Special Report: The Upcoming Death of a Dream; The Inevitable Collapse of the Euro Currency within this Decade — Written by Simon F. Waslander.
Special Report: The Upcoming Death of a Dream; The Inevitable Collapse of the Euro Currency within this Decade
Written by Simon F. Waslander.
Original article: 6th October 2021.
Update: 1st of November 2022
Introduction:
The Euro currency is much more than a simple unit of exchange but at the time of its introduction in policy planning as early as 1992 in the Maastricht Conference. The Euro was the most audacious attempt to solidify a union of very culturally different member countries within the European continent.
The continent had been ravished by two world wars in the 20th century. The Eurozone federation is believed by its proponents to be the only viable long-term hope of keeping the European peninsula free of military conflict.
In this regard, the solidification of the economic bloc with a single unified currency was and is seen as the ultimate stepping stone to the formation of the European Super Federation.
Sadly this greatest of monetary adventures was doomed to fail from its very conception.
In this article, I will be writing about a long-term prediction which in my view is an inevitability over a timeframe of roughly a decade.
Cultural Differences:
The greatest and most obvious barriers to the formation of a super federation in Europe are the massive cultural differences amongst its member states. Especially the rough divide between the Nordic member states consisting of Germany and the Netherlands and the Southern countries now famously and derogatorily dubbed the “PIIGS” countries of Portugal, Ireland, Italy, Greece, and Spain.
The basis of the impossible Herculian task lies in the fundamental religious aspects of the Nordic vs PIIGS. Nordic countries are highly influenced by Calvinism, which puts profound emphasis on ‘hard work’, savings, and investment caution. In contrast, PIIGS countries put less attention to these aspects.
Long-term these deep-rooted cultural aspects create a societal divide which translates into large governmental policy divergences. This given enough time as we have experienced in the two decades of the Euro currency’s inception creates completely insurmountable differences in the fiscal condition of Nordic vs PIIGS countries.
Thus the root of the entire drama to unfold in the coming decade in the European continent can be traced to religious and cultural aspects.
PIIGS are Hopelessly Trapped in Debt.
Something that was never supposed to have come this far was the accumulation of overall debt in the Eurozone constitutes. The Maastricht Treaty of 1992 clearly stated a maximum debt level of 60% and budget deficits of no more than 3%.
The end results over a two-decade period due to chronic mismanagement both in the local country political level and in Brussels. Has been the fact most Eurozone countries have higher debt levels than what is allowed. To make the matter even worse PIIGS have debt levels surpassing the symbolic 100% Debt-to-GDP ratio which entails a point of no return where long-term repayment of debts in non-adulterated real-terms simply becomes impossible.
Simply the debt levels amongst the PIIGS will lead to the demise of the single currency.
The European Central Bank: When the Lender of Last Resort becomes the Only Lender.
Predictions of the collapse of the Euro currency have been made by so many varied experts in the past decades. Only for none of it to come to pass. However, this does not mean that the inevitability of these predictions is invalid.
Let us not forget that the very scenario of a Euro collapse was front and center news in 2011.
At the time the European Central Bank (ECB) stepped in and with massive bond purchasing programs was able to lower the PIIGS vs German yield spreads.
The problem is that bond purchases can not be stopped without the yield spreads surging. With debt at inescapable black hole levels in PIIGS countries. The ECB support which was to be only temporary has become as essential to the survival of the Euro as oxygen to a Covid patient in an ICU.
Stagflation: The Catalyst that will Destroy the Euro within 10 Years.
With the Eurozone suffering record inflation of more than 10% and core CPI at 5%.
Even with the enormous rise in the long-term interest rates of Bunds and Dutch government bond yields. The real interest rate in the region as measured by Bund-Inflation spreads is at a record and truly massive -7.9%
The Dutch Government has Already made Secret Preparations for a Eurozone Collapse
“De Tweede Kamer mag binnen enkele weken zien welke geheime scenario’s er klaarliggen op het ministerie van Financiën voor het geval er een noodsituatie ontstaat rond de euro. Een aantal Kamerleden heeft daarop aangedrongen, nu de economische situatie zeer onzeker is geworden.”
Translation:
Within a few weeks, the House of Representatives can see which secret scenarios are ready at the Ministry of Finance in case an emergency arises around the euro. A number of MPs have urged this, now that the economic situation has become very uncertain.
Eurozone Assets will Severely Underperform in a Decade-Long Period.
Already we are seeing underperformance of Euro-based assets. If my prediction would be even remotely right, Euro assets will severely underperform in real non-Euro-denominated terms. In short, Europeans will lose purchasing power on a real international level. The political power of the continent will also decrease.
The collapse of Eurozone assets, when measured in US Dollars, has been staggering as measured via the German $EWG and Dutch $EWN dollar-denominated indices.
This trend will only continue for the coming years. The $EWG and $EWN are both down a whopping 39% in less than a year.
This bodes very badly for the region’s prime sector which is real estate. Which I expect to go into free fall in due time
Conclusion
The Euro currency will continue its free-fall eventually with targets as low as $0.8 on the multi-year horizon. Eventually the Nordic countries will opt to leave the Euro and return to their own domestic currencies.