In 20 years' time, if events continue along their natural course, the euro currency will be long gone from this world, and an entire generation will have missed out on Europe's nondescript pastel bills.
How we got here
The euro has been a disaster waiting to happen for a long time. In fact, the concept of the euro doesn't even pass the common-sense test. Historically, Europe just isn't a place that likes to cooperate.
Consider, for example, the numbers in this 2000 survey on how Europeans see themselves. Before we get to the specifics, remember the context. It's the year 2000, Europe's GDP just grew a remarkable 4%, European integration is seemingly going well, and France just hosted and won the World Cup. It's a high water mark for friendly relations across Europe.
Even against this optimistic backdrop, only in Luxembourg (and really, who cares about Luxembourg?) did more than 15% of the population put Europe ahead of their nationality. Foreshadowing what was going to happen over the next 10 years, more than 60% of the populations in Spain and Greece told researchers that they felt no affinity for Europe.
Yet politicians forged ahead, pushing the Greeks, Spanish, German, French, Irish, and more into a political and economic union. To assure the economic stability of this motley group (save your hate mail; that's a compliment), participants signed the Maastricht Treaty, establishing strict guidelines for how governments were to administer finances. Foremost among these were stipulations limiting a government's annual deficit to no more than 3% of its previous year's GDP and limiting total debt to less than 60% of GDP. In the event these terms were not achieved, violating countries needed to demonstrate that they were making steady progress in achieving them.
Fast-forward 10 years
This all sounds well and good, but a disturbing number of EU members now find themselves in financial disarray, led primarily by Greece and Spain. How did this happen? As The Wall Street Journal recently reported, it's because Greece was allowed to fudge its financial results. One of the more egregious transgressions was the failure to book $2.2 billion of defense spending in 2001. Europe was either unwilling or unable to audit Greece's results and enact change to head off the current catastrophe (Greece's debt today is 113% of GDP).
Why the total lack of oversight?
First, since most of the EU members were running afoul of their agreed-upon financial guidelines, calling attention to one outlaw likely meant calling attention to them all -- and that would have been embarrassing. Second, as long as euro zone economic growth continued apace, many of the budget ills could be masked by sovereign debt sales and gradual revenue-raising measures. Third, the big goal of European integration caused political leaders to ignore some of its more troubling details. Just as politicians in this country considered homeownership a worthy enough goal to compromise underwriting standards, many European elites believed the creation of a political and economic rival to the United States was worth the inevitable pains it might cause.
Those pains now threaten the EU's currency, and it's unclear if people in Germany, Greece, and elsewhere feel enough affinity for Europe to do the hard work to save it.
Signs of the Eurocalypse
It's on the margins where the most fun is taking place (consider this magazine cover where Germany literally gives Greece the finger), but there's a significant amount of resentment in the mainstream as well. Greece's Deputy Prime Minister, for example, has suggested the country's financial issues stem from Nazi Germany's World War II occupation, while two high-ranking German politicians advised Greece to sell some of its islands to pay down its debt (as we all know countries love it when you discount their territorial sovereignty 65 years after occupying said territory).
To get back within spitting distance of the EU's fiscal requirements, the Greek government will need to enact painful austerity measures (reduced spending, higher taxes) in the name of a cause that most Greeks seemingly do not support. Similarly, some two-thirds of Germans are reportedly opposed to bailing out Greece of financial crisis. So if the Greeks aren't up to the task and the Germans don't want to save them, who will?
More ominously, Greece isn't the last domino to fall. Spain will run a deficit of almost 10% of GDP this year (again, 3% is the target), its unemployment rate is near 20%, and its people aren't exactly attached to Europe as an ideal.
How it ends
One solution for the debt crises in Greece and Spain is for the European Central Bank to devalue the euro. This, however, would precipitate significant price increases across Europe that would crush already-pressured European consumers and prompt more transcontinental resentment.
Failing that, Europe could hang together, keep selling bonds, and hope a global economic recovery eventually bails them out. The downside here is if the rest of the world doesn't cooperate, Europe is staring down low to no growth for the next decade.
Finally, Greece could pull out of the euro and go its own way for a while. It's unclear what this scenario would look like, but it would explode Greek's borrowing costs and potentially send the country into default -- though it might also trigger IMF aid that would be highly embarrassing for the proud people of Greece. This decision would spur euro skepticism around the world given that there is no precedent for how any kind of disentangling might occur. Investors hate the unknown, and this would be the ultimate unknown in the world's largest economy. Markets might crash, defaults might rise, and chaos might ensue. This is a last resort.
But it's still a resort
I predicted (link requires a membership) to Motley Fool Global Gains members a year ago that the euro as we know it would disappear by 2014. I stand by that prediction.
What that means for investors is that we should beware the euro and companies that derive significant revenues from the region. One obvious move would be to dabble with either the Market Vectors Double Short euro
Corporate candidates would be European companies such as Coca-Cola Hellenic
On the flip side, Europe-based manufacturers and exporters such as ABB
How does it all exactly shake out? It's hard to know, but we're headed to Greece -- ground zero of the crisis -- next week to find out. If this is an issue that interests you and you'd like to receive our real-time updates from the field, just type in your email address in the box below and I'll keep you in the loop.
