How The European Union Will Fall

| October 12, 2011

As the EuroZone debt crisis drags on, the options for resolving it are getting thin.  We’ve seen virtually every economic expert weigh in with their opinion on how the EU can be saved…

If we step back and look at all the news over the past year, adding up the parts of the puzzle… there’s only one way the crisis in Europe will ever be completely solved.  And that’s transforming the European Union into a type of “United States of Europe”.

But somehow, I can’t see them making it across the finish line…

While the 17 EU countries are wrapping up approval of their bailout fund, the stage is setting up for a massive collapse of the EuroZone. And the expansion of the European Financial Stability Facility (EFSF) is a disaster waiting to happen.

The wheels are in motion.  Like a runaway locomotive, the destruction of Europe is already speeding along the tracks.

Before I get into where this crisis is headed, I think it’s important you know a few of the key workings of the EFSF.  We hear the term all the time in the news, but few people know much about it…

You see, the EFSF is similar to the United States TARP program in a few ways.  As you recall, the TARP program was the US mechanism used to prevent a total financial meltdown in 2008.

And that’s exactly what the EFSF is designed to do for Europe… but using a much different method.

The TARP program allowed the US Treasury to purchase troubled assets directly from any financial institution.  Without getting into the messy details of TARP, let’s just say it allowed the US government (and taxpayer) to become equity and debt owners in exchange for capital.

In contrast, the EFSF was established with the goal of preserving the financial stability of Europe’s monetary union.  The EFSF is designed to provide “temporary financial assistance” to troubled European governments.

Here’s the big difference…

While TARP actually exchanged capital for assets with banks, the EFSF offers to “issue bonds or other debt instruments on the market to raise the funds needed to provide the loans.”

So who will buy these bonds and debt instruments?  As usual, it’ll be the banks, pension funds, central banks, insurance companies, etc…

These bonds are backed by the EFSF, currently funded up to €440 billion ($607 billion).  Without the backing of the EFSF, no one would touch them.

Doing some basic math, it’s obvious the EU will need more than €440 billion.  Italy alone has well over $2 trillion in public debt.  In reality, the original EFSF was set up to save say, Greece, and other small EU members.

However, the contagion and fear of default has spread far beyond the borders of Athens…

The limited funding of the EFSF has created a new fear that if Greece defaults on its debt… some of these other countries will follow.

A risk of contagion is why the EFSF now needs more backing.

For investors to have faith in the newly issued EFSF debt, the EU needs to ramp up the guaranteed funds.  Rumors put the needed funds over €3 trillion ($4.14 trillion)!

Here’s the bottom line…

If EU nations pony up that much coin to save their union, they’re going to be in too deep to back out of any commitments.  This new fund may work for quite some time, and the internal workings of the EU may continue functioning… for now.

But with 17 member nations, a peaceful accord will not last. Remember, each country is required to vote changes to the monetary system into law.

In the end, all 17 countries will be married at the hip by over €3 trillion ($4.14 trillion) in shared debt (think EuroZone bonds).  Remember, these 17 European countries are steeped in tradition and independence.

There’s no way they’ll all relinquish their independence for statehood.

So when the political infighting gets too much to deal with, the EU will explode!  If you think we have a crisis now, wait until there’s over €3 trillion in shared debt involved.  How will they divvy that up?

It will be like a megaton bomb dropped on the financial world… and it will be centered in Europe.  Simply put, breaking off a €3 trillion ($4.14 trillion) commitment would end the EU in a very ugly fashion.

Instead of letting the weak members of the union fail now and getting the pain out of the way, the EU is simply driving toward total meltdown by passing the expansion of the EFSF.

It may not happen this year, but I can’t see how they’ll avoid it.  You won’t want to be holding any Euros then.

Tags: , , , ,

Category: Currency Trading

About the Author ()

Comments are closed.