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Stuart Staines, the editor and publisher of The Staines Letter, has over 18 years experience in banking and wealth management. Born in London, he studied in Geneva, Switzerland, and holds a Certified International Investment Analyst diploma (CIIA) from The Swiss Financial Analyst Association... More
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  • A Good Entry Level On Gold In Euro

    Have you ever wondered why we spend hours typing on a totally counter intuitive keyboard layout? Inertia. This layout dates from the development of the mechanical typewriter in the nineteenth century and was specifically designed to avoid jamming by placing the most frequently used letter pairs in a way that it would be hard to type them rapidly. Another reason was to place all the letter of the word “typewriter” on the top row so that the salesmen could show off without knowing how to type. Two centuries later we are still using this same uncomfortable layout although jamming is clearly impossible with keyboards. The costs of changing the layout are ridiculously cheap and yet inertia has kept us from making this easy change that would offer clear benefits for all.

    If inertia has kept us from doing this costless and easy technological change what should we expect from 16 European governments stuck in a monetary system that is clearly not working? More inertia. It is only when backed against a wall by mounting systemic risk that the decision to completely rethink the monetary union will be forced upon the member countries. Until then, the Euro will continue to weaken and the divergence in economic performance and financial accounts will only accentuate. In the US and even more so in Europe, fiscal austerity and tax increases have become the motto of governments. Who would blame a government who wants to reduce its debt? It makes for reassuring headlines stamped with responsibility. But as we know (see my pevious article http://seekingalpha.com/article/213198-imf-report-simple-accounting-identities-flawed-austerity), to avoid contracting economies and deflation, any government savings must be accompanied by either private sector spending or current account surpluses.

    So why my interest in Gold? It is clearly not because I expect a burst of inflation. If anything, the past few centuries have showed how unreliable gold has been as a long-term store of wealth. Had you bought gold in 1980 and held it the following twenty years you would have lost close to 10% on an annualized real basis. Had you invested in the Dow Jones instead, well let’s just say that the irony is that both gold and the Dow were trading at about 850 at the time. Even if your ancestors had successfully stored it for future generations since 1500, you would have found yourself five hundred years later with a depressing 90% real wealth loss. Another gold bug argument for holding gold is that it makes for a perfect currency, a standard of value. I see it more as a meaningless chemical element that has caused much suffering and the spill of so much blood across the history of mankind, an inexplicable obsession. Those wishing that we return to a gold standard should be reminded just how unstable and dysfunctional the global financial system may be when it is arbitrarily determined by the supplies of a metal whose major sources are located in Russia and South Africa. History is crowded with examples demonstrating how painful the adjustments imposed on countries were under the gold standard.

    Ironically, it is precisely because the gold standard is so imperfect that I am recommending gold today. The euro, which is a de facto gold standard for euro zone members, is the latest example of the hardship imposed on countries with no currency sovereignty and which are forced to choose between sensible domestic policies and the urge to correct external imbalances. It has ensured that the euro zone may not run large fiscal imbalances. This loss of sovereignty is the Damocles sword on the head of European countries which will ultimately force the weakest into a succession of debt restructurings. As the imbalances across the different member countries grow larger, the Euro will reflect the mounting stress it has imposed on itself. Finally, like all currencies before it under a gold standard, it will be forced to devalue. Of course, the euro is not really backed by gold but I see gold as a measure of systemic risk.

    It measures the level of confidence investors have in governments and the financial system. Similar to volatility, it measures the level of uncertainty. Gold is attractive when most other assets are unattractive. At a time when government’s solvability is questioned and currencies will have to bear the weight of adjustment, gold is an attractive tail hedge. The metal will benefit from the diversification that Europeans will actively seek for as the net closes around them and provide an interesting tool to benefit from rising European sovereign credit spreads without taking on the counterparty risk inherent in derivatives.

    The most powerful and misunderstood bull market today is politics. This political bull market is planting the seeds for profound changes in long term policies and will be reflected by a large increase in market volatility for as long as the markets fail to understand the unintended consequences of these tectonic changes. Think of it, this is the largest build up in government debt since World War II and this is the largest economic contraction since the Great Depression. The policy that has shaped our world economies between these two major events is Bretton Woods. The latest gold bubble in the 1970’s, which pushed gold up 14 fold, was attributed to the collapse of the Bretton Woods system. As mentioned previously (http://seekingalpha.com/article/214608-bretton-woods-inertia-and-the-coming-end-of-an-era), I tend to disagree and believe that the tipping point for the Bretton Woods system has just been reached and with it the end of an era. If so, imagination could well be the only limit to this gold bubble and a unit invested in Gold in Euros makes sense.



    Disclosure: Long Gold/EUR
    Jul 20 1:54 AM | Link | Comment!
  • The Great Depression And The Revolution Of 2017
    I thought I would share with you a satirical view of our world in 2017 published in New Economic Perspectives by L. Randall Wray (link: neweconomicperspectives.blogspot.com/2010/05/great-depression-and-revolution-of-2017.html). Enjoy!

    WASHINGTON, 7 NOVEMBER 2017*. Yesterday Speaker of the House Dennis Kucinich was sworn in as President, replacing President Jeb Bush, who had fled to Riyadh, Saudi Arabia, aboard Air Force One seeking asylum in his father's well guarded compound on the grounds of the Bin Laden family's palace. Vice President Dick Cheney, who has been in a coma since August after suffering his fifteenth heart attack, was declared incompetent. President Kucinich immediately announced a wide-ranging package of policies designed to bring an end to the Great Depression, which began with the global financial crisis of 2007. He called for calm and pleaded with leaders of the Revolutionary Tea Party Army that has encircled Washington to call off the attack that had been planned for today, the 100th anniversary of the Bolshevik revolution. Commandant Dick Armey said he is willing to meet for a discussion of a ceasefire so long as his militia can take their weapons home.

    President Kucinich apparently ordered the Marines to invade Goldman Sachs headquarters in Manhattan early this morning. While there were some reports of small arms fire, most of the 6000 employees were reportedly removed without struggle and are on their way to various jails and prisons in the greater New York area. CEO Timothy Geithner was captured at La Guardia, attempting to board a private jet said to be headed for Riyadh. An anonymous source claimed that Geithner complained that President Bush had left him behind after promising protection. President Kucinich announced that Geithner would be charged with fraud, racketeering, and tax evasion. The case dates back to 2012 but had been put on hold when former President Sarah Palin ordered the attorney general's office to stop its investigation of the Treasury Secretary. President Kucinich said that Goldman, the last remaining bank in America, would be nationalized. He assured depositors that the bank would reopen next Monday under management of a team of presidential appointees led by William Black. All insured deposits will be protected, but it is believed that other claims will not be honored. FBI agents have reportedly moved to seize all assets of current and former Goldman employees. Warrants for the arrest of former Treasury Secretaries Paulson, Rubin, and Summers were also issued.

    President Kucinich's package of policies includes universal and comprehensive debt cancellation. Under the plan, all private debts will be declared null and void. The implications are not immediately clear since delinquency rates have already reached 95% on most categories of debt. Several economists said that the new President was only validating reality, but others argued that it gave legal protection to squatters who have refused to leave their foreclosed homes over the past decade. The global movement for the "Year of Jubilee" had been pushing for such debt relief since the crisis began.

    The policy proposals, which have been dubbed "New Deal 2.0", also include a universal job guarantee that would provide work and wages for the nation's estimated 75 million unemployed. The plan seems to follow a proposal that then-Representative Kucinich had introduced into the House in 2011. Funding for the program would be provided by Washington, but projects would be created and managed at the local level. At the time, Kucinich had argued that the program would "take workers as they are and where they are", providing a living wage to participants and useful public services and infrastructure to their communities. When asked how the government would pay for the program, Representative Kucinich had said at the time "by crediting bank accounts, of course—that's the only way a sovereign government ever spends." However, his bill had failed to get out of committee; it was revealed that large campaign contributions were subsequently made by hedge fund manager Pete Peterson to all committee members who had opposed the legislation—and although he was never accused of wrong-doing, it was long suspected that there might have been a connection.

    President Kucinich also announced a new "Marshall Plan" for war-ravaged Europe, which has descended into near anarchy since the EU collapsed in late 2010. He called on the Italian Red Brigade army to end its siege of Berlin. He promised to begin an airlift of food for Europe's starving millions, to be followed by industrial products to help European nations to begin to produce for domestic consumption. He called for an end to fiscal austerity and argued that since each nation had adopted its own currency with the collapse of the euro, each now had the ability to "spend by crediting bank accounts." Hence, "whatever is technologically feasible is financially feasible."

    Wall Street rallied on the news, with Nasdaq reaching a new high of nearly 250 and the Dow hitting 1150—the highest levels seen since the Great Crash of October 2011. The dollar also rose on the news, to $52 per Chinese RMB. Optimism spread to Japanese markets, with the yen remaining close to 132 per dollar.

    In his statement, President Kucinich said that the long "nightmare" was coming to an end. He struck a conciliatory tone when he responded to a question about the actions of the administration of President Obama in the early years of the Great Depression, which many believe to have set the stage for the Great Crash. "Look, President Obama as well as his successors followed the advice of economists—who continually called for more fiscal austerity, much like the misguided physicians used to bleed patients to death. They were, and still are, clueless. I promise you that I will ban all economists from my administration. I will not seek, nor will I follow, advice from economists." After a decade of suffering over the course of the second Great Depression, the nation breathed a collective sigh of relief.

    The President pointed to the experiences of China, India and Botswana, the only nations to escape the Great Depression. He recalled that just a decade ago, US GDP and the standard of living of the average American were many times higher than those in any of these nations. Indeed, Botswana was widely derided for its policies, which had generated hyperinflation. Yet, each of these countries had adopted a job guarantee and had developed programs that achieved full employment with wage and price stability. And while unemployment rose dramatically all around the globe, these three nations enjoyed full employment and rising living standards—indeed, all three have surpassed the US median real household income level. President Kucinich said that Botswana has offered to send advisors to help get America's fiscal and monetary policy back on track. He proclaimed that the days of misguided fiscal austerity are over, and promised to "spend whatever it takes to get our nation's workers and factories operating at full capacity."

    In related news, a handful of economists have declared their support for President Kucinich's policies. Among them is former Fed Chairman Alan Greenspan, who had recanted his belief in free market economics early in the depression. Over the years he has moved ever further to the left as he embraced reforms ranging from socialized medicine to abolition of private ownership of the means of production. While some economists have dismissed Greenspan's public statements as the rants of "a senile old man" others have noted that the statements have become remarkably cogent in contrast to the testimonies he used to provide as Chairman. An early disciple of Ayn Rand, Greenspan's recent testimonies now include obscure quotes from Marx, Lenin, and Rosa Luxemburg. He has also been calling for the elimination of the Fed, arguing that monetary policy and fiscal policy should be consolidated in the Treasury Department.

     *Disclaimer: Some of the events reported here have not been fact-checked**.
    **Disclaimer: Actually, none of the events reported here has yet occurred, although some are quite likely.

    Disclosure: No positions
    May 26 2:28 AM | Link | Comment!
  • Germany, Greece and Exiting the Eurozone
    Just wanted to share with you an interesting article published by Marco Papic, Robert Reinfrank and Peter Zeihan at Stratfor that explains in good details what are (or rather not) the exit options from the Eurozone:

     

    Rumors of the imminent collapse of the eurozone continue to swirl despite the Europeans’ best efforts to hold the currency union together. Some accounts in the financial world have even suggested that Germany’s frustration with the crisis could cause Berlin to quit the eurozone — as soon as this past weekend, according to some — while at the most recent gathering of European leaders French President Nicolas Sarkozy apparently threatened to bolt the bloc if Berlin did not help Greece. Meanwhile, many in Germany — including Chancellor Angela Merkel herself at one point — have called for the creation of a mechanism by which Greece — or the eurozone’s other over-indebted, uncompetitive economies — could be kicked out of the eurozone in the future should they not mend their “irresponsible” spending habits.

    Rumors, hints, threats, suggestions and information “from well-placed sources” all seem to point to the hot topic in Europe at the moment, namely, the reconstitution of the eurozone whether by a German exit or a Greek expulsion. We turn to this topic with the question of whether such an option even exists.

    The Geography of the European Monetary Union

    As we consider the future of the euro, it is important to remember that the economic underpinnings of paper money are not nearly as important as the political underpinnings. Paper currencies in use throughout the world today hold no value without the underlying political decision to make them the legal tender of commercial activity. This means a government must be willing and capable enough to enforce the currency as a legal form of debt settlement, and refusal to accept paper currency is, within limitations, punishable by law.

    The trouble with the euro is that it attempts to overlay a monetary dynamic on a geography that does not necessarily lend itself to a single economic or political “space.” The eurozone has a single central bank, the European Central Bank (ECB), and therefore has only one monetary policy, regardless of whether one is located in Northern or Southern Europe. Herein lies the fundamental geographic problem of the euro.

    Europe is the second-smallest continent on the planet but has the second-largest number of states packed into its territory. This is not a coincidence. Europe’s multitude of peninsulas, large islands and mountain chains create the geographic conditions that often allow even the weakest political authority to persist. Thus, the Montenegrins have held out against the Ottomans, just as the Irish have against the English.

    Despite this patchwork of political authorities, the Continent’s plentiful navigable rivers, large bays and serrated coastlines enable the easy movement of goods and ideas across Europe. This encourages the accumulation of capital due to the low costs of transport while simultaneously encouraging the rapid spread of technological advances, which has allowed the various European states to become astonishingly rich: Five of the top 10 world economies hail from the Continent despite their relatively small populations.

    Europe’s network of rivers and seas are not integrated via a single dominant river or sea network, however, meaning capital generation occurs in small, sequestered economic centers. To this day, and despite significant political and economic integration, there is no European New York. In Europe’s case, the Danube has Vienna, the Po has Milan, the Baltic Sea has Stockholm, the Rhineland has both Amsterdam and Frankfurt and the Thames has London. This system of multiple capital centers is then overlaid on Europe’s states, which jealously guard control over their capital and, by extension, their banking systems.

    Despite a multitude of different centers of economic — and by extension, political — power, some states, due to geography, are unable to access any capital centers of their own. Much of the Club Med states are geographically disadvantaged. Aside from the Po Valley of northern Italy — and to an extent the Rhone — southern Europe lacks a single river useful for commerce. Consequently, Northern Europe is more urban, industrial and technocratic while Southern Europe tends to be more rural, agricultural and capital-poor.

    Introducing the Euro

    Given the barrage of economic volatility and challenges the eurozone has confronted in recent quarters and the challenges presented by housing such divergent geography and history under one monetary roof, it is easy to forget why the eurozone was originally formed.

    The Cold War made the European Union possible. For centuries, Europe was home to feuding empires and states. After World War II, it became the home of devastated peoples whose security was the responsibility of the United States. Through the Bretton Woods agreement, the United States crafted an economic grouping that regenerated Western Europe’s economic fortunes under a security rubric that Washington firmly controlled. Freed of security competition, the Europeans not only were free to pursue economic growth, they also enjoyed nearly unlimited access to the American market to fuel that growth. Economic integration within Europe to maximize these opportunities made perfect sense. The United States encouraged the economic and political integration because it gave a political underpinning to a security alliance it imposed on Europe, i.e., NATO. Thus, the European Economic Community — the predecessor to today’s European Union — was born.

    When the United States abandoned the gold standard in 1971 (for reasons largely unconnected to things European), Washington essentially abrogated the Bretton Woods currency pegs that went with it. One result was a European panic. Floating currencies raised the inevitability of currency competition among the European states, the exact sort of competition that contributed to the Great Depression 40 years earlier. Almost immediately, the need to limit that competition sharpened, first with currency coordination efforts still concentrating on the U.S. dollar and then from 1979 on with efforts focused on the deutschmark. The specter of a unified Germany in 1989 further invigorated economic integration. The euro was in large part an attempt to give Berlin the necessary incentives so that it would not depart the EU project.

    But to get Berlin on board with the idea of sharing its currency with the rest of Europe, the eurozone was modeled after the Bundesbank and its deutschmark. To join the eurozone, a country must abide by rigorous “convergence criteria” designed to synchronize the economy of the acceding country with Germany’s economy. The criteria include a budget deficit of less than 3 percent of gross domestic product (NYSE:GDP); government debt levels of less than 60 percent of GDP; annual inflation no higher than 1.5 percentage points above the average of the lowest three members’ annual inflation; and a two-year trial period during which the acceding country’s national currency must float within a plus-or-minus 15 percent currency band against the euro.

    As cracks have begun to show in both the political and economic support for the eurozone, however, it is clear that the convergence criteria failed to overcome divergent geography and history. Greece’s violations of the Growth and Stability Pact are clearly the most egregious, but essentially all eurozone members — including France and Germany, which helped draft the rules — have contravened the rules from the very beginning.

    Mechanics of a Euro Exit

    The EU treaties as presently constituted contractually obligate every EU member state — except Denmark and the United Kingdom, which negotiated opt-outs — to become a eurozone member state at some point. Forcible expulsion or self-imposed exit is technically illegal, or at best would require the approval of all 27 member states (never mind the question about why a troubled eurozone member would approve its own expulsion). Even if it could be managed, surely there are current and soon-to-be eurozone members that would be wary of establishing such a precedent, especially when their fiscal situation could soon be similar to Athens’ situation.

    One creative option making the rounds would allow the European Union to technically expel members without breaking the treaties. It would involve setting up a new European Union without the offending state (say, Greece) and establishing within the new institutions a new eurozone as well. Such manipulations would not necessarily destroy the existing European Union; its major members would “simply” recreate the institutions without the member they do not much care for.

    Though creative, the proposed solution it is still rife with problems. In such a reduced eurozone, Germany would hold undisputed power, something the rest of Europe might not exactly embrace. If France and the Benelux countries reconstituted the eurozone with Berlin, Germany’s economy would go from constituting 26.8 percent of eurozone version 1.0’s overall output to 45.6 percent of eurozone version 2.0’s overall output. Even states that would be expressly excluded would be able to get in a devastating parting shot: The southern European economies could simply default on any debt held by entities within the countries of the new eurozone.

    With these political issues and complications in mind, we turn to the two scenarios of eurozone reconstitution that have garnered the most attention in the media.

    Scenario 1: Germany Reinstitutes the Deutschmark

    The option of leaving the eurozone for Germany boils down to the potential liabilities that Berlin would be on the hook for if Portugal, Spain, Italy and Ireland followed Greece down the default path. As Germany prepares itself to vote on its 123 billion euro contribution to the 750 billion euro financial aid mechanism for the eurozone — which sits on top of the 23 billion euros it already approved for Athens alone — the question of whether “it is all worth it” must be on top of every German policymaker’s mind.

    This is especially the case as political opposition to the bailout mounts among German voters and Merkel’s coalition partners and political allies. In the latest polls, 47 percent of Germans favor adopting the deutschmark. Furthermore, Merkel’s governing coalition lost a crucial state-level election May 9 in a sign of mounting dissatisfaction with her Christian Democratic Union and its coalition ally, the Free Democratic Party. Even though the governing coalition managed to push through the Greek bailout, there are now serious doubts that Merkel will be able to do the same with the eurozone-wide mechanism May 21.

    Germany would therefore not be leaving the eurozone to save its economy or extricate itself from its own debts, but rather to avoid the financial burden of supporting the Club Med economies and their ability to service their 3 trillion euro mountain of debt. At some point, Germany may decide to cut its losses — potentially as much as 500 billion euros, which is the approximate exposure of German banks to Club Med debt — and decide that further bailouts are just throwing money into a bottomless pit. Furthermore, while Germany could always simply rely on the ECB to break all of its rules and begin the policy of purchasing the debt of troubled eurozone governments with newly created money (“quantitative easing”), that in itself would also constitute a bailout. The rest of the eurozone, including Germany, would be paying for it through the weakening of the euro.

    Were this moment to dawn on Germany it would have to mean that the situation had deteriorated significantly. As STRATFOR has recently argued, the eurozone provides Germany with considerable economic benefits. Its neighbors are unable to undercut German exports with currency depreciation, and German exports have in turn gained in terms of overall eurozone exports on both the global and eurozone markets. Since euro adoption, unit labor costs in Club Med have increased relative to Germany’s by approximately 25 percent, further entrenching Germany’s competitive edge.

    Before Germany could again use the deutschmark, Germany would first have to reinstate its central bank (the Bundesbank), withdraw its reserves from the ECB, print its own currency and then re-denominate the country’s assets and liabilities in deutschmarks. While it would not necessarily be a smooth or easy process, Germany could reintroduce its national currency with far more ease than other eurozone members could.

    The deutschmark had a well-established reputation for being a store of value, as the renowned Bundesbank directed Germany’s monetary policy. If Germany were to reintroduce its national currency, it is highly unlikely that Europeans would believe that Germany had forgotten how to run a central bank — Germany’s institutional memory would return quickly, re-establishing the credibility of both the Bundesbank and, by extension, the deutschmark.

    As Germany would be replacing a weaker and weakening currency with a stronger and more stable one, if market participants did not simply welcome the exchange, they would be substantially less resistant to the change than what could be expected in other eurozone countries. Germany would therefore not necessarily have to resort to militant crackdowns on capital flows to halt capital trying to escape conversion.

    Germany would probably also be able to re-denominate all its debts in the deutschmark via bond swaps. Market participants would accept this exchange because they would probably have far more faith in a deutschmark backed by Germany than in a euro backed by the remaining eurozone member states.

    Reinstituting the deutschmark would still be an imperfect process, however, and there would likely be some collateral damage, particularly to Germany’s financial sector. German banks own much of the debt issued by Club Med, which would likely default on repayment in the event Germany parted with the euro. If it reached the point that Germany was going to break with the eurozone, those losses would likely pale in comparison to the costs — be they economic or political — of remaining within the eurozone and financially supporting its continued existence.

    Scenario 2: Greece Leaves the Euro

    If Athens were able to control its monetary policy, it would ostensibly be able to “solve” the two major problems currently plaguing the Greek economy.

    First, Athens could ease its financing problems substantially. The Greek central bank could print money and purchase government debt, bypassing the credit markets. Second, reintroducing its currency would allow Athens to then devalue it, which would stimulate external demand for Greek exports and spur economic growth. This would obviate the need to undergo painful “internal devaluation” via austerity measures that the Greeks have been forced to impose as a condition for their bailout by the International Monetary Fund (NYSE:IMF) and the EU.

    If Athens were to reinstitute its national currency with the goal of being able to control monetary policy, however, the government would first have to get its national currency circulating (a necessary condition for devaluation).

    The first practical problem is that no one is going to want this new currency, principally because it would be clear that the government would only be reintroducing it to devalue it. Unlike during the Eurozone accession process — where participation was motivated by the actual and perceived benefits of adopting a strong/stable currency and receiving lower interest rates, new funds and the ability to transact in many more places — “de-euroizing” offers no such incentives for market participants:

    • The drachma would not be a store of value, given that the objective in reintroducing it is to reduce its value.
    • The drachma would likely only be accepted within Greece, and even there it would not be accepted everywhere — a condition likely to persist for some time.
    • Reinstituting the drachma unilaterally would likely see Greece cast out of the eurozone, and therefore also the European Union as per rules explained above.

    The government would essentially be asking investors and its own population to sign a social contract that the government clearly intends to abrogate in the future, if not immediately once it is able to. Therefore, the only way to get the currency circulating would be by force.

    The goal would not be to convert every euro-denominated asset into drachmas but rather to get a sufficiently large chunk of the assets so that the government could jumpstart the drachma’s circulation. To be done effectively, the government would want to minimize the amount of money that could escape conversion by either being withdrawn or transferred into asset classes easy to conceal from discovery and appropriation. This would require capital controls and shutting down banks and likely also physical force to prevent even more chaos on the streets of Athens than seen at present. Once the money was locked down, the government would then forcibly convert banks’ holdings by literally replacing banks’ holdings with a similar amount in the national currency. Greeks could then only withdraw their funds in newly issued drachmas that the government gave the banks to service those requests. At the same time, all government spending/payments would be made in the national currency, boosting circulation. The government also would have to show willingness to prosecute anyone using euros on the black market, lest the newly instituted drachma become completely worthless.

    Since nobody save the government would want to do this, at the first hint that the government would be moving in this direction, the first thing the Greeks will want to do is withdraw all funds from any institution where their wealth would be at risk. Similarly, the first thing that investors would do — and remember that Greece is as capital-poor as Germany is capital-rich — is cut all exposure. This would require that the forcible conversion be coordinated and definitive, and most important, it would need to be as unexpected as possible.

    Realistically, the only way to make this transition without completely unhinging the Greek economy and shredding Greece’s social fabric would be to coordinate with organizations that could provide assistance and oversight. If the IMF, ECB or eurozone member states were to coordinate the transition period and perhaps provide some backing for the national currency’s value during that transition period, the chances of a less-than-completely-disruptive transition would increase.

    It is difficult to imagine circumstances under which such support would not dwarf the 110 billion euro bailout already on the table. For if Europe’s populations are so resistant to the Greek bailout now, what would they think about their governments assuming even more risk by propping up a former eurozone country’s entire financial system so that the country could escape its debt responsibilities to the rest of the eurozone?

    The European Dilemma

    Europe therefore finds itself being tied in a Gordian knot. On one hand, the Continent’s geography presents a number of incongruities that cannot be overcome without a Herculean (and politically unpalatable) effort on the part of Southern Europe and (equally unpopular) accommodation on the part of Northern Europe. On the other hand, the cost of exit from the eurozone — particularly at a time of global financial calamity, when the move would be in danger of precipitating an even greater crisis — is daunting to say the least.

    The resulting conundrum is one in which reconstitution of the eurozone may make sense at some point down the line. But the interlinked web of economic, political, legal and institutional relationships makes this nearly impossible. The cost of exit is prohibitively high, regardless of whether it makes sense.
     

    "This report is republished with permission of STRATFOR"
     

    It appears from this study that there is no good solution, or maybe  worse, none at all.
    www.stratfor.com/weekly/20100517_germany_greece_and_exiting_eurozone



    Disclosure: No positions
    May 21 6:44 PM | Link | Comment!
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