Dating all the way back to the day the Greek Drachma was accepted into the EU's ERM (Exchange Rate Mechanism), thus retiring Greece's currency, and replacing it with the Eurocurrency ... we have always believed that a two-tier Eurocurrency 'regime' would ultimately 'reign', once the EUR experiment failed.
We envisioned that the northern 'core' countries such as Germany, France, the Netherlands, Belgium and Austria would represent the 'first tier' EUR countries, while the southern, more indebted non-core nations, including Greece, Spain, Portugal, and Italy, would represent the 'second tier'.
Within the last two years we have abandoned that thought-process, as the 'core' itself has disintegrated, amid a deepening debt-deficit crisis in France, Belgium, Austria and the Netherlands (more of a macro-political crisis in the latter, than a sovereign debt issue).
Indeed, as we have repeatedly stated since 2009 ... 25 of the 27 EU member nations, including both France and Germany, are in violation of the Union Treaty defined (allegedly) 'hard caps' for debt, or deficits, or both.
For sure, the tectonic political shift in France puts their top-credit-rating status at greater risk ... and with it, their position as a 'core' nation.
We have already exposed Belgium and Austria for the egregious level of their sovereign debt, relative to their respective populations ... levels that are, on a relative basis, larger than the debt of Italy.
As for the countries in the south ...
... Spain is already in crisis, on ALL fronts, the sovereign debt front, the political front, the banking sector front, the housing-labor-deflation front, and the macro-economic front as it applies to domestic final demand ...
... while Italy is becoming increasingly desperate in their effort to stave off a bond market crisis.
Portugal is not as indebted as the other second-tier countries, but their banking system is less secure, and their bonds have gotten crushed.
And then there is Greece.
In April of 2010 we 'penned' the first of a trilogy of Money Monitors focused on Greece, using the "Titanic" theme.
As the ship (Greece, and their participation in the EUR) continues to sink, the options as it pertains to actions that might represent a "solution" to the Greek situation, can be whittled down to a simple choice between two courses of action:
--- Greece leaves the EU, and brings the Drachma out of retirement
--- EU officialdom does whatever it takes to keep Greece in the EU, to avoid setting a precedent that could 'spread' to Portugal and Spain, sparking a debate about a return to the Escudo and Peseta.
Seemingly, either solution is merely an illusion, as neither is likely to 'work'.
But what if everyone is looking at this from the wrong 'angle'?
What if there is an optical illusion dynamic here that is keeping officialdom from 'seeing' an alternative 'solution'?
Indeed, we cannot help but think of the old 'optical trickery' offered by the 'image' on display below, picturing one of two possible 'visions'.
From the most often observed perspective, the picture is an older woman facing to the left, with a witch-like profile, and wearing a shawl.
Indeed, the vision of the old woman represents Greece.
In terms of the EU crisis, the vision of the old woman represents Greece leaving the EUR and going 'old-school', by bringing back the Drachma.
But there is an alternative 'vision' to be gleaned from within the picture shown above ... that of a young woman, with dark hair and a perky little nose, facing left and away from the front and wearing a choker (which also serves as the thin lips of the old woman).
The young woman represents an alternative 'vision'.
In terms of the European crisis, the young woman represents an alternative 'solution', one that does NOT include reviving the Drachma.
Indeed, if the Drachma were revived ... eventually, there would be a similar need to bring the Spanish Peseta and the Portuguese Escudo out of retirement too ...
... followed by the Italian Lira, and perhaps even the French Franc.
In such a circumstance ...
... ALL of these currencies would be immediately 'devalued'.
So what if we REVERSED the perspective.
What if we took the OPPOSITE 'view'?
What if we suggest that a better solution than pushing Greece back into the Drachma ... would be to let Germany resurrect the Deutsche Mark!
This would allow for some level of 'rebalancing' in the underlying macro-dynamic, particularly as it applies to trade.
Moreover, this would also allow for some 'depreciation' in the EUR linked to Spain, Italy, Portugal, Greece, France, et al ... as one unit, relative to the German D-Mark.
Rather than 'seeing' the old Greek Drachma woman ...
... we 'see' the younger German Deutsche Mark woman.
Fixed-income markets use the German Bund as the benchmark against which all other sovereign bond yields are measured, as the primary 'credit spread', so why not add the foreign exchange dynamic in the same way, using the D-Mark as a benchmark.
Indeed, the two tiered system is NOT 'dead' ... but rather, the first tier would include ONLY ONE currency, the German currency.
It is Germany's understandable obsession with hard-currency 'driven' monetary and fiscal policies, that ISOLATES THEM from the rest of the EU.
So, let them have their hard currency ... the D-Mark.
And let the rest of the debt-offenders have the softer EUR.
Within the scope of enacting such a seemingly-outrageous idea, perhaps the legal framework can be 'manipulated' to enable the ECB to utilize freshly minted EUR, as a means to monetize, and thus 'eradicate', a portion of the region's sovereign debt ... in a move that would NOT need to be 'approved' by Germany.
Of course, EU officialdom is not likely to be at all enamored by this thought, but perhaps, maybe, potentially ... plenty of support for such an idea could materialize.
For sure, there would be 'problems' and potential roadblocks that we have not yet contemplated. In fact, we generated this idea out of the blue, shooting from the hip on Thursday afternoon while doing an 'interview' with our buddy and colleague Jim Puplava, on his internet radio show "Financial Sense Newshour" (financialsense.com).
But I am, myself, personally ... intrigued by the thought.
It seems to be worthy of debate, at least, given the 'keystone-cop-routine' (slapstick inefficiency) currently being performed by EU officialdom, as the crisis deepens, and broadens ... daily.
Continue reading "Macro-EU: The Solution Illusion" [pdf attachment, 4.83 mb]
Weldon’s Money Monitor is a fluid combination of top-down fundamentals and bottom-up technical analysis. Weldon applies intense rigor to his inter-market examinations seeking to capture the dominant secular macro-trends against the shorter-term micro-evolution taking place. He reconciles an extraordinary volume of facts with other variables such as psychology of the markets and his own intuitive insights to present a very unique and thorough publication. His loyal readers understand that Weldon does all the research and writing single-handedly and they welcome his newsletter 2-3 times a week, sometimes more. For a free-trial subscription, visit: https://www.weldononline.com/MoneyMonitor.aspx.
