“The real question is who will get the Euro if the wish-bone snaps”

By jturbin | August 7, 2012 10:24 PM IST

While financial tensions in Europe have eased considerably in recent weeks, the fundamental problems of over-indebtedness and the presence of a monetary union with no fiscal union remain completely unsolved.  As a result, the sovereign debt crisis is likely to remain at the forefront of investors’ concerns in the weeks and months ahead.

One notable investor who has continued to discuss the flaws in the approach of euro zone officials in Dr. John Hussman, founder of The Hussman Funds.  In his latest weekly market comment, entitled Erasers, Hussman noted that “My impression regarding the Euro remains unchanged – liquidity will not durably counter insolvency, and the solvency problem among peripheral European countries is too great to be addressed without debt restructuring.”

“ECB purchases of distressed sovereign debt would most likely have to be permanent purchases, and would therefore represent a fiscal transfer at the expense of stronger countries that would prefer to use the proceeds of money creation for the benefit of their own citizens,” he added. “Doing those purchases indirectly – the ECB buying the debt of an ESM with a banking license, and the ESM buying distressed debt – does not change the arithmetic. Very reasonably, Germany is only willing to mutualize the debts of its neighbors if it can exert centralized authority over their fiscal policies – in Angela Merkel’s words ‘liability and control belong together.’ But while Europe is geographically united, it is culturally and politically diverse, and a surrender of national sovereignty to the required extent is unlikely.”

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Hussman went on to say that “As a result, the Euro is likely to be pulled apart, and the tensions will probably be greatest across geographic and socioeconomic fault lines.  From a geographic perspective, Finland (which insists on good collateral even for EFSF actions) and Italy (where popular sentiment against the Euro is strongest) have the greatest divide. From a socioeconomic standpoint, Germany (which is strongly anti-inflation and more oriented toward free enterprise) and the southern European states of Greece, Italy, Spain and Portugal (which have high debt ratios, heavily socialized economies, and very fragile banks) seem to be the furthest apart.”

Lastly, he contended that “The real question is who will get the Euro if the wish-bone snaps – the stronger more solvent states, or the weaker more inflation-prone states. Until the answer is clear, it will be difficult to anticipate the future direction of the Euro’s value. I would expect the least amount of systemic disruption in the event of an exit from the Euro by the stronger European countries, but that would also be associated with the maximum amount of Euro depreciation as the remaining members are left to inflate as they (and the ECB) please.”

This article is contributed by Gold Alert and does not represent the views or opinions of International Business Times.
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