I have long proclaimed that Europe has but two choices – collapse or full unification (I think unification is the more obvious direction). After all, the only way to resolve the inherent flaw in the union is to create autonomous monetary states (or state). Collapse simply isn’t an option in my opinion as the banking crisis that would unfold in its aftermath would ripple across the entire region. Too much progress has been made in the EMU and I still maintain that a fully unified EMU could be one of the truly great economic progressions of the last 100 years.
It looks like this idea of unification is slowly gaining some traction (see here for more). George Soros was interviewed by Der Spiegel today saying there is no other way than to implement Eurobonds:
“SPIEGEL: What, then, needs to be done to fight this crisis?
Soros: I think there is only one choice. It is not a question of whether Europe needs a common currency. The euro exists, and if it were to break apart, all hell would break loose. Germany has to make it work. To make it work, you have got to allow the members of the euro zone to be able to refinance the bulk of their debt on reasonable terms. So you need this dirty word: “euro bonds”. But when you study what it involves to have euro bonds, you really have a problem because each European country remains in control of its own fiscal policy, and you have to rely on the country to meet its financial obligations.
SPIEGEL: Germans hate the euro bonds idea. They fear that under this scenario they will ultimately need to bail out everyone, even large nations like Italy.
Soros: That is why you need to establish fiscal rules that will ensure the solvency of every member. This should make the euro bond acceptable to German voters. Europe needs a fiscal authority that has not only financial but also political legitimacy. The difficulty is agreeing on the rules. Unfortunately, Germans have some funny ideas. They want the rest of Europe to follow their example. But what works for Germany can’t work for the rest of Europe: No country can run a chronic surplus without others running deficits. Germany must propose rules that other countries can also follow. These rules must allow for a gradual reduction in indebtedness. They must also allow countries with high unemployment, like Spain, to continue running cyclical budget deficits until they recover.”
This has the potential to be enormously bullish. Eurobonds are the bazooka I keep discussing. The only problem is, Germany still appears hesitant about the move towards Eurobonds. So the only question left is whether Europe willingly accepts Eurobonds or the markets force them to act. The risk in waiting is that the turmoil in the global economy intensifies as Germany fiddles around with something that now appears inevitable. Germany may very well hold the key to whether a global balance sheet recession turns into a global recession. Let’s hope they don’t take a chapter from the American Central Bank’s playbook by being reactive to crisis when they have the option of being proactive.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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