The End Game for the Euro

The euro is doomed, and the consequences of its demise are far-reaching — both in terms of the dangers for anyone who is unprepared and the opportunities for those who are.

This is so important I have created a special presentation, entitled “Currency Wars Helping Savvy Investors Make Fortunes.” It shows you not only how the currency wars are escalating but how to profit from them.

And right now, the biggest global war is against the euro, driving it to its demise.

To readers who have been following me, this should come as no surprise. I’ve made the case for some time that the euro’s days were numbered — even while most others were hailing it as “the next world reserve currency.”

But for investors and politicians who have staked their financial future on the euro — both in Europe and the U.S. — the shock could be traumatic. They’ve simply refused to recognize the flaws in the entire European Union — flaws that have been, and still are, abundantly clear.

Here’s the key: Monetary unity can only be possible with fiscal unity.

The whole idea of creating a single monetary unit — the euro — on the shaky foundation of 16 different governments, each taxing and spending at their own whim, was insane from Day One.

It created incentives to cheat the system. It encouraged certain countries to spend beyond their means and take shelter under the credit of their stronger neighbors. And it has led to precisely the kind of anomalies and disasters we should expect:

• Wildly varying financial positions for the countries within the monetary union — some on the brink of bankruptcy, others still solvent.
• No freedom for individual countries to determine the value of their currencies independently. For them, instead of serving as a benefit, the euro has become a curse.
• Extreme vulnerability to any economic downturn — the ever-present danger that the union could collapse under economic or financial stress.
• Grave political turmoil and public unrest.

As long as Europe’s economy was growing, prosperity camouflaged these fundamental failings. All that was needed to expose these flaws and set the euro’s demise into motion was a severe economic downturn.

And in 2008, that’s precisely what we got, along with a massive housing bust.

The bust, in turn, blatantly exposed everything that was wrong with the euro from the start — the fiscal irresponsibility of Portugal, Ireland, Italy, Greece, and Spain … the extreme vulnerability of stronger euro members as they are pulled down by the weak … and the invalid rulebook upon which the euro concept was built.

That’s why this crisis is far more than just an ordinary economic recession. What we have been witnessing is the progressive downward spiral of Europe itself.

Europe’s High-Risk Game of Poker

In response, Europe’s high officials have undertaken Herculean measures to stay afloat and prevent a breakup.

But despite all the rescue packages, bold promises, backstops and politicking, the sovereign debt crisis has continued to fester, spread, and accelerate.

This can mean only one thing: The outlook for the euro is bleak.

The fact is Europe’s strategy for handling the spreading sovereign debt crisis is nothing more than a grand bluff with a weak hand. Here’s how they’re playing it:

Earlier this year, the European Union and the IMF, using mostly German money, bet huge sums on insolvent countries. They put $1 trillion on the table, thinking they’d impress global investors. They didn’t.

Now, they’re talking about doubling the ante without any better cards to play. They’re hoping that this bluff will push back global investors and speculators who have staked their bets against the euro and the bond markets of the weak euro-zone members.

But all the while, they’ve known they’re holding a losing hand. They won’t admit it in public. But they’re also deathly afraid that the longer the game lasts, the more money Europe will be forced to pour into the black hole called “rescue aid.”

Games Like These Always Have an
Inevitable and Predictable End

Investors see through the bluff. Speculators can virtually smell the fear. And they attack with one simple weapon: Their ability to SELL the currency and the country’s government bonds at any time and in any amount of their choosing.

With few exceptions, no matter what the central bank says, the attacks continue relentlessly. And they typically, in the case of a currency attack, do not end until the central bank has depleted large sums of foreign exchange reserves. This, in turn, forces the central bank to fold its hand, abandon its defense of the currency, and enact a major devaluation.

But for the European Union, the bet is so large and the cards so weak, the end game could be even more Draconian: A breakup of the euro altogether.

Already the language and rhetoric is beginning to change in Europe. It’s gone from denial and political-unity speak … to admission and nationalist speak. Indeed, in just the last few days …

Talk of a Euro Breakup Has Suddenly
Begun Spilling out of the Continent!

Look at the swelling uproar …

• The Irish Times has just run a headline “Ireland likely to leave the euro.”
• German Chancellor Angela Merkel was said to have threatened to take Germany out of the euro. She denied it. But the swelling political pressures for a German exit are not deniable.
• A UK official and former Bank of England member openly admitted the collapse of the euro was possible.
• An Austrian Central Bank Governor and ECB policymaker said no country in the euro zone was safe from the collateral damage of a euro breakup.

Breakup or no breakup, anyone holding euros should be looking for the exit door. You wouldn’t own a company that’s loaded with sinking junk bonds. Likewise, you shouldn’t own the currency of the European Central Bank, which continues to buy up the junk bonds of Greece, Ireland and a growing list of weak countries — each digging itself deeper into debt despite ever harsher austerity measures.

My main point: This is far more serious than just one currency or even one continent. European banks are loaded with the seedy debt from the weakest euro- zone member countries.

If a major country like Ireland or Spain defaults or restructures its debts, it could send European banks into the tank. And those bank failures, in turn, could threaten the entire global financial system much as they did in 2008.

So the euro problem isn’t just a Europe problem. It’s a problem for everyone. World economies are highly interconnected. Those investors who aren’t closely monitoring the situation in Europe and the impact on the euro, could be caught on the wrong side of another Lehman-type event.

This is very dangerous for those who are unprepared. But it also has tremendous profit potential for those who are — with instruments any investor can buy. To see how, check out my presentation, “Currency Wars Helping Savvy Investors Make Fortunes,” which I’ve just posted online.

Click here, and it will begin playing right away.

Regards,

Bryan

P.S. This week on Money and Markets TV, we checked in on the health of the U.S. economy, and offered our prognosis for the pace of recovery in 2011. Plus viewers received some concrete investment ideas based on the economic outlook of all the Weiss Research editors.

If you missed Thursday night’s episode of Money and Markets TV — or would like to see it again at your convenience — it’s now available at www.weissmoneynetwork.com.