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Before Christmas I noted that there was a way to bet that the first member of the eurozone would leave by the end of this year.
But things are deteriorating faster than I first anticipated. Over the last few weeks, the tone has changed – not in the financial markets, but among Europe’s leaders. I reckon there’s a great opportunity to bet on the early break-up of the euro.
I’ve put my money down. Today I’ll tell you why.
It strikes me that we’ve moved on from the “There will be no Greek default... nobody’s leaving the eurozone... there’s no mechanism to do so anyway” mind-set. And the tone has changed to... “Well, if Greece can’t raise money in the markets, then it will have to leave…”
I don’t know about you, but I never believed that the euro (and in particular Greece’s place in it) was forever. But I didn’t think we’d hear an admission of the fact so soon. The nature of politics is the same as finance. You keep up the pretence right up until the bitter end. Not to do so merely causes panic. In the case of the euro, that would accelerate its demise.
It’s not just the fact that they keep having to raise money in the markets that means the peripheral nations need to go. The really damning fact that will lead to break up is that the euro is just too strong for the southern bloc to be competitive. That’s why a botched rescue for Greece isn’t sustainable. All it does is save the banks, it doesn’t pull the economy back from the brink and it doesn’t create jobs.
People are angry. And it’s not just in Greece. There’s a presidential election looming in France – just three months to go now. And the public are getting agitated. Last week France lost its prized triple-A credit rating when Standard and Poor’s downgraded its debt. Now people are starting to say out loud what’s previously been confined within their own four walls…
The French have the opportunity to speak their minds
There’s nothing like an election to remind the politicians that we’re supposed to be living in a democracy. For a while, they’ll need to pretend that they’re listening. And the public are increasingly demanding change.
The polls put the Socialist Francois Hollande well ahead of Sarkozy. But more interestingly, there’s practically nothing to separate Sarkozy from the leader of the far right (National Front), Marine Le Pen.
And I suspect that’s because she’s saying out loud what many are thinking: Get out of the euro project and restore the French franc before it’s too late.
Le Pen wants to bring monetary policy back home. She wants the Bank of France to print the equivalent of €100bn each year and lend the government €45bn interest free. Interesting ideas. And I can very well imagine the Gallic envy as they look across to the other side of La Manche to the UK and our central bank.
As a side-note, it was interesting to see Ed Miliband on the Andrew Marr show on Sunday trying desperately to reason why we’ve still got our triple-A credit rating when they’re dropping like confetti on the Continent. Why didn’t he just say it like it is? We can print money and buy our gilts back.
That’s exactly what many in Europe want: to be able to print their way out of this mess. And the only way to do that is to leave the euro.
It’s interesting to note that in a poll by TNS Sofres, 31% of the French public agree with the ideas of the National Front.
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What to do about it
Looking at the bigger picture, I’m still in two minds about how quickly a country will be able to exit the euro project even if they’re determined to do so.
Half of me says that it’ll have to happen very quickly. Once the writing is on the wall, capital flight happens practically instantaneously – automatically Greek euro assets will get ‘marked-to-market’ to reflect the new equilibrium.
But then again, there are many complexities to iron out. Legal issues over existing contracts, not just in finance, but in the real economy will have to be resolved. And then there’s the logistics of redistributing a new currency... this took years to get right in the run-up to the euro.
The easiest thing would be for Greece to keep its own euro... you could call it a drachma if you wanted to. But it would no longer be linked to the ‘real’ euro and would have nothing to do with the European Central Bank. One would expect some almighty battles in the financial world to determine which accounts and contracts would be in €Greek and which in €eurozone.
I’ve always felt that this is what needs to happen. But increasingly it looks like it could happen this year.
The public is getting more agitated and the words of the authoritarians are mellowing.
Given the chaos that could ensue, I’d expect strong demand for physical gold. If the euro starts to disintegrate, many won’t hang around to see how the changes will affect them. Sure they could convert holdings into dollars, or other currencies (a trade that has already started); but what good is that if the bank you’re dealing with goes bust?
I suspect that we’ve seen the bottom for gold and its traditional (well, traditional over the last 11 years or so) start-of-year rally is underway.
But I’m already long gold. That’s why I’ve decided to look again at a spread bet on the breakup of the Union.
To find out how it works, see my article: Why I think the euro has one year left. Although I didn’t advocate putting my money down when I first wrote that article in December, I’ve since warmed to the idea and placed a small bet. I’ll let you know how I get on.
That’s a punt on the break-up of Europe. It won’t be for everyone, I know. But if you’re sold on the idea that Europe is going to be one of the biggest threats to your money – as I am – then there are other steps you can take.
There’s an excellent ‘crisis investing’ report Tim Price has written. Have you seen it? Europe is just one of the dangers he names as threatening UK investors in 2012. The investments he recommends we take to protect ourselves make good sense.
You can read about them here.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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