has been to increase daily volatility. Everyday the market moves up or down by ridiculous margins. The solution that Angela Merkel (Germany) and Nicholas Sarkozy (France) is to borrow money more money. This will not work, at least not as structured. In order to attract the capital to the vehicle that is known as the Euro Bailout fund (actually the EFSF) there needs to be more than just Germany backing it (having Italy pledge support makes no sense as they are a likely bailout target). Merkel and Sarkozy refuse to allow the European Central Bank (ECB) to be involved – but without the ECB as a lender of last resort, the ESFS has no credibility and will fail. Without the ECB involved, Europe is doomed to fail. Like it or not the ability to print Euro’s is about the only solution in the short term and might be the only solution to preventing collapse. Even with the ECB printing, without a proper restructuring of the banks and the governments involved – the pain will simply be extended for a prolonged period.
The other option is to break up the Euro and allow certain struggling countries to leave, re-adopting their old currency and printing their way to devaluation and thus to being competitive again. Giving up a national currency had its benefits (low borrowing costs) but has effectively hamstrung Greece (and other nations) from making the adjustments that need to be made in order to be prosperous again. It will be painful move – but likely less painful than prolonged austerity.
In short, regardless of your thoughts about printing money – its about the only solution left, yet its not on the table. It will either need to be put on the table or it will be forced. The ebbs and flows of the eurocrisis will continue to reverberate throughout the world (can anyone say MF Global) – solutions exist, but for one reason or another are being ignored.
One last thought – if member nations do leave the Euro, get ready for currency and tariff wars.
Scott Dauenhauer CFP, MSFP, AIF