Euro: Breaking Up Isn’t Easy

Standard & Poor’s cut to Ireland’s credit rating is only the first of very many cuts to the sovereign ratings of the weakest members of the euro-zone.  The internal tensions tearing the euro apart are only going to increase.  The 20-30% loss of competitiveness in Spain, Italy, and Greece, is only going to increase without a miracle increase in productivity, or a kiss from a princess.  As Lombard Street Research puts it, “the structural overvaluation of Italian and Spanish ‘real exchange rates’ is simply a restatement of the undervaluation of Germany’s.  It’s taken nine years of stagnation in real consumer spending – and feeble growth – to achieve this cost competitiveness in Germany.  For Italy and Spain to regain competitiveness requires wages there to rise more slowly than German ones, or for there to be no pay increases for the next 25 years!  That’s a time horizon I think everyone is agreed the European single currency simply doesn’t have.

Greece, Portugal, and Spain’s reliance on the ECB for funding only continues to grow.  ECB funding now represents 20% of total Greek banking assets.  That is why The Angry Analyst thinks a sovereign debt default, and break-up of the euro – though not necessarily its demise – is inevitable.  Apparently, we are not alone.  Analysts at Morgan Stanley say there is no question that European governments will renege on their promises, and that insolvency has ceased to be merely possible and become plausible:  “The sovereign-debt crisis is global, and it’s not over.”

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