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Europeans Less Adept than US at Undermining Currency

Dysfunctional European planning means the Euro won't die just yet...

INVESTORS have fixed their attention on the Eurozone. Europeans are wringing their hands and curling their lips. They are worried...mad...and they don't know what to make of the situation, writes Bill Bonner, founder of the Daily Reckoning.

French bankers have come up with a plan – much like the Brady bonds of Latin American debt fame. The idea is simply to roll over Greek debt, voluntarily, to 30 years. This is a default…but it's a graceful default. Lenders lose money – they don't get their money as promised. But they can still hold their heads up; they'll get it later. If everything goes well.

Trouble is, things are not likely to go well. There is no plausible growth rate that will make it possible for the Greeks to 'grow their way out' of this debt. All they can do is default, one way or another.

Americans who take the trouble to look across the Atlantic gloat. They knew the Euro would never work out. And now, even Europeans themselves are saying so.

Our old friend John Mauldin, for example, recorded French economist Charles Gave as follows:

Now, for those who have never had the extreme pleasure of time with Charles, he is a powerful, white-haired French patrician, and one of the better economists I know. Quite a brilliant thinker and not afraid to express his mind forcefully with a voice that sounds like God talking, with about the same assurance (note to self: never again follow Charles on a speaking stage).

"The question is entirely irrelevant" – punctuating the air for added emphasis. "The Euro will not exist in a year. The whole thing was dysfunctional from the beginning."

Gave has a habit of coming up with clever, well-argued ideas. Some are even good ideas. But we would not rush to dump our Euros. The dysfunctional nature of European central planning is a blessing; the Europeans aren't nearly as good at undermining their currency as Americans.

Along the southern and western periphery of Europe, people are wondering what will happen next. This week, the Greeks are scheduled to vote on a 5-year austerity plan. If they vote against it, maybe the French will reconsider. But the French banks aren't the only ones holding Greek debt. It's all over the financial world. Sooner or later, it will have to be reckoned with.

Further to the west, Italians are getting ready to vote too. They run deficits and are faced with the threat of bankruptcy too. In minutes, fearful investors could push up the price of borrowing beyond their reach. They need to soothe the marketplace by beginning to cut spending now. On Thursday, Berlusconi's cabinet is expected to approve $40 billion of cuts.

Keep following the sun, and the story gets worse. In Spain, Portugal, and Ireland "austerity," cutbacks and threats of bankruptcy are in today's headlines.

But wait. We didn't have to come to Europe to read headlines like that. The LA Dodgers filed for bankruptcy yesterday.

And what about the Golden State? Or Illinois? Or New York? If these were separate countries, their finances would be no better than that of Europe's southern tier. Add their share of the US central government debt, and their share of unfunded pension and health programs, to their already bulging state and local debt and what do you have? That's right, Greece!

In terms of debt to GDP, many of America's states are as heavily burdened as Europe's limping, battered debt-plagued countries. The difference is, in America the central government shoulders the largest portion of the debt.

So, in Europe, a few marginal nations head for bankruptcy. In America, the whole shebang is going broke.

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New York Times best-selling finance author Bill Bonner founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group exposed and predicted some of the world's biggest shifts since, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and the election of President Trump (2016). Sharing his personal thoughts and opinions each day from 1999 in the globally successful Daily Reckoning and then his Diary of a Rogue Economist, Bonner now makes his views and ideas available alongside analysis from a small hand-picked team of specialists through Bonner Private Research.

See full archive of Bill Bonner articles

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