The End of the Euro?

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 (NYSE: DRR  ) or ProShares UltraShort euro (NYSE: EUO  ) ETFs (buyer beware: these are leveraged funds).

Corporate candidates would be European companies such as Coca-Cola Hellenic (NYSE: CCH  ) , Santander (NYSE: SAN  ) , or France Telecom (NYSE: FTE  ) . Although the latter two have heretofore been protected thanks to their emerging markets exposure, if you believe the case I laid out above, their European exposure will catch up to them eventually. Finally, there's a company like Cemex (NYSE: CX  ) , which, while based in Mexico, gets more than one-third of its sales from Europe. All of these companies or their American investors would be hurt by a falling euro or a stagnant European economy.

On the flip side, Europe-based manufacturers and exporters such as ABB (NYSE: ABB  ) will benefit from a falling currency since it would make their products more cost competitive around the world.

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.

Attention, Fools! Get Tim Hanson's new columns every Thursday on Fool.com.

Tim Hanson is co-advisor of Motley Fool Global Gains. He owns shares of ABB, which is a Global Gains recommendation. CEMEX is a Motley Fool Stock Advisor pick. ABB is a Motley Fool Global Gains choice. France Telecom is a Motley Fool Income Investor selection. The Motley Fool's disclosure policy is older than the euro and will outlast it.


Read/Post Comments (22) | Recommend This Article (45)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 17, 2010, at 2:34 PM, Melaschasm wrote:

    When the US sneezes, Europe catches a cold. The EU is going to struggle until the US is several years into economic growth.

    I expect that Greece will raise taxes, slow the rate of spending growth, receive some behind the scenes bailouts from the EU, and the EU will mildly devalue it's currency.

    I do not see a collapse of the euro or the EU. Europe wants to be a global power and the only way they can matter is if they can strengthen the EU.

  • Report this Comment On March 17, 2010, at 3:07 PM, PeteysTired wrote:

    What does the following have to do with Gov'ts spending more than they take in which is Greeces fault, US, Great Britain, Ireland........?

    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.

    To me the problem is fiat money luster for Gov'ts. It is mythical. Need more money, then print it up.

  • Report this Comment On March 17, 2010, at 4:08 PM, DJDynamicNC wrote:

    This is an intriguing concept. I really don't know if I buy the idea that the Euro will be disappearing (or wildly reforming) by 2014. But I admit, you've piqued my curiousity.

    There has been a rising tide of nationalist sentiment lately on the political front. Couple that with the debt crisis and one more good strong blow could knock the whole thing down.

    Worth watching for sure.

  • Report this Comment On March 17, 2010, at 4:31 PM, TMFAleph1 wrote:

    "One solution for the debt crises in Greece and Spain is for the European Central Bank to devalue the euro."

    This is not a solution as it does nothing to address the imbalances that exist between Eurozone members.

  • Report this Comment On March 17, 2010, at 4:44 PM, Adam1226 wrote:

    Not sure how you can have this conversation without mentioning the fact that the dollar is far worse off than the euro...

  • Report this Comment On March 17, 2010, at 4:55 PM, lemoneater wrote:

    I agree with Melaschasm. Strengthening the Euro is in Europe's interest if they want to maintain global power. I don't know what will happen which is one reason I'm avoiding ForEx and have diversified as well as I can within my limitations.

  • Report this Comment On March 18, 2010, at 6:14 PM, ellipsoid wrote:

    I'm looking forward to your continued analysis and insight on this issues. Lets assume that your thesis is correct. How does that affect the dollar, the US economy, and the World economy for that mater. Is there a safe haven in the Yen or the Austrailan Dollar, etc?

  • Report this Comment On March 19, 2010, at 7:29 AM, mikeinmadrid wrote:

    It's called the Euro but in reality it's just a proxy for the Deutschmark. Greece et al. are effectively pegged to the DM. This works for a while until it doesn't. You only have to note the comparison with Argentina's 1:1 Dollar peg.

    I believe Germany are subtly inviting Greece to leave the Euro zone. The Euro will continue to exist and continue to be a strong currency. However, the southern European countries will drop out one by one over the next decade.

  • Report this Comment On March 19, 2010, at 8:05 AM, SPARTANBURG wrote:

    It's in Germany's short to medium term interest to have a devalued Euro since Germany is the second largest exporter in the world and in these hard times a hard currency is not exactly an asset for an exporter. Germany also owns 25% of E.U. GDP and pretty much calls the shots. In the long run, the EU has to be strong in order for European Union to be relevant and still keep a bunch of other countries to beef up its size. Germany and maybe France have to see the Euro differently very soon if they want to lead a powerhouse called the European Union. Otherwise they can call it a day and break up this Motley party.

  • Report this Comment On March 19, 2010, at 10:51 AM, flydeargod wrote:

    Yes, it's the end of the Euro, so, you can invest in USA from now on: http://investment-usa.blogspot.com/2010/02/top-stocks-for-20...

  • Report this Comment On March 19, 2010, at 10:55 AM, Brickguy wrote:

    ohh~

  • Report this Comment On March 22, 2010, at 11:37 AM, PSU69 wrote:

    England refused to adopt the Euro and remain independent. As Spain and Greece grapple high unemployment and heavy social burdens, how do we best manage our investments? I enjoyed the article and hope to see more along this line with a goal of investment options based on the foundation stones of the articles.

  • Report this Comment On March 22, 2010, at 2:52 PM, montelatici wrote:

    Methinks I see the usual american willy wagging. The us dollar will come to an end before the Euro, trust me.

  • Report this Comment On March 22, 2010, at 2:58 PM, theHedgehog wrote:

    Here's a metaphor for the Euro transposed to the US. We have one currency and 50 states. Imagine the chaos if those 50 states were each empowered to print their own money. The idea is sheer madness, whether it's the US or EU. If you have one currency, then there must be only one mechanism for changing its value, and it must affect all member states.

    Hedge

  • Report this Comment On March 22, 2010, at 3:30 PM, montelatici wrote:

    There may be several places where Euros may be printed, but only the ECB has the authority to order Euros being printed. If any EU state could print Euros at will, Greece wouldn't be having any problems...They could behave like the Federal Reserve and print their way out of their problems as the US is doing.

  • Report this Comment On March 22, 2010, at 5:08 PM, Fricol wrote:

    Sorry Tim, but you're reporting out of the world-wide context and your conclusions are, in my humble opinion, totally off-mark. Greece is in terrible shape, but so is the US after the disastrous Bush policies that destroyed fiscal discipline, caused a doubling of military expenditures with an least one unnecessary war and, via its laissez-faire credit policies, created the massive housing bubble and the rampant greed that brought us to our knees. The hole that was dug is in fact so deep that extracting ourselves will be a tougher task than Greece's. My prediction: the Euro will recover faster than the dollar and will be around for many more years beyond 2014.

    To those interested in the issue of world economy, I recommend reading "The Economist" that has a very realistic perspective of things.

  • Report this Comment On March 23, 2010, at 1:57 AM, Masug wrote:

    Isn’t “United States of Europe” is in the same state as “United States of America”? In the US you have states like California running up huge debts (and as a whole the US owes a lot to countries like China buying treasuries and keeping the country/currency afloat) and no one at Motley Fool is talking about the demise of US Dollar. Is it because:

    1) Going to Greece to “investigate the demise of Euro” better than being at home and “investigate the demise of the US Dollar”?

    2) Or is it because you are afraid that the US government/ FBI/ SEC/ NSA (and the other organizations with 3 letter acronyms) come after you for spreading malicious rumors?

    :)

  • Report this Comment On March 23, 2010, at 7:45 AM, EuroBob7 wrote:

    Poor old Tim - a very US centric article. When will the MF start acting like a global investment site? The main points have been refuted above but what many of our American friends miss is the POLITICAL will for the euro. The decision to set it up, to maintain it and to have it survive has little to do with economics. The current German/Greek posturing is setting up the negotiation boundaries (very similar to the US left versus right debate on health care - not always a rational debate). A deal will be done in this one. The real elephant in the room is Spain and to a lesser extent Italy. They are the real problem for the euro due to their relative size.

  • Report this Comment On March 23, 2010, at 10:38 AM, montelatici wrote:

    Greece has been out of line. I recall that most recently, the average salary of Greeks exceeded that of EU states which are substantially wealthier in terms of GDP per capita, however, if the great minds that are reporting on the matter don't get it, I really wonder about the qualifications of the pundits.

    The economy of Greece is about 300 billion Euro, in a Eurozone that has a GDP of about 10 trillion euro (13 trillion + USD). Ireland's and Portugal's economies are even smaller. Spain is a larger economy, while having a large current deficit has a comparatively low level of national debt, about 50% of GDP, far lower than the US or the UK. Italy, the largest of these economies, has a high national public debt but very little of it is external, with Italians buying most government bonds. Furthermore, Italy has relatively negligible household debt which compensates for the high public debt vis-a-vis GDP.

    So, if none of the pundits can't figure out that there is the posturing and that Greece is just trying to maintain its unnatural (based on GDP) standard of living by crying wolf, and that the only crisis is that Greece (is trying to avoid) but will have to pay more interest on the bonds it issues, then they are misinformed pundits. Greece trying to sell bonds at the same interest rate as Germany is like California trying to sell bonds at the same rate as a more financially healthy state.

  • Report this Comment On May 20, 2010, at 12:19 PM, purple500fun95 wrote:

    I HOPEFULLY SOOOOO END OF THE EURO!!! CUZ THIS WORLD ARE VERY VERY GREEDY, GREEDY, AND GREEDY!!!!! AND ALSO THIS IS WORLD ARE VERY VERY EVIL EMPIRE CUZ THEY ARE THINKING LOTS OF "GREEDY" TOO MUCH LIFE!!! AND I BLIEVE GOD WILL BE CRUSH THIS WORLD CUZ VERY VERY BAD PEOPLES ARE VERY VERY EVIL, GREEDY, SELFISNESS!!!! AND I AM TIRED AND SICKNESS OF THEM!!!!

  • Report this Comment On May 20, 2010, at 1:24 PM, garyegray wrote:

    Europe's socialist economies are being paid for by tremendous debt, just as it is in the United States.

    Wake up people, if you are going to have socialism, you have to FUND it.

    Get it?

    No, you do not, and that is why we are in this mess globally.

  • Report this Comment On January 22, 2011, at 11:39 AM, JoeXYZABC wrote:

    Euro seems hear to stay. Estonia just joined. Latvia, Lithuania, Bulgaria will join next. Others to follow. No mechanism for those in trouble like Greeks & Irish to leave. Anyway Euro is not to blame for financial crisis in those countries. Just that these countries have fewer tools to deal with their dismal economies. Or they are forced to look at more solutions. One solution is a population boom: Ireland needs to reverse trend and get migrants - ideal to get overseas Irish back but they want high salaries. Better to look to China and India for the numbers. Greece could do the same. With a population boom, the housing and construction sector should improve and the economy improve. Don't count on exports to improve the economy without reducing business costs by migrant workers. Meanwhile the last few west and central European countries will likely join the Euro within two decades except Switzerland.

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