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The Euro: What’s Done Is Done

Speculation is rife that Greece will be ejected from the eurozone — at this point it’s more a question of “when” than “if.”

Seventy percent of Greek voters voted on May 6 for parties that rejected the terms of Greece’s bailouts. Barring a massive reversal in a rerun election to be held next month, it would appear that Greek voters have sent a message: They want out.

Whether Greece exits the eurozone or not, the uncertainty surrounding the move has been devastating to consumer and business confidence. Who in their right mind would lend in euros to a Greek business or individual knowing that you might be paid back in depreciated drachmas?

By now, few would disagree that it was a mistake to let Greece into the eurozone. But this raises a larger question: Should the euro exist as a currency at all?

The rationale for the euro is easy enough to understand. Out of the wreckage of the World Wars, Europe’s leaders sought to build a united Europe built on shared prosperity. Free trade was a major means to that end, and a common currency would be a major facilitator of trade and integration.

And for the countries of Mediterranean Europe, the euro offered the opportunity for price stability.

Alas, there was a fatal flaw. For some countries — most notably Greece and Italy — the newfound price stability and the lower interest rates that came with it allowed them to go on a borrowing and spending spree that would have been impossible in the days before the euro.

But even the countries that managed to keep their sovereign borrowing to seemingly prudent levels before the crisis — such as Spain and Ireland — saw dangerous debt-fueled bubbles form in the private sector, and in construction in particular.

To answer my own question, the euro never should have been launched in the form that it was. It was excessively optimistic — perhaps even arrogant — to start an experiment that large with economies that diverse and to expect it to succeed. A more prudent course of action would have been a gradualist approach. The Northern European countries — perhaps Germany, Belgium, Luxembourg and the Netherlands — could have launched the first stage (call it a proto-euro), and then after a period of five to 10 years or more, France, Spain, Italy, etc., could have been added one at a time at exchange rates that didn’t make the euro an artificially hard currency.

As it went down, most of Mediterranean Europe found itself locked into a currency union at a rate that guaranteed chronic trade deficits with the North, which in turn led to the destabilizing capital flows that make the debt bubbles possible.

What’s done is done. In retrospect, most of Mediterranean Europe would have been better off without the euro. But they can’t leave without creating an inflationary currency collapse and banking crisis.

It’s a case of choosing the lesser of two evils. And for Spain, Portugal and Italy, the lesser of the two is the status quo within the eurozone. For Greece, this too would be the better choice, though it’s a closer call.

In any event, this promises to be a long, hot summer on the other side of the Atlantic.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. Sign up for a FREE copy of his new special report: “Top 3 ETFs for Dividend-Hungry Investors.”

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