STAFF NEWS & ANALYSIS
Jim Rogers: Euro Will Probably Break
By Staff News & Analysis - March 24, 2010

The European debt crisis sounds the beginning of the death knell for the euro, says investment icon Jim Rogers. "The euro will probably break up in the next 15 to 20 years," he says. "We've had currency unions in history. They didn't survive, and this one won't survive either," he recently told CNBC. Greece suffers from a budget deficit that totals 12.7 percent of GDP, and public debt that is forecast to exceed 120 percent of GDP this year. So the European Union has pledged assistance. "If (the euro zone helps) the Greeks, that weakens the fundamentals of the euro," Rogers said. "As the next government comes to demand concessions, they weaken the currency from within. I would let Greece go bankrupt, because then everybody will say the euro is a serious currency." The British pound is in trouble too, though it's not in danger of disappearing like the euro, Rogers says. The United Kingdom's main problems are "gigantic debt and a huge trade deficit," he explained. – MoneyNews

Dominant Social Theme: Many troubles at once.

Free-Market Analysis: Jim Rogers, whom we have interviewed in the recent past (click here to read), now states he believes that the euro will go the way of the dodo bird – it will eventually become extinct. We never understood why countries would so easily give up their own currencies to begin with, because leaders were giving away a portion of the ability to control national destiny. But of late the rationale has become clear. The countries participating in the euro were basically arbitraging the great German industrial machine. Greece, Portugal, Spain, etc., used the euro's stability and low lending rates to go on a great spending spree. The restive nature of European socialism was soothed by gobs of money. Strikes became pretty much a thing of the past. Harmony reigned, as much as it ever could.

But nothing is free forever. Eventually those who were buying the bonds of EU countries became aware of the profligacy – and the amount of debt that some of these countries were incurring. Politicians had received a blank check, and were penciling in large sums to buy social peace. First to have its solvency questioned was Greece. But the problem was actually regional, and occurred over a period of years across the entire Southern part of Europe.

The split, interestingly enough, mirrors the religious orientation of Europe. The countries with the most difficulties are Catholic. The Protestant block of countries, the Scandinavian countries and Germany are apparently in better shape from the markets' point of view. It is these countries, especially Germany, that have a tradition of post-war socialism and have a middle class engaged in entrepreneurialism. The Southern European countries do not have such a tradition of small business, or not to the extent of their Northern neighbors.

Which brings us to France. The French have so far avoided being lumped into the profligate countries called "Pigs," but we wonder how long this can last. The recent French elections, which the socialists are winning, emphasized the French political and cultural affinity for statism –and state security. The French, like the rest of Southern Europe, do not have an industrial tradition as regards small business and the public sector is very large. If one were to peer under the presentable facade of French numbers, might one confront a situation that has a Greek-like flavor?

It is no coincidence that the French have come out in favor of an EMU solution to Greek's debt crisis. The French in our opinion are thinking about the French. Sooner or later, logic tells us, the French will need some sort of currency aid of their own. We would bet that public spending in France has been more generous since the advent of the euro, that the French political strata has in fact done just like the rest of Southern Europe – purchased labor peace using the stability and low rates of the euro.

The French are going to try to make the "stability" of the EU an issue in calling for eurozone countries to help Greece. But the obstacles to such help have become apparent. It is illegal for other European countries to come to the aid of Greece and in any case the only candidate for such aid is Germany, which has internal, constitutional structures that would prevent such aid. The creation of an European IMF, an EMF, is questionable as well and would likely include the rewriting of treaties. And the EU is having plenty of trouble getting additional treaties passed these days. Finally, the creation of an EMF is merely another way of getting Germany to shoulder most of the burden of such a bailout as after Greece would come Spain, Portugal, Italy, etc. The moral hazard only increases as the bailouts mount. Nonetheless, there is this in the New York Times, recently, indicating that a compromise could be reached:

Germany indicated on Tuesday that it might agree on an aid package for Greece financed in part by the countries of the euro zone — but only as a last resort and subject to tough conditions. In an apparent attempt to set the terms of the debate among European leaders, Berlin made it clear that before it acted to bail out Greece, the Athens government would have to exhaust its ability to borrow. Germany also said that any rescue would have to involve the International Monetary Fund. German and other European leaders will convene on Thursday in Brussels for a two-day summit meeting. France and Spain made a proposal on Tuesday for the leaders of the 16 countries that use the euro to meet before the main meeting to talk about how to resolve the Greek situation.

The use of the IMF remains strange to us as devaluation is the IMF's favored way of dealing with bankrupt countries, and Greece and the rest of the Pigs, being in the eurozone, cannot devalue, as we understand it. The final solution to the currency crisis, then is for Greece and the rest of the profligate southern European countries to tighten their collective belts, cut spending and pare their generous public sectors. But these countries, ones that do not have entrepreneurial cultures, have purchased civic peace through public spending.

Yes …These countries have small, elite upper classes – similar to South America – and these elites have purchases immunity for their privileges by paying off their respective, restless electorates. The European model of concentrating power and wealth in a small elite while paying off the larger population through social programs turns out to be unsustainable – as we knew it was – even though it has been extended by the EU experiment. Now that, alternative, too, seems to be shutting down.

After Thoughts

It seems obvious that Germany's leaders do not want to be responsible for causing a eurozone collapse. It seems equally obvious that there is not much sentiment in Germany for a bailout of the Greeks – given the additional moral hazard. If the IMF steps in and demands the kind of Draconian cuts – without devaluing – that it would take to stabilize the Greek situation, the social chaos in Greece now occurring might grow worse. The real solution would probably be for the Greeks to leave the euro and start over. If the Greeks somehow were able to offer a gold or silver-backed currency, that would alleviate much of the difficulties the country now seems to face. Just because this is a reasonable solution, does not mean it will be pursued.

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