Thoughts from the Frontline

Could the Eurozone Break Up?

By John Mauldin

June 17, 2011

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Could the Eurozone Break Up?
The EMU Has Always Fallen Short…
Surely a Break-Up Remains Inconceivable?
Has it Really Come to This?
Kiev, Geneva and London

Is it possible for the Eurozone to break up? It was so inconceivable when they formed it that there is nothing in the treaty that mentions a member leaving or being removed; but now, if we’re to be honest with ourselves, we need to think about how that would work. This Friday finds me in Kiev for the first time ever, with my youngest son, Trey; and the small tour we went on last night was fascinating. Since I know not if I will ever get to this fascinating city again, I am going to write a briefer missive than usual, and it will center on my thoughts on Europe, as I have just had the pleasure of the company of a number of very diverse people, talking about the issues. Nouriel Roubini has graciously agreed to allow me use his latest private piece (very powerful analysis here), where he analyzes the question of whether the Eurozone could actually break up, so you will get the usual solid content (OK, maybe a little better), with my notes at the end. And I’ll close with some thoughts on Kiev.

But first, a quick fix. In last week’s fascinating Outside the Box by Pat Cox on the state of stem cell technology, which you really should read, there was a link to Lifeline Skin Care cream that was faulty. It should have been http://www.lifelineskincare.com.

Could the Eurozone Break Up? Possible Over a Five-Year Horizon

By Nouriel Roubini

The current “muddle through” approach to the eurozone (EZ) crisis is not a stable disequilibrium; rather, it is an unstable disequilibrium. Either the member states move from this disequilibrium toward a broader fiscal, economic and political union that resolves the fundamental problems of divergence (both economic, fiscal and in terms of competitiveness) within the union…

…or the system…

Discuss This

6 comments

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Comments

George Blackburne

June 25, 2011, 7:26 p.m.

Greece has many small islands.  They have borrowed and spent money like drunken sailors, and they have rioted in opposition to the sacrifice required to repay their loans.  Make them cede territory - maybe some tiny, inconsequential island suitable only to graze sheep - to the ECB in return for this latest bailout.

It’s an intentional affront.  Germany was forced to cede territory after it failed to make reparations payments after World War I, so there is precedent.  The message will be sent to the Irish and the Spanish that, hey, we will chip away at your territorial boundaries if you thumb your noses at us.  I am talking about a tiny island - maybe one worth 500,000 Euro’s in return for a 12 million Euro bailout.

It’s the message that’s important.

Charlie Lambert

June 20, 2011, 1:03 p.m.

While the rational answer might well be for Greece to back out of the EU, Nourabini ignore the strong emotional desire to eliminate the possibility of yet another European war.  That emotion provides a very strong glue on both sides.

I think the scenario will be that the EU first punishes Greece as best they can, then the ECB takes over Greece’s sovereign debt and ‘reprofiles’ it in such a way as to avoid triggering bond default clauses.

The mystery is how the EU and ECB will get there.  Unfortunately, the article sheds no light ...

David Champeau

June 18, 2011, 8:24 a.m.

just came back from a week in Italy. All my friends there said the same thing, “no one is spending any money.”

Credit-based monetary systems, low immigration and aging populations will lead to that. No borrowing = deflation.

The comment about just letting the Greeks figure it out is interesting. The probable reason that they cannot is the domino effect that Greek defaults would have around the world. The interlaced global economics cannot allow even the smallest of countries (or medium to large states in the US) to default without a domino effect. Maybe Afghanistan or Burma could get away with it but not a developed country.

Watch for the sequel in the US very soon. Calif, Ill, NJ, etc all lined up in the default aisle. Will they secede? We have language in our Constitution for this. LOL

scott grider

June 18, 2011, 5:44 a.m.

boatman says:

always appreciate your words,john.

EU breakup is one gray swan that is inevitable…..the ‘swan’ part is just ‘when’.....probably the straw that breaks the weak world economy’s back.

the end of the great experiment in financialized credit(and everything else) and fiat currency, coincides with peak oil and ‘carbon credit’(there’s that word again) wackos.

soon, we will remember this summer as ‘the good old days’

we’ve had our QEx equity bubble….hope everyone got some of it.

P/E ratios and valuation irrelevant now.

buckle up and place your bets.

Charles Breese

June 18, 2011, 2:51 a.m.

The link to the Pat Cox material does you no credit - whilst the underlying theme is fascinating, the style of delivery is in your face/time consuming marketing. Agora should find a more intelligent way of marketing to your readers rather using their standard approach! For example, a video interview with Mr Cox about one company could be vastly more interesting and achieve a better outcome for Agora.

Frank Rockwell

June 17, 2011, 4:08 p.m.

I think Figures 1 & 2 are duplicates.

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