Outside the Box

The Euro Debate Gets Philosophical

John Mauldin

December 6, 2011

Europe is rapidly approaching the denouement, the Endgame, of its currency experiment. The outcome is not clear, at least to your humble analyst, as the debates rage and there are huge pluses and minuses the 17 nations must decide upon. But the proverbial road down which the can is tumbling and clattering, kicked along haphazardly, is coming to its end, and soon a rather sharp turn, either to the left or to the right, will be required. Let us hope they choose wisely.

Today's Outside the Box is a rather philosophical debate between my friends at GaveKal, which they have graciously shared with us. It is important to note that Charles Gave, Louis-Vincent Gave and Francois-Xavier Chauchat are French. Louis served in the French army, studied at Duke, and has lived in Hong Kong for over a decade. Charles (his father) is the quintessential French patriot and patrician right from central casting, whose voice has the authority of God. Anatole Kaletsky is supremely British and one of the most influential economic thinkers in Europe. He is Editor-at-Large and Principal Economic Commentator of The Times, for which he writes a thrice-fortnightly column on economics, politics, and financial markets. These are Europeans vigorously debating the European future as only good friends can.

What we have is an email exchange among them on the future of the euro and the inherent philosophical tensions that are faced by European leaders. I have read it three times and will read it several times more. (Do not feel bad if you need Google to keep up with some of the references. When Anatole refers to Sedan, for instance, he is not talking about cars but a major battle the French lost to the Germans in 1870. Interesting Wikipedia page for you history buffs.)

Let me give you a taste, from so many great lines. Here's Louis (who I will see Monday in Dallas – more below):

"Above, Charles focuses on the philosophical hurdles to any mass intervention. And while I subscribe to Charles' reading of the German institutional framework, my concerns are far less intellectual and far more practical. Basically, we have to remember that the average sovereign debt buyer is not a hazardous investor. The guy who buys a government bond is looking for a very specific outcome: he gives the government 100 only so he can get back 102.5 a year later. That's all the typical sovereign debt investor is looking for. Nothing more, nothing less.

"But now, the problem for all EMU debt is that the range of possible outcomes is growing daily: possible restructurings, possible changes in currencies, possible assumption of other people's debt, possible mass monetization by the central bank etc. Given this wider range of possible outcomes, and the consequent surge of uncertainty, the natural buyer of EMU debt disappears. Again, the typical sovereign investor is not in the game of handicapping possible outcomes; he is in the game of getting capital back!

"... Even if the Bundesbank did agree to monetization (which is hardly a foregone conclusion), the window for this to work may now have closed."

I will be with Louis and Anatole this coming Monday morning in Dallas at a seminar for money managers and accredited investors. If you would like to attend, drop me a note and I will get you an invitation.

And you can find out more about GaveKal consulting services and funds at www.gavekal.com.

What fascinating times. What an interesting period in which to live. And don't we all want to get through this and have more certainty, in place of the roller-coaster ride we are now on? I will be glad to get back to long-term investing, but in the meantime we should appreciate the fascinating spectacles. It will make for interesting stories to tell our grandkids. Have a great week, and in the midst of spectacle enjoy the holiday season.

Your amazed to finally see it all happening analyst,

John Mauldin, Editor
Outside the Box

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The Euro Debate Gets Philosophical

GaveKal
Nov. 29, 2011

Anatole: Clausewitz, the Prussian military theorist, said in his reflections on the Napoleonic period that “war is the continuation of policy by other means”. If so, then it would seem that Germany is again at war with Europe; at least in the sense that German policy is trying to achieve in Europe the characteristic objectives of war: the redrawing of international boundaries and the…

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Duncan Hume

Dec. 7, 2011, 12:47 a.m.

So it boils down to this, either enforce draconian austerity and bankruptcies which will be most unpleasant for many people or; print money (using the new name of Quantitative Easing) which will ultimately debase the currency which will be most unpleasant for many people. If Europe goes austerity and North America hyper then we will have a real time comparison of each road as an example for future generations.

Cathy Boirac

Dec. 6, 2011, 11:27 a.m.

What a thrilling debate.

Just a small nuance, from a “suffering Euro country like Spain”. The traditional parties did no attract 95% of the votes. Here in Spain we have been “suffering” since many years a bi-party system between the Socialist Pary (PSOE) and the Conservative Party (PP).
And for the first time, although the PP has won the november 20th general elections with 44,62 % of the votes, many small parties have gained votes, although due to the d’Hont system they have not gained their proportional representation in Parliament. Here you will find all the figures http://www.elmundo.es/elecciones/elecciones-generales/

And one question. If Germany is on a warfare against the Euro (I had thought of that but of course did not have the knowledge to express it as you do) and warfare is to redraw international boundaries and subjugate foreign people, would not Germany “lose” in the end, if we think that Germany is THE winner on the EEC/EU export markets since many decades. What advantage would Germany have of -say - Spain out of the Euro zone?
Cathy (Madrid, Spain)

Greg Webbink

Dec. 6, 2011, 9:16 a.m.

GaveKal should stick to finance.  This is a political diatribe bringing out the undying pomposity of the remaining grandeur-delusional French.  The root cause of the Euro-crisis - namely, lack of a mechanism to effect fiscal discipline - is completely ignored by these Messieurs.  The Germans know that even they don’t have the surplus to “cure” the fiscal hemorrhaging of the fiscally irresponsible EU members, of which dare I say France might be one.  For the benefit of all of Europe, they need to address this root cause.  Even in addressing it, it’s not a foregone conclusion that the Germans will dictate the result, but Merkel (and probably Sarkozy) know that this is the only way to avoid a worse disaster.

The historical references give the article away as a political, not financial, expression.  And as regards Sedan, there is a history that precedes it of France marching through whatever German principality at will with Sedan being the result of a war that France declared on Prussia because it was ticked that the Spanish invited a Hohenzollern to occupy its vacant throne leaving Louis Napoleon Bonaparte’s (Napoleon III’s) feelings hurt.

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