Heralding the death of the Euro?

When it comes to news about the European economy, a pendulum is on the swing. And while the European economy has its good days and its bad days, some experts warn that the handwriting is on the wall for the euro.

BRUSSELS, BELGIUM (Catholic Online) - Grameme Leach, chief economist at the Institute of Directors, a London-based nonpolitical organization, told reporters this weekend, "three years after the first 'once in a generation' fiscal crisis, we may now be entering the end game for a euro of 17 countries."

If Leach is right, the euro zone could break apart with some or all of its countries returning to their own currencies rather than a common shared currency. 

Political leaders announced last week that they had reached an agreement that would once again saved the euro, but announcements which profess the salvation of the euro zone now appear to be a regular affair, and even most optimistic investors are growing skeptical of the repeated claims.
At the heart of the problem is the size of the euro itself. Made up of 17 member countries, it is a complex and difficult thing to get them to agree on anything. Add to the complexity the fact that each of those 17 countries has its own populace, divided into multiple constituencies, and it becomes obvious that the very size and structure of the euro zone has become a liability.

In spite of this, European leaders announced on Friday that a new intergovernmental treaty would be proposed that would deepen the integration of national budgets. The majority of the European Union appears to be in support of the plan, with a frank exception of the UK.

Of course the politicos can agree all they like, but his Leach pointed out, "it's the ECB or bust," referring to the European Central Bank. "Unless the ECB begins to operate as a sovereign lender of last resort function, with massive purchases of euros of public debt, the inexorable logic is that the euro zone will break up."

The European Central Bank has been a key figure in the crisis to date. The ECB has stepped in repeatedly to buy massive amounts of sovereign debt from troubled countries, bailing out one nation after another, in their turn. Unfortunately, the ECB has been financing these rescues by simply printing more money-- or rather the modern equivalent of doing so.

Any student of macroeconomics can tell you is simply printing money to cover expenses will do little more than cause hyperinflation.

Leach invoked the lessons of history explaining "printing money is associated with hyperinflation, the collapse of the Weimar Republic, and the rise of Hitler. From a German perspective the question is that, once you ECB has lost its virginity printing money, just how promiscuous could it become."

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He concluded by explaining that the ECB is "massively over-leveraged."

If true, there may not be much left but to start planning the dissolution. But that would be a very unpopular plan. Certainly the breakup of the euro of would lead to a deep recession across Europe, and would be political suicide for anyone advocating such a move. Still, it may not be a matter of choice. If the ECB doesn't have the clout to make the difference it needs to make, and politicians can't come together and agree on solutions, and there can only be one fate for the euro zone and the sooner investors and political leaders accept this reality, the sooner the pain can end and the recovery began.

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