The Euro is doomed and will definitely fail. This analysis focuses on the economic and monetary fallout from the event.
The Euro collapse is inevitable; only the timetable is uncertain. This analysis focuses on the economic and monetary fallout from the event. I am not an expert in the political side of things, so I leave that analysis for those who know better than I.
Today’s article will focus on the Top and Bottom of the Euro table; at the top is Germany, with France a solid number 2. At the bottom of the table are the PIIGS.
This is not intended to be an in-depth analysis. I don’t have the patience to read that, let alone write it. This is just a first-blush analysis with a good deal of thought behind it.
On thing to note: the big banks in Europe are insolvent right now, but are pretending not to be with the cooperation of the ECB and the collaboration of all bankers. When the Euro fails, the gloves will come off and these bankers will devour one another. Few if any will survive intact and – yes – it will affect the US as well.
Germany: We start with Germany because it is the engine of Europe. When the deutschmark is re-introduced, Germany will plunge into a fairly sharp recession due to the strength of their (fiat) currency; it will be the strongest in the developed world. A strong currency translates into plummeting exports and rising imports. (Goods priced in deutschmarks will be expensive relative to goods priced in other currencies.) The recession will be intense, but won’t be long if German leadership doesn’t panic and do something stupid. Germany’s industrial and manufacturing strength are the key to their survival and ultimate ascendancy. Additionally, Germany has a surplus in their social support programs, so the country will be able to ride out the recession with minimal pain.
Greece: Sovereign default and back to the drachma. Depression. No exports to speak of, plus the salad days of socialism will be over. Greek sovereignty will likely be challenged by their stronger neighbor to the east, (Turkey), though this will come to little. (The Turks aren’t stupid enough to piss off the entire western world.) Not much hope for a good outcome for decades here, unless you want to buy a Greek Island. Greek real estate will be pretty cheap on a relative basis for a long time to come. On the other hand, the Greeks will be out from under the thumb of their European overlords, (and back under the thumb of their domestic overlords, where the progenitors of democracy belong.)
Largest banks at risk and likely to fail will be National Bank of Greece and Alpha Bank.
Spain: Back to the peseta. Sovereign default, if it hasn’t occurred before the failure of the Euro, will definitely occur afterwards. Major banks to fail will be Depression, massive unemployment and civil unrest. This may be the opportunity the Basque separatists seize to finally gain independence. The Spanish government may let them go just to shrink the size of the mess they have to deal with. Of course, France will get involved somehow. Hard to see how that ends well. Not much in the way of exports to offer the world, although I expect the Spanish, Portugese and Italians to play a little nicer with each other than the rest of the Eurozone will. Better than Greece, but that’s not saying much – and political instability to boot.
Largest banks at risk and likely to fail will be Santander and BBVA, both of which also have a presence in the US consumer market.
Portugal: A big platter of suck. Sovereign default. A smaller version of Spain. Back to the escudo. Exports? Bah. They’ve got sunshine, wine and beaches – just like Spain and Greece. Depression, not much to look forward to. Will be dependent upon either innovation internally or growth from the rest of Europe to get pulled out of the hole.
Largest banks at risk and likely to fail are all of these.
Italy: The oldest country in Europe, (demographically), has tons of experience with failure. Deep recession/mild depression. The lira will be in the middle of the pack in terms of “new/old” currencies. The religious/historical ties of Italy will keep the tourists coming, particularly since it will be relatively less expensive. Older Italians will suffer brutally. But this will be old news to Italy. They’ve had more governments in the last 65 years than all the rest of the Eurozone combined.
Largest banks at risk and likely to fail are Unicredit and Intesa Sanpaolo.
Republic of Ireland: They’ve got a head start on the rest the Eurozone in regards to default, since their banks have already gone belly up. They’re in their second year of recession and the collapse of the Euro likely won’t make it much worse. Will they reintroduce the Irish Pound or do something else? Don’t know and doubt it will matter. I think the Irish will be more pragmatic than the rest of the PIIGS. Not a lot of industry to pull them out of recession, but they’ll be aggressive in pursuing new opportunities. Ireland will continue to be attractive due to an educated populace and a perception that they’ll be one of the first to emerge from the doldrums.
Irish banks have already taken their medicine – mostly – and the mood in Ireland is ugly toward the banks. (Hooray for the Irish!) An Irish sovereign default actually will damage the Greek banks most – assuming there are any left. I consider the likelihood of Irish banks failing (any more than they already have) relatively remote.
France: Back to the Franc, which will be slightly less strong than the deutschmark and paradoxically will allow France to be a little stronger initially than Germany. Unlike Germany, though, France’s social safety net is not nearly as strong, and its manufacturing base is weaker. France will be quick to erect additional trade barriers because that is what the French do. This step will actually harm their neighbors Spain, Portugal, France and Belgium and will prolong the downturn. France is in love with socialism, and I expect intense social unrest when it becomes clear that there is no money to fund the good socialist life any longer. France will be in recession/depression for much longer than Germany, but not as long as the southern countries.
Sovereign default is unlikely, but big banks like Soc Gen and BNP Paribas will likely be nationalized.
Next time, I’ll look at the effects of the euro collapse on the “middle of the table” countries in the Eurozone.