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The euro
crisis has begun to feel like an everlasting steeplechase with high hedges
and water obstacles blocking the path to economic resurgence on the
Continent. Each time a hurdle has been cleared another problem emerges to
potentially block the track. The latest developments involve ugly
anti-austerity riots across the southern tier and open rifts emerging among
the creditors, most notably between the International Monetary Fund and
northern nations. Despite the difficulties, I believe that ultimately the
horse will pass the finish line; the Continent has too many economic bright
spots to simply slip into irrelevance. The big question should be whether the
monetary jockey (the euro) will be thrown off the mount before that happens.
Investors should prepare for both eventualities. But while the race is
ongoing, the uncertainty over the euro currency is galvanizing the push for
full political union of the Eurozone and providing effective camouflage for
the weakness of the world's reserve currency, the U.S. dollar.
Future
historians of the European Union likely will ponder how democratically
elected governments of once proud empire nations willingly surrendered their
sovereignty without full and open discussions. The answer lies in greed and
fear. By 1950, Western Europe had been ravaged by two horrific Continental
wars in 35 years and had been tossed about like a tennis ball in the Cold War
match between the United States and the Soviet Union. In light of the
situation, the impulse for greater European unity and cooperation was
natural.
The key
founders of a united Europe were France and Germany. The French sought
security by attaching themselves to Germany, while the Germans saw an
opportunity for the political hegemony that the two wars could not deliver.
But had the idea of European Union been originally presented as a means to
empower Germany, few European peoples would have accepted it, least of all
the British.
To that end,
Jean Monet, one of the early architects of the Union, is alleged to have
said, "Europe's nations should be guided towards the superstate
without their people understanding what is happening. This can be
accomplished by successive steps each designed as having an economic purpose,
but which will inevitably and irreversibly lead to political union." He
suggested patience in waiting for "opportunities" to progress the
idea. As a Member of the UK Parliament, I witnessed such deception first
hand.
Gradually,
the innocent sounding European Coal and Steel Community (EC&SC) evolved
into the European Common Market (ECM), European Economic Community (EEC), the
European Community (EC) and now the European Union (EU), a budding superstate, dominated by Germany.
In perhaps
one of the most foolhardy moves in recent decades, the euro currency was
launched in 1999, long before the political or fiscal unification had taken
hold in earnest. In retrospect, the creation of a currency in the absence of
a unified state with coordinated fiscal policies seems doomed to failure. And
failing it appears to be.
With each
stumbling block, the invariable solution offered has been increased political
integration and austerity. On November 7th, German Chancellor Angela Merkel
flew to London apparently to 'persuade', if not compel, Prime Minister
Cameron to tone down or delay his objections to increased EU budget
expenditures. She felt so confident that, for the first time, she exposed the
covert plans for the European Superstate.
According to
the UK Telegraph, Merkel said, "Of course, the [unelected] European
Commission will one day become a government, the [unelected] European Council
a second chamber and the European Parliament [which currently has no
effective power] will have more powers."
Clearly, a
failing euro provides all the ingredients needed to knock down barriers to
unity. As evidenced by massive public demonstrations in Portugal, Italy, Greece
and Spain, the southern tier is desperate for rescue funds. In order to
preserve bloated pensions and early retirement, many citizens would gladly
accept lost sovereignty.
The failure
of the euro also has provided cover for the severe debasement of the U.S.
dollar. Prior to the crisis, the euro had established itself as the world's
second currency. Its threatened failure has resulted in massive flights of
capital into U.S. dollars. The result is that the colossal currency and debt
crisis threatening the U.S. dollar and Treasury markets has been largely
obscured. Today, most investors appear to be blissfully unaware that the
United States faces debt problems that are worse than many countries in
Europe.
However, if
European politicians are successful in imposing the political unity needed to
save the euro, money will flow out of the U.S. dollar. Alternatively, should
the euro fail, other currencies such as a
reconstituted Deutsche Mark could rise in its place. Either way, a resolution
of the euro problem likely will signal a weaker U.S. dollar and higher
interest rates.
Those
investors who are overweight in U.S. Treasuries (or the government securities
of other debtor nations) could likely suffer when either resolution is
reached. Investors should prepare by acquiring assets that will stand and
fall on their own merits. Being the least ugly contestant at a beauty pageant
is not a strategy for long term success.
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