It’s make or break time for the eurozone.
Again.
Stop yawning at the back there. Seriously, this time it’s really important. The International Monetary Fund (IMF) says so. And our own chancellor, George Osborne, is warning the Europeans to “get a grip”.
Even Barack Obama has been on the phone to Angela Merkel. Although given that the US is on the verge of defaulting on its debt too, she might have told him to clean up his own backyard before complaining about the state of hers.
Anyway, apparently the French and the Germans have agreed on a solution to the crisis. We’ll find out all about it later today after Europe’s leaders have all had their latest chinwag in Brussels.
But whatever their cunning plan happens to be, I can tell you now that it’s not going to work…
There is no palatable solution to this crisis
“We have found solutions to previous crises and we’ll find a solution now as well”, said French foreign minister Alain Juppé, according to the FT.
Well, now, that’s not really true, is it Alain? The reason this crisis has erupted is because you didn’t find solutions to the previous ones. If you had, then we wouldn’t still be rattling on about the eurozone nearly two years after Greece first blew up.
All the previous ‘solutions’ were fudges, and whatever comes out of the meeting today is almost certain to be a fudge too. Depending on the precise nature of the fudge, the market may cheerfully lap it up for now, or it might see through it right away and sell off heavily.
But whatever happens, this crisis is not going to end today. In fact, I think this will end in a panic: what the pundits like to call a ‘disorderly’ resolution, rather than an ‘orderly’ one.
As I’ve said before, this isn’t because I have some blind pathological hatred of the European project, though I’m not a fan of it either. It’s because all of the solutions that would draw a convincing line under this mess are unpalatable to at least one or more powerful parties involved.
There are three basic solutions. The first is ‘extend and pretend’. You sweep everything under the carpet, and hope that, given enough time, Greece gets its act together. This is what everyone has been trying to do. It has failed miserably. Greece isn’t going to be able to repay its debts, regardless of how much extra time it gets.
Despite that, this is what today’s fudge will probably consist of, whether it’s about buying bonds with the European Financial Stability Facility (EFSF), or a ‘voluntary rollover’ of Greek debt, or even a ‘bank tax’ designed to help fund a new Greek bail-out.
The big problem with this option is that it doesn’t really provide a solution for the ‘too big to fail’ countries, like Spain and Italy. There simply isn’t enough money in the eurozone to stand behind all that debt, which is why the fear is spreading.
The second solution is for the European Central Bank to print money and buy the debt of any country that’s struggling: quantitative easing euro-style. Or you can issue joint eurozone bonds, backed by the full faith and credit of every country in the eurozone.
What would this mean? It would mean a much weaker euro. It would mean rich countries – let’s call them Germany – would pay a tax in the form of either inflation (in the QE option) or higher borrowing costs (in the joint bond option) in order to repay Greece’s debts. Markets would no doubt rebound, but in the long run this would also send the gold price soaring.
This would also inevitably require closer political integration. Because this is the equivalent of giving Greece a free pass to spend what it wants. No one would be happy about that. So you’d need to have some sort of central body actively dictating economic policy.
But it’s hard to see how that would work. There were already economic ‘rules’ on debt in place that European countries (including us) are meant to stick to. They haven’t of course. And what sort of sanctions can you threaten a country like Greece with? You can’t toss them out of the euro, because that’s what you’re trying to avoid in the first place.
The logical conclusion is that you have to have a central European policy-setting and tax-collecting body with serious enforcement powers that supersede sovereign governments and their citizens. That’s going to be a hard sell to the voters, to say the least.
Why not throw Greece out?
So what’s the third option? Well, you evict Greece, and maybe some of the other countries too. You make sure everyone who needs to know, knows that it’s going to happen. You prop up the banks that need to be propped up, and you throw Greece to the wolves. The other problem countries get the message, redouble their efforts to reform their economies, and the euro survives, stronger than ever before.
This might seem the most sensible route. After all, some of these countries should never have been in the euro in the first place. But there’s a problem here too, which again comes down to politics.
If Greece is chucked out, or allowed to leave the euro, it puts the whole project of closer political union under threat. Because if you establish a mechanism by which one country leaves, then others can do the same thing.
The fact is, lots of people don’t like the idea of being part of a United States of Europe. After all, any time they allow citizens to vote on it, they have to insist on at least two referendums before the voters make the ‘right’ choice. If you show the voters an exit door from the euro, then that strengthens the ‘no’ camp in every member country.
So the real fear among the ‘elites’ is not a ‘Lehman’ moment. It’s the worry that if you kick Greece out, every other euro member will want to follow.
What does this mean for you?
This is the very definition of being caught between a rock and a hard place. There are no good options here. That’s why I suspect the choice will be made for politicians in the end. Because a genuine crisis will erupt, and something will have to be done.
What should you do? I’d build up a watch list of stocks you’d like to buy for a start, particularly in the eurozone. When a panic comes, it’s handy to know exactly what you want to ‘buy on the dips’ so that you can take advantage.
I’d stick with gold – it might be due a correction, but this turmoil could also send it much higher in the long run. And I’d stick with our usual defensive stocks: they’re best placed to cope with all this.
We also still like Japan – you can find out more on why in the next issue of MoneyWeek magazine, out tomorrow, where James Ferguson gives his view on why now’s the time to buy. If you’re not already a subscriber, subscribe to MoneyWeek magazine.
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