Wednesday, July 4, 2012
Euro end game Part 1: Pattaya
When I was in Pattaya last month, I was introduced to my neighbor who is the Ambassador to Thailand of a European country and had the opportunity of asking him off the record about his view of the Euro. His first reaction was that the Euro would never be broken up. The Euro was a political creation to begin with and there is too much political will to hold it together, which explains why there is no mechanism for countries to exit the Euro voluntarily or involuntarily. Given that, his prediction was that Europe would be on a road to permanent stagflation: inflation because the only way to solve a genuine debt crisis is by printing money (default is the other option but doesn't work for Europe because default means triggering credit default swaps ("CDS") that will blow up major European financial institutions) and stagnation because of the original lack of productivity growth in Europe (except Germany and a few other countries) aggravated by the debt overhang and low confidence. Buildings and churches will fall into disarray and more social disorders will take place but European governments will choose to bite the bullet and deal with these problems as they occur. I asked him if the political will to hold the Euro together has to do with avoidance of wars between major European countries and he said yes. I wanted to tell him that after 60 years of peace, his wife wouldn't want to receive food rations and his son wouldn't want to be driving a tank instead of surfing in Pattaya, but decided I would offend a very nice gentleman that I met for the first time if I said that.