I still believe most market participants are underestimating the gravity of the issue here. While this is being largely played off as a SOLVENCY crisis I believe it is not. This is and remains a CURRENCY crisis. The Euro is unworkable in its current format. The imbalances that have been caused by the mish mash of differing economies has done what single currency systems do best – it has imposed harsh restrictions and vulnerabilities on the nations within the currency system. Alan Ruskin at RBS elaborates:
“The package does not solve M/T problems of a sub-optimum currency area. It cannot solve productivity divergences and associated divergences in growth, external balance and inflation trends. This is absolutely fundamental, and there is no way out of the long-term problems this pose.”
Many market participants are keenly focused on the solvency issue here when in fact, this is a currency crisis. The solvency issue is a byproduct of the failures within the actual currency system. As I’ve said repeatedly, a move to QE would undermine the system’s existence and the dramatic about face by the ECB leaves it with zero credibility in my opinion. The ECB is no longer independent and no longer responsible for price stability. Even with rumors of sterilization, with their bond purchases I believe they have crossed a line. Without their knowing it, they have all but admitted that the Euro is a failed currency experiment and have resorted to “last ditch” efforts to save it.
In my opinion it is not a matter of if the Euro will ultimately require some form or restructuring (such as defections), but when. This bailout may have bought the EMU some time, but it has not resolved the structural problems which will continue within the EMU. My greatest fear (for markets in the near-term) is that the “speculators” now know the system is broken (while the politicians do not) and they will continue to weigh on the market until it breaks.
Many say that these “speculators” are having an adverse impact on the markets. I fully disagree. When a young male lion attacks and kills his weaker competitors, the integrity of the food chain is kept intact and ultimately strengthened when the weaker animal is killed (or prevented from mating). Ultimately, the species is strengthened and its odds of survival substantially increased over the long-term. While this causes some near-term pain it is ultimately a benefit to the species as a whole. The Euro is broken. Single currency systems do not work and they must be killed. In the long-term, it is in the best interest of all involved. If the politicians in Europe are wise they will begin working on real structural reforms now that they have bought themselves some time. Unfortunately, I don’t think they recognize that this is a currency crisis and that’s why the risks in the market remain abnormally elevated.