The End Of The Euro: A Survivor’s Guide

By Peter Boone and Simon Johnson

In every economic crisis there comes a moment of clarity.  In Europe soon, millions of people will wake up to realize that the euro-as-we-know-it is gone.  Economic chaos awaits them.

To understand why, first strip away your illusions.  Europe’s crisis to date is a series of supposedly “decisive” turning points that each turned out to be just another step down a steep hill.  Greece’s upcoming election on June 17 is another such moment.  While the so-called “pro-bailout” forces may prevail in terms of parliamentary seats, some form of new currency will soon flood the streets of Athens.  It is already nearly impossible to save Greek membership in the euro area: depositors flee banks, taxpayers delay tax payments, and companies postpone paying their suppliers – either because they can’t pay or because they expect soon to be able to pay in cheap drachma.

The troika of the European Commission (EC), European Central Bank (ECB), and International Monetary Fund (IMF) has proved unable to restore the prospect of recovery in Greece, and any new lending program would run into the same difficulties.  In apparent frustration, the head of the IMF, Christine Lagarde, remarked last week, “As far as Athens is concerned, I also think about all those people who are trying to escape tax all the time.”

Ms. Lagarde’s empathy is wearing thin and this is unfortunate – particularly as the Greek failure mostly demonstrates how wrong a single currency is for Europe.  The Greek backlash reflects the enormous pain and difficulty that comes with trying to arrange “internal devaluations” (a euphemism for big wage and spending cuts) in order to restore competitiveness and repay an excessive debt level.

Faced with five years of recession, more than 20 percent unemployment, further cuts to come, and a stream of failed promises from politicians inside and outside the country, a political backlash seems only natural.  With IMF leaders, EC officials, and financial journalists floating the idea of a “Greek exit” from the euro, who can now invest in or sign long-term contracts in Greece?  Greece’s economy can only get worse.

Some European politicians are now telling us that an orderly exit for Greece is feasible under current conditions, and Greece will be the only nation that leaves.  They are wrong.  Greece’s exit is simply another step in a chain of events that leads towards a chaotic dissolution of the euro zone.

During the next stage of the crisis, Europe’s electorate will be rudely awakened to the large financial risks which have been foisted upon them in failed attempts to keep the single currency alive.  If Greece quits the euro later this year, its government will default on approximately 300 billion euros of external public debt, including roughly 187 billion euros owed to the IMF and European Financial Stability Facility (EFSF).

More importantly and currently less obvious to German taxpayers, Greece will likely default on 155 billion euros directly owed to the euro system (comprised of the ECB and the 17 national central banks in the euro zone).  This includes 110 billion euros provided automatically to Greece through the Target2 payments system – which handles settlements between central banks for countries using the euro.   As depositors and lenders flee Greek banks, someone needs to finance that capital flight, otherwise Greek banks would fail.  This role is taken on by other euro area central banks, which have quietly leant large funds, with the balances reported in the Target2 account.  The vast bulk of this lending is, in practice, done by the Bundesbank since capital flight mostly goes to Germany, although all members of the euro system share the losses if there are defaults.

The ECB has always vehemently denied that it has taken an excessive amount of risk despite its increasingly relaxed lending policies.  But between Target2 and direct bond purchases alone, the euro system claims on troubled periphery countries are now approximately 1.1 trillion euros (this is our estimate based on available official data).  This amounts to over 200 percent of the (broadly defined) capital of the euro system.  No responsible bank would claim these sums are minor risks to its capital or to taxpayers.  These claims also amount to 43 percent of German Gross Domestic Product, which is now around 2.57 trillion euros.  With Greece proving that all this financing is deeply risky, the euro system will appear far more fragile and dangerous to taxpayers and investors.

Jacek Rostowski, the Polish Finance Minister, recently warned that the calamity of a Greek default is likely to result in a flight from banks and sovereign debt across the periphery, and that – to avoid a greater calamity – all remaining member nations need to be provided with unlimited funding for at least 18 months.  Mr. Rostowski expresses concern, however, that the ECB is not prepared to provide such a firewall, and no other entity has the capacity, legitimacy, or will to do so.

We agree:  Once it dawns on people that the ECB already has a large amount of credit risk on its books, it seems very unlikely that the ECB would start providing limitless funds to all other governments that face pressure from the bond market.  The Greek trajectory of austerity-backlash-default is likely to be repeated elsewhere – so why would the Germans want the ECB to double- or quadruple-down by suddenly ratcheting up loans to everyone else?

The most likely scenario is that the ECB will reluctantly and haltingly provide funds to other nations – an on-again, off-again pattern of support — and that simply won’t be enough to stabilize the situation.  Having seen the destruction of a Greek exit, and knowing that both the ECB and German taxpayers will not tolerate unlimited additional losses, investors and depositors will respond by fleeing banks in other peripheral countries and holding off on investment and spending.

Capital flight could last for months, leaving banks in the periphery short of liquidity and forcing them to contract credit – pushing their economies into deeper recessions and their voters towards anger.  Even as the ECB refuses to provide large amounts of visible funding, the automatic mechanics of Europe’s payment system will mean the capital flight from Spain and Italy to German banks is transformed into larger and larger de facto loans by the Bundesbank to Banca d’Italia and Banco de Espana– essentially to the Italian and Spanish states.  German taxpayers will begin to see through this scheme and become afraid of further losses.

The end of the euro system looks like this.  The periphery suffers ever deeper recessions — failing to meet targets set by the troika — and their public debt burdens will become more obviously unaffordable. The euro falls significantly against other currencies, but not in a manner that makes Europe more attractive as a place for investment.

Instead, there will be recognition that the ECB has lost control of monetary policy, is being forced to create credits to finance capital flight and prop up troubled sovereigns — and that those credits may not get repaid in full.  The world will no longer think of the euro as a safe currency; rather investors will shun bonds from the whole region, and even Germany may have trouble issuing debt at reasonable interest rates.  Finally, German taxpayers will be suffering unacceptable inflation and an apparently uncontrollable looming bill to bail out their euro partners.

The simplest solution will be for Germany itself to leave the euro, forcing other nations to scramble and follow suit.  Germany’s guilt over past conflicts and a fear of losing the benefits from 60 years of European integration will no doubt postpone the inevitable.  But here’s the problem with postponing the inevitable – when the dam finally breaks, the consequences will be that much more devastating since the debts will be larger and the antagonism will be more intense.

A disorderly break-up of the euro area will be far more damaging to global financial markets than the crisis of 2008.   In fall 2008 the decision was whether or how governments should provide a back-stop to big banks and the creditors to those banks.  Now some European governments face insolvency themselves.  The European economy accounts for almost 1/3 of world GDP.  Total euro sovereign debt outstanding comprises about $11 trillion, of which at least $4 trillion must be regarded as a near term risk for restructuring.

Europe’s rich capital markets and banking system, including the market for 185 trillion dollars in outstanding euro-denominated derivative contracts, will be in turmoil and there will be large scale capital flight out of Europe into the United States and Asia.  Who can be confident that our global megabanks are truly ready to withstand the likely losses?  It is almost certain that large numbers of pensioners and households will find their savings are wiped out directly or inflation erodes what they saved all their lives.  The potential for political turmoil and human hardship is staggering.

For the last three years Europe’s politicians have promised to “do whatever it takes” to save the euro.  It is now clear that this promise is beyond their capacity to keep – because it requires steps that are unacceptable to their electorates.  No one knows for sure how long they can delay the complete collapse of the euro, perhaps months or even several more years, but we are moving steadily to an ugly end.

Whenever nations fail in a crisis, the blame game starts. Some in Europe and the IMF’s leadership are already covering their tracks, implying that corruption and those “Greeks not paying taxes” caused it all to fail.  This is wrong:  the euro system is generating miserable unemployment and deep recessions in Ireland, Italy, Greece, Portugal and Spain also.  Despite Troika-sponsored adjustment programs, conditions continue to worsen in the periphery.  We cannot blame corrupt Greek politicians for all that.

It is time for European and IMF officials, with support from the US and others, to work on how to dismantle the euro area.  While no dissolution will be truly orderly, there are means to reduce the chaos.  Many technical, legal, and financial market issues could be worked out in advance.  We need plans to deal with: the introduction of new currencies, multiple sovereign defaults, recapitalization of banks and insurance groups, and divvying up the assets and liabilities of the euro system.  Some nations will soon need foreign reserves to backstop their new currencies.  Most importantly, Europe needs to salvage its great achievements, including free trade and labor mobility across the continent, while extricating itself from this colossal error of a single currency.

Unfortunately for all of us, our politicians refuse to go there – they hate to admit their mistakes and past incompetence, and in any case, the job of coordinating those seventeen discordant nations in the wind down of this currency regime is, perhaps, beyond reach.

Forget about a rescue in the form of the G20, the G8, the G7, a new European Union Treasury, the issue of Eurobonds, a large scale debt mutualisation scheme, or any other bedtime story.  We are each on our own.

A version of this material appears also on the Huffington Post.

85 responses to “The End Of The Euro: A Survivor’s Guide

  1. richard hendry

    Thanks for calling out the elephant.

    For a remarkably concise and still deadly accurate treatment of what inevitably comes next, read The True Believer by Eric Hoffer.

    He lived through the depression and upheavals following, lived in the train yards and educated himself at the libraries of UC Berkeley. Disrupted read him. The True Believer is best read in tandem with In Dubious Battle by Steinbeck; they are quite complimentary and taken together, devastating. But Hoffer gives some rudimentary prospects of solution.

  2. richard hendry

    Mistype- disrupted should be Eisenhower.

  3. I think you very much underestimate the readiness of European leaders to save the Euro. Once we will be at the brink of the “Catastrophe” (probably after the Greek elections) tough decisions will be taken: e.g. fiscal integration, or Eurobonds. However, this changes will stay incremental, it will be messy politically and it will take time before a proper European banking and fiscal Union is in place, but the Euro will survive. Probably the Greeks, Spanish, Irish and Portuguese will have to continue to suffer a tough adjustment, though some sweeteners (Euro-Investments, phasing out of the debt payments, German-inflation) will provide some relief.

    One of the problem with American commentators (Krugman, Roubini and yourself) is that they are logically trapped in the paradox between monetary Union and fiscal sovereignty. Yes you are right austerity is self-defeating and the periphery cannot get out of the debt trap this way, but you are wrong when you see the €xit coupled with devaluation as the only solution. Since the beginning the European Union, its member states (among them Germany) and its citizens (see the polls in Greece on the Euro), have proven that they are willing to go very far (and fast at an historical scale) to save the Euro (and the Union), therefore the “more integration” solution should not be ruled out so hastily. It will not happen in a night, the process is slow and painful, but it is leading towards this end-goal.

  4. How would the Swiss Franc be affected by the collapse of the Euro?
    rudy franchi

  5. Clear as usual, but calls for one correction that is not free of interest. The ECB is the middleman in target 2 system, and, as such, takes the full and direct credit risks arising from its lendings to EZ member’s Central Banks. On the other hand, its shareholders, that is, all the EZ members, face “only” the usual indirect risks pertaining to assets write-downs, which are diluted across these very same shareholders.

    In terms of the ongoing capital flight from Greece into German, it all means that, on the asset side of the ECB’s balance sheet, the Central Bank of Greece owes to the ECB, while on the liability side, the ECB owes to the Bundesbank. Accordingly, if Greece defaults on its ECB’s borrowings, it is the whole Eurosystem that takes the ensuing capital losses, which is then shared across all EZ members according to the ECB’s capital key: 25% for Germany, 17% to France and so on…

    The irony then is that, while Germany is enjoying almost all the benefits from the extra liquidity from the existing flight to quality in Europe, the burden associated to a Greek default on its debt against the ECB would be proportionally shared by all EZ members.

  6. It seems that the end of the Euro is inevitable. Nevertheless, isn’t there still any way to save it?

    This “knot” can be untied only by employing an Alexandrian solution, not any of the conventional solutions we have turned to in the past to jumpstart a flagging economy mired in recession. Then, what could be the Alexandrian solution?

    I believe the lack of necessary public supply chain infrastructure in the market of the Modern Information Age is the real cause of the current worldwide economic crisis including the euro zone crisis.

    Without necessary public infrastructure in the modern information supply chain process, there will be no sustainable recovery, because it will be almost impossible to create enough businesses and jobs to keep consumer spending at the desired level and revitalize the economy, no matter how powerful the economic policies or stimulus plans adopted. They might be able to fend off urgent problems for a time but could also create or accumulate unforeseen abnormalities in the market.

    For the Alexandrian solution, I would suggest you see this article: “To have Prosperity or to have Decline…” http://goo.gl/AeP9O

  7. Samuel Conner

    Catherine Dobbs’ New Euro White/New Euro Yolk looks better and better

  8. The Bond Man

    Nice, really, if the funding WAS going to the nations of Europe, but this is not what is happening: the funding is going into the ZOMBIE banks of Europe, to underwrite its’ massive failures in the derivatives business.

    Therefore, in my opinion, this statement by Professor Johnson is largely without merit:

    “The most likely scenario is that the ECB will reluctantly and haltingly provide funds to other nations – an on-again, off-again pattern of support — and that simply won’t be enough to stabilize the situation”.

    Finally, I agree (above) with Mr. Lee……the solution is INFRASTRUCTURE spending, as opposed to frittering away the limited resources of the European contingency funds on banks that are insolvent or bankrupt.

  9. “Most importantly, Europe needs to salvage its great achievements, including free trade and labor mobility across the continent, while extricating itself from this colossal error of a single currency.”

    This sentence requires special attention. Much of the discussion today regarding a dissolution of the EMU seems to imply that free trade and labor mobility must rapidly decline. As frustrations between and within nations are allowed to grow, this outcome may prove true but it need not. The benefits from free trade and labor mobility in the EU are significant regardless of whether any single currency exists. If that were not the case, then why are some countries part of the EU but not the EMU? An end to the Euro currency will be troublesome, but an end to the EU will be disastrous.

    http://bubblesandbusts.blogspot.com/2012/05/ending-euro-currency-not-european-union.html

  10. Conscience of a Conservative

    The Euro had some interesting promise, but ultimately was a catalyst for disaster. I wish Europe would stop resorting to smoke and mirrors pretending things aren’t dire. Bankia got a high pass on Europe’s stress tests less than a year ago. Unless the Northern countries wish to subsidize the Olive Oil countries this cannot work.

  11. Ever since the beginning of the housing bubble burst, I feel like I have been watching the various American and European plutocrats try to all be like little Dutch boys with fingers trying to stem the inevitable flood. There has been a certain fatal inevitability to it all. Four years ago, I said that sooner or later we would be swept into the abyss by this extraordinary combination of greed and power. I have been watching ever since. We saw, in the J. P. Morgan recent loss, a small glimpse of the near future. Oh it may be several months before these hens come home to roost, but, as you point out in your article, the blindness of the perverse greed incentivisation established by the bailout philosophies touted here and in Europe, are too tempting for the Jamie Dimons to ignore. So, our behemoth TBTF institutions have lined their portfolios with derivative dynamite. We won’t be spared in the explosion. How we rebuild will depend on whether their political muscle is stronger than a furious and exhausted populous. It would be hard to imagine either Romney or Obama making an argument to save these financial travesties called banks (massive betting parlors) which could win public opinion. After all, no matter how bad they could say things would become, it could hardly be worse than now. The Eurozone experiment was always doomed to failure without some form of potent political alliance to match the power of the monetary and fiscal alliance created. How could it work when culturally there are such massive and remarkable differences between the cutures of the various nations who are members? Always hard to imagine. Of course, during good times, such alliances always seem fine. Apply some pressure, and breakdown is certain. And there is unbelievable pressure now, which is not going to abate.

  12. If I hadn’t given up hope long ago, I would probably find this article depressing.

  13. The Bond Man

    LOL @ Mogden!

  14. I’m looking forwards to much cheaper hotel rooms in Paris when the Euro collapses.

  15. richard hendry

    Oregano, you would spend much, much more on bodyguards. The social consequences are already dire; they will soon enough prove calamitous.

  16. Mogden, been sitting on that fence for 8 months at least. If it weren’t for the child who may graduate (BS) next May, and may get a decent job after that, I would have given up. Note that of that trio, only the month of May will definitely occur. The probability on the others falls every day. The worst part is I am in health care. Do not understand law or finance very well. If I really understood just the basics of all this, it would probably dumb me off the fence. I’m afraid my daughter’s school of hard knocks perspective on life – “Life sucks, get over it.”- is going to change to “Life sucks, go on or get out.”

  17. uh. dumb = dump

  18. Dear Simon and Peter,

    Brilliant analysis and brutal honest appreciated as always.

    My own $0.02 contribution: I postulate that Lagarde’s Greeks don’t pay taxes comment was a self-sacrifice of sorts to try and help the pro-bailout Greek political parties for the 17 June election, which appears to have worked (at least temporarily):

    http://www.polycapitalist.com/2012/05/lagarde-sacrifices-herself-to-help.html

  19. @richard hendry, I would be ignored as old and irrelevant and not worth bothering to kill.
    It’s the better fed and fatter folks that should worry. They make for much more satisfying meals.

  20. To MIT:

  21. Per Kurowski

    On the contrary… my bet is that the Euro will survive because no Greek will accept a Drachma issued by the same politicians as always.

    This Greek tragedy is the direct result of bank regulations which allowed all European banks to lend to a Greek government against only 1.6 percent in capital, signifying an authorized leverage of 62.5 to 1… and a Simon Johnson, after I do not how many years, have yet not understood that.

  22. tigger nitro

    Great Post.

  23. try2bamused

    With all due respect, it’s quite possible that in a system as complex as the eurozone, it’s just impossible to know for certain what the future holds. So Simon’s thoughtful forecast might come to pass, or it might not. The whole thing might be thrown off Simon’s projected trajectory by some completely unforeseen and impossibly minute event. We won’t know for sure until it’s over and the dust has settled.

  24. Juan Didgee

    Someone needs to ring the socialists in China asap and remind them what is coming, they still think they’ll ride it out by tinkering with bank deposit lending stategies, spin about the strength of their ‘model’ and more spin … the direct line is 1800-MYWORDISYOURBOND … and ask for Shirlee.

  25. Frank Durant

    ………and Shirley will tell you that in China they still shoot incompetent
    and corrupt CEO’s, bankers and assorted politicians as the situation
    may require. She will tell you more than you want to know.

  26. No, no…the analysis works fine except you left the Wizard of Oz out of the story altogether. What about all of his past actions makes you think Bernanke won’t stair-step the dollar down right alongside this train wreck?

  27. Now where is the LIKE button when you need one?

  28. Ralph the doorman

    Nobody can see the all mighty wizard, NOBODY! You know that. Now go home before someone drops a rainbow on you.

  29. The Bond Man

    Alexis Tsipras and the Syriza bloc are fighting crushing austerity in Greece and are on the correct path, in standing up to ruthless, financial oligarchs that have Greece in a suffocating headlock.

    Mr. Tsipras is now the tip of the spear, and represents hope, as opposed to despair, penury, and unfair and outrageous measures imposed on the Greeks, (or, a “W” was fond of pointing out, the “Grecians”).

  30. birds of a feather flock together. this place is now full of simpletons!

    for the record, Simon was wrong about the US economy in 2009. he is wrong about euro now.

  31. I like to say, it takes a simpleton to know a simpleton.

  32. peter and simon, you are asking for a proactive resolution based on an incalculable scale. politicians and leaders, to start, are more of the reactive species. it takes an acute crisis to spark any action. and even if they were to be proactive, the entire world has not a clue as to how the complexities of defaults will affect trillions in derivatives and swaps. they fear for the worst because the web of the system has become so tangled, one cannot set themselves free without the web being destroyed. im sorry, but your response to the situation is naive. you would have to have central banks print billions upon billions one way or another. that leads to the end of fiat money no matter which way you slice it–either to keep the charade going, or to bail out entire nations. it cannot work. to think that you will have a wide array of personalities coming together to solve such a complex issue is just being naive. sorry, but that is the truth. its folly to think otherwise.

  33. I’m glad to hear Simon express it so simply! This Band will play on until the ship slides into the abyss. Those in the lifeboats will find a new way to trade and a new cycle will begin, ultimately leading to the next Titanic. That which is unsustainable, won’t be sustained (we in the US are next).

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  35. The Bond Man

    @ Annie, where do I sign up, to get MY MONEY? :-)

  36. I believe that was Nigeria, but first you must pay to have the cash shipped, and a garage to hold the money once it arrives, it’s all ones. Don’t be scared, i’m right here with you on the phone describing how you are to send the money, so i can send your money ASAP. Any questions just contact the CIA, they have a derivative to off set any loses on either one of our behalf’s and I have their phone number and they are most helpful. Thanks for your payment by the way.

  37. I’m interested in why you think inflation will be a result of the Euro’s collapse.

  38. Here is a much better analysis from Simon’s colleague at the Petesons Inst.

    http://www.piie.com/realtime/?p=2905

  39. carlo lugarotti

    A little too British, Simon. Hard times are in and ahead, but your kind of catastrophe has no more than 40% of chances, in my opinion. This means it is terrifying, and real, but not sure. If I were British I would probably share more of your thesis. If the euro survives, what is the future of the British Pound? I mean, 15-20 years from now? But I am Continental.

  40. Very helpful article, especially with respect to the mechanism by which bank runs in the periphery automatically create credit exposure for Germany. But since the exchange rate / trade balance / current accounts balance with Germany is the underlying problem, if Germany itself voluntarily leaves the Euro then why can’t the rest of the Eurozone hold together and continue with a single currency (with some appropriate adjustment mechanism for trade balances etc. going forward)?

  41. Surely a better option is for the ECB to just print a shedload of money and cause some inflation, no? What are they waiting for?!

  42. Juan Didgee

    Mr Market isn’t that naive Rob, but I know where you’re coming from. The capital markets would see straight through that plan and would immediately turn around and say “what’s Plan B” cause when the money which was printed is hoarded by corporates and consumers alike you have a real crisis of confidence (sugar highs from such policies tend to wane very very quickly). Its best the bottom 15% of the lending market is sent packing (receivership), bad debts are recognised for what they are and the private sector steps up and replaces the public sector etc etc.

  43. This is Laughable!! the Euro is NOT going to collaps as per Argentina – if for no other reason than the German Fuhrer won’t permit it!!

  44. TonyForesta

    Outstanding analysis. So much of the Ponzi that is Wall Street is based on rumor. Here a good word, the markets roar. Whenever math rears it’s ugly head, the markets fall. Optimism is one thing. Running wild on whispers and hope in another. There are no fundamentals in market operations. Wild animal spirits dependent on this or that central banks printing billions out of the myst and funnelling into the off shore accounts of predatorclass oligarchs and individuals is all that drives this toxic market. Growth? Good luck. A prosperous consumer class? Decades of infrastructure investment will not repair the horrorshow realities for most of the worlds middleclass who are facing depressionlike futures.

    The math is incontravertable. The imbalances too extreme. The incentives radically perverse.
    The pathological greed and wanton criminality too systemic. The system is doomed. It’s only a question of when and how brutal this certain end will be, and who suffers most as result.

  45. richard hendry

    Or in Yeats’ words “the centre cannot hold.” (The Second Coming). Which is devastatingly apt today.

  46. richard hendry

    Vous imaginez que la nation francais ont oubliez le fuhrer, ou de meme tout l’Europe?

  47. richard hendry

    Sorry, in English: You imagine that the French nation has forgotten the fuhrer, or by the same token, the rest of Eirope?

  48. bena gyerek

    things you missed:
    – total eurosystem losses need to include banknotes printed, distributed and then repudiated by exiting national central banks
    – germany’s borrowing costs will not increase. every currency has to have its own safe haven asset (if people sell a currency, someone else has to buy it and hold it in an asset denominated in that currency). although german cds will widen and imported inflation may well rise, german borrowing costs will continue to head towards zero so long as the ecb remains dovish.
    – once france and austria get drawn into the crisis (due to the exposure of their banks), it will become obvious to german voters that it is not merely about the fecklessness of other nations
    – once france is deep in it, merkel will strike a deal for fiscal and political federalism, at which point the german purse strings will be fully opened
    – the 2014 european elections (look them up on wikipedia) will play a crucial role from next summer, assuming germany and the ecb can string the crisis out that long
    – protests by left-wing young unemployed (syriza, indignados, ows) will develop into a pan-european federalist movement over the next 12 months

  49. When are you Brits just getting over yourself and leave the EU?

    You have been scathing the EU for decades, then the Euro, and the Germans, because all you want is a weak Europe and the fall of the Euro so that your beloved Pound isn’t going down the toilet.

    But you know what? This is exactly what’s going to happen. And along with it goes your City casino, and then you are left with NOTHING except bad taste, bad food, and entire districts in London speaking only Arabic.

    Even your MIT credentials and snotty lingo will not prevent this.

    Get the heck out of Europe, or shut up and pay your share of the the rescue!

  50. @richard hendry Of course, France hasn’t forgot the Fuhrer and will prove it by giving him, in a true spirit of collaboration, all the support needed. Saving the Euro will be only the first step. The next one will be a joint franco-german blitz on the City and the Pound.

  51. The Bond Man

    This time, finish the job!!

  52. ezra abrams

    kinda wordy and repetitive, and doesn’t live up to it’s title – if it is a survivors guide, where are the steps I should take, listed in numeric or outline point, point 1, do this, point 2, do this…of course, if those points constitute financial advice, perhaps that triggers liability issues

  53. Global economic armageddon has now begun–bond and bank runs galore–and world war is not far behind: “The Eurocalypse Has Arrived, Where Do You Put Your Capital?”

    http://www.zerohedge.com/contributed/2012-05-30/eurocalypse-has-arrived-where-do-you-put-your-capital

  54. Timk: Inflation is the tried and true way for sovereigns to reduce debt without an outright default. “This time is different” by by Carmen M. Reinhart and Kenneth Rogoff is a good read on the subject and for that matter, the not so distant future.

  55. Okay. That’s it.

    Women are officially taking over the planet. We can’t possibly do worse because we are less prone to believe our own made up bs and then blow up the world when the bs doesn’t match up with *reality*.

    Now, surrender your laptops, phones, joy sticks and all other e-gizmos.

    Scheesh.

    Thieves lying to each other – now there’s something new…NOT!

  56. Seriously, where can you “hide” the monkey-brain virtual reality big black hole that’s sucking out the life of life-maintenance?

  57. The Bond Man

    @ Annie, cancel, delete, negate, shred, destroy……all DERIVATIVE contracts…….for starters, seriously.

  58. Maybe all that Global Economy schtick wasn’t a good idea after all. The house of cards, comes tumbling down.

  59. An apocalyptic perspective with an exceptionally broad merging of data. What Simon and Mr Boone do not take into account, understandable from an Anglo-American perspective, is the considerable real wealth in continental Europe, not one built in a house of cards that (only) partially collapsed in 2008, and may not withstand the next earthquake tremor.
    My other critique is the fact that Germany can in no way afford a return to the DM, speculators would shoot its value over the moon and it would simultaneously loose its competitive edge in its European market (60+% of its exports) and to the rest of the world.
    I might buy a VW at a premium but not double its current value, same goes for a precision machine tool.
    As the prior French President admitted it was a mistake to allow Greece in let us not forget it is the recurrent villain (should I say mercenary) Goldman Sachs that cooked the Greek books to allow entry.
    With pain I believe the Euro will stay, perhaps in a tiered system and an unfair sharing of the burden, for the reality is business integrated Europe way ahead of the political power curve, Airbus is but one most vibrant example.

  60. Brilliant article. Same story: Lies, failure to see mistakes and obstinance. Funny, the observation about Goldman cooking the books. Wonder who else’s books have been cooked? And why do they get away with it?

  61. If the devil had a choice to save his soul, or save his *hide*, which would he choose? After many moons of extensive research, it was proved he would always save his hide. Go figure.

  62. @Mr DeLutz – “…With pain I believe the Euro will stay, perhaps in a tiered system and an unfair sharing of the burden, for the reality is business integrated Europe way ahead of the political power curve, Airbus is but one most vibrant example…”

    And in the thousands of years of history of Europe, when did the people accept the solution of “an unfair sharing of burden”….?

  63. Agreed. Untangle ourselves and each for their own. Cheap holidays in Greece await… We gathered some views from Greek MBAs on the coal-face on b-school publication BusinessBecause: http://www.businessbecause.com/news/making-the-headlines/mba-students-should-greece-exit-the-euro-81156 – all of them set against leaving the Euro…

  64. The Bond Man

    Why not Greece having a go at suing GS, because GS is largely at the epicenter of the Greece tragedy?

    Serious responses sought.

  65. I am not a lawyer, but GS was paid handsomely for its services, those that should be sued are the individuals with intent. Unfortunately even at home they get away with it. It has been said before but begs constant repetition they own us, they own the system, our politicians. Our frustration has but one course today, raise awareness, in the meantime support entities such as OWS.

  66. Great jumping Jehosaphat! What a post! I see I’m going
    to have to revise(and shrink, not extend) my opinion of
    Professor Johnson.
    First: exercise for readers. Read the 23 paragraphs of
    Boone-Johnson again and count for yourselves the number
    of paragraphs with solid information, or reasoning. Discard
    those with prognostication, or simply Heavy Breathing.

    Second: I am just back from three weeks in Europe: a week
    in Germany, a week in France, and a week in Switzerland.
    I have also lived in a country, Eritrea, in 1998, as it
    switched currencies from the Birr to the Nakfa. It was
    celebratory and interesting, but still caused a lot of
    turmoil. But of course Eritrea is very poor, and doesn’t
    have masses of vending machines and ATMs, which made
    things easier for them.

    I’ll try to make my comments as short as possible.
    1. Have Messrs B and J thought seriously about the
    difficulties of switching even a small country like
    Greece(still 1.5 times the size of Eritrea, and much richer)
    away from the Euro? Think printing/minting new bills/coins,
    fixing the vending machines, imposing new contracts of all
    kinds, quelling the public turmoil . . . And Messrs B and J
    want to do this, simultaneously, for all Euro-zone
    countries? It is nuts, and thank the Lord, the people in
    Germany and France know this.

    2. When I was abroad, in April and May, I didn’t talk to
    any national leaders; I simply read some papers and talked
    to a whole lot of informed citizens. They, together with
    the French public, voting for Hollande, and the
    Nordrhein-Westfalen voters, voting for the Social Democrats
    and Greens, understand that abolishing the Euro is great for
    the banks but lousy for ordinary businesses, whether VW or
    Renault or the smaller German export industries.

    Think! The Germans have become rich by exporting. They
    don’t want a bunch of trading partners all racing to devalue
    their currencies, thus making German trade harder. Far
    better for the Germans to support the Greeks and Spaniards,
    paying their debts so that the Greeks and Spaniards, and
    Portuguese and Finns, can keep buying what they make. That
    is what the Chinese do for us Murricans; ain’t the Germans
    as smart as the Chinese?

    Do I have to write more? I recommend to Messrs B and J to
    get away from their preoccupation with the banks and look at
    the world of industry and trade in _goods_. A single
    currency serves such people well; a welter of currencies
    serves only banks(even a lone traveler like me, wrestling
    with euros and francs in various compartments in his
    wallet, understands that)

    I offer no prognoses. Maybe the German and French leaders
    _are_ really stupid. But the election of Hollande in France
    is a good sign, and Ms Merkel has received her wake-up call.
    So I am hopeful. But depressed about the post I’m
    commenting on. What possessed the good Messrs B and J??

    Best wishes,

    Alan McConnell, in Silver Spring MD

  67. The end of a silly and stupid project.

    “So, the big question on everyone’s mind in Europe nowadays is: will the euro crash? And pretty much everyone knows the answer to it: yes, it will. But not before European political leaders, both elected, sort of elected and unelected, waste more trillions of taxpayers’ money on trying to save it.

    The point of the matter is that the euro was pushed through initially by the lot in Brussels, in cahoots with national politicians who betrayed their respective peoples, on the assumption that it would be the first major step in creating a joint fiscal system with a pan-European ministry of finance and central bank. No one spoke about it then because the Eurocrats and the treacherous political leaders on the ground in each member country were too afraid to open up their cards and reveal the federalist plan. That was why a single currency came into force without the proper institutions to back it up. It was absolutely crazy, having countries like Germany or France playing in the same league as Greece, Portugal and Ireland. But as it was too early to push through the pan-European finance ministry the creeps in Brussels and corrupt national politicians were hoping that it would work out somehow, until they push through the idea of a superstate with its own finance ministry and central bank, to run the whole of Europe as one nation.”

    http://www.stirringtroubleinternationally.com/2012/05/27/the-euro-will-crash-but-not-before-politicians-waste-more-trillions-on-saving-it/

  68. “The following draft is a leak (and an intentional one) from the Berlin Finance Ministry scoping out how life in the Fiskal Union will work. And as we all know, work makes free: The portion of a FU nation’s debt exceeding 60% of GDP will be transferred into a new European Redemption Fund. (Very Merkelian, that one: sinners will be redeemed)
    The 17 countries will be liable for their own portion of the debt transferred to the ERF. But they will face a maximum term of 20-25 years to pay it off. But here comes the double-think: In a legal ‘redeemable pref shares’ sense (as per standard takeover contracts in business) all 17 nations will be jointly liable for the debt placed in the fund. This locks everyone in forever: you can run, but you can’t hide. As the more observant among you will have spotted, the original eurozone lock-in caused most of the problems the ezone faces today. Good to see that Berlin learns from its mistakes, nicht? But it also means that nobody (for example – pulling a name out at random – Germany) can ever get lumbered with the entire debt mountain: because the word ‘severally’ is missing from the definition used (‘jointly’), creditors can’t come after one debt guarantor like they could in business. Deutschland über alles – naturlich. And – to be fair here – Brussels off the hook yet again…it not being a sovereign nation an’ all. “Don’t let’s be beastly to the Germans, or in any way horrid to the Hun” as Noel Coward sang in 1939.
    One final thing of course – because Berlin never misses anything in the detail: if countries fall behind in their repayment of debt in the European Redemption Fund, some of their national tax revenue would be earmarked for repayments. They would also have to commit to fixing national finances to free up money for debt service.
    Und all ziss vill be offaseen by little Volfy in dem Veelchair. You haff been varned. Before any new readers write me off as an anti-German headcase, let me just reiterate what I’ve written a hundred times before: these problems are chiefly CDU-Merkelian, not German. The SPD would be opposed to these tactics, if not the overall goal, of eurostability. And, like UKIP’s Nigel Average, being married into a German family, I’m hardly likely to be a Germaphobic Mossad agent, now am I? What I am doing here is dramatising and sharpening the focus on some facts to wake people up. Wolfgang Schäuble is a ruthless and slippery man found suspicious by most German politicians. Angela Merkel is a former Osti Stalinist who insists on taking a hard line in support of whatever she is promoting….usually herself. The Brussels eurocrats are all unelected functionaries who have shown themselves to be autocratic and pathetically unimaginative. Schäuble is already approved as the man who will be running the finances of the Fiscal Union. His idea of Germany is clearly going to dominate it. This is only ever going to end in tears.”

    http://hat4uk.wordpress.com/2012/05/31/greek-scare-tactics-continue-as-berlin-remorselessly-plans-a-future-fiscal-union-dominated-by-wolfgang-schauble/

  69. Best wishes indeed Al. The Euro is currently @ .76 to the dollar right now, the rest of the equation is attributed to negative rates, a double negative giving you today’s stated @1.28/per dollar. So many people have been living in la la land for so long that they forgot or misinterpreted dynamics of the math. The Euro is a mess, and as long as no one converts to many Euro’s to dollars at today’s rates, all will be fine. Otherwise, if it is the will of the people, it shall be done. Inflation that is.

  70. @Alan, “…Think printing/minting new bills/coins, fixing the vending machines, imposing new contracts of all kinds, quelling the public turmoil . . .”

    Uh, they already went through this exercise when they switched to the Euro – in today’s climate, you’re just describing new *jobs* :-)

    Counter argument is that this activity would certainly delete the derivatives contracts since no one knows who *owns the house*.

    Chlorox the bowl and give it two flushes…

  71. “We don’t know exactly what is to come, but we can all join the very few dots from where we are now, to the collapse of the first major bank…
    With very limited room for government bailouts, we can very easily join the next dots from the first bank closure to the collapse of the whole European banking system, and then to the bankruptcy of the governments themselves.
    There are almost no brakes in the system to stop this, and almost no one realises the seriousness of the situation.
    The problem is not Government debt per se. The real problem is that the $70 trillion in G10 debt is the collateral for $700 trillion in derivatives…
    Yes, that equates to 1200% of Global GDP and it rests on very, very weak foundations
    From an EU crisis, we only have to join one dot for a UK crisis of equal magnitude.
    And then do you think Japan and China would not be next?
    And then do you think the US would survive unscathed?
    That is the end of the fractional reserve banking system and of fiat money.

    It is the big RESET.

    It continues:

    Bonds will be stuck at 1% in the US, Germany, UK and Japan (for this phase).
    The whole bond market will be dead.
    Short selling on bonds – banned
    Short selling stocks – banned
    CDS – banned
    Short futures – banned
    Put options – banned

    All that is left is the Dollar and Gold

    It only gets better. We use the term loosely:

    We have around 6 months left of trading in Western markets to protect ourselves or make enough money to offset future losses.
    Spend your time looking at the risks of custody, safekeeping, counterparty etc. Assume that no one and nothing is safe.
    After that…we put on our tin helmets and hide until the new system emerges

    And the punchline:

    From a timing perspective, I think 2012 and 2013 will usher in the end.”

    http://www.zerohedge.com/news/big-reset-2012-and-2013-will-usher-end-scariest-presentation-ever

  72. richard hendry

    You are all preoccupied with ‘near history.’. Just guessing which scenario is baked in. What happens after any of these scenarios is the violent diminution of the middle class across the 1st world with highly predictable, but not yet fully determined mass movements that will embody largely irrational, but thoroughly manipulable reactions.

    This is what the right thinks of as anarchy and the left thinks of as revolution.

    But the danger is not really with the peculiarities of left and right, it is with an arisen people no longer anchored to a secure life. It is with a dispossesed ‘montaigne’ in the tradition that gave us the terms ‘left’ and ‘right.’

  73. Endgame 2012: Must see video:

  74. “…But the danger is not really with the peculiarities of left and right, it is with an arisen people no longer anchored to a secure life…”

    When predators run free = no secure life

    All these doomsday survival scenarios are still based on a lawless society – reacting to the power of lawlessness instead of *hot-spotting* where the lawbreakers are and stopping them.

    The tribe needed to get out of the cave to survive which meant that they predator had to be slayed….just saying, Law of the Jungle 101 – the *survivalist* mode…

    Money God needs to go…

  75. “The Truth About Europe: There Is No Solution: Europe, like America, could have used all those trillions in bailout money to guarantee their citizens deposits. Instead, both have opted to guarantee their banks’ losses. A clear and simple choice. But also one that just about nobody seems to have understood.”

    http://www.marketoracle.co.uk/Article34918.html

    “Hedge funds place record bets against the euro: A record number of hedge funds made so-called short bets, or wagers that the euro would weaken, according to the latest report from the Commodities Future Trading Commission that tallied the data for the week ended May 29″

    http://money.cnn.com//2012/06/05/investing/euro-hedge-funds/index.htm?section=money_news_international

  76. “The REAL Reason the EU is Implementing Border and Capital Controls: The EU in its current form is finished. Done. Game Over. I’ve been saying this for months. But it’s a fact. Europe has literally run out of money. Indeed, the ECB’s interventions are now not only toxic for those participating in them (those banks taking money via the LTRO have been crushed in the credit market) but are losing their impact (LTRO bought only one month of market gains). Again, the EU is finished. And the powers that be know this….Folks, the EU End Game is now officially in play. Germany has played its hand: if you want us to foot the bill we want your Gold. This tells us: Germany is aware that most EU Sovereign bonds and paper are garbage (this is confirmed by the fact that Germany has passed legislation allowing its own banks to dump EU Sovereign bonds into a bailout fund during a Crisis). Germany will only put up more money if it’s granted fiscal control of the EU and Gold bullion as collateral. Germany is the REAL monetary power in Europe (not the ECB). I believe this is Germany’s final push for EU control. If this fails and Germany ceases to offer additional bailout funds in some form then the EU will collapse (as noted earlier, the ECB, IMF, and US Fed cannot prop the EU up nor will the ESM mega bailout fund work). Spain’s literally on the verge of seeing a bank holiday. Germany is the only one who might have the funds to prop it up. And Germany wants gold. In plain terms, the EU will likely not last through the summer. It’s literally GAME OVER time. Various proposals will crop up (such as Germany’s ‘cash for Gold’ program), but no one (not even Germany) actually has the funds to support the avalanche of banking failures that is coming. THIS is why various countries are moving to put border and capital controls in place. They know the game is up. It’s now just a matter of time before things go from ugly to truly disastrous.”

    http://www.zerohedge.com/contributed/2012-06-06/real-reason-eu-implementing-border-and-capital-controls

  77. “Forget about a rescue in the form of the G20, the G8, the G7, a new European Union Treasury, the issue of Eurobonds, a large scale debt mutualisation scheme, or any other bedtime story. We are each on our own.”

    But, for those still mired in ‘normalcy bias,’ here is PART 2 of the Survivor/BIG RESET Guide:
    “Because if the Big Reset told us what is coming, Eidesis tells us how to get from there to the other side…

    First of all, what is systemic risk?

    Typical Systemic Risks:

    Wide-spread defaults, sovereign debt crises, devaluations, capital controls, bank holidays, etc.

    How it usually happens:

    No warning;
    Emergency announcement over a weekend;
    Drastic measures to “protect the public” against [insert suitable culprits];
    Outcome- someone’s value gets expropriated.

    Yes, it can happen here –it has in the past.

    Usually, the best warning indicator of a major systemic “event” are soaring cross-asset correlations: something we are experiencing right now.

    Crisis of 2007-2009 was a “High Correlation” disruption:
    Multiple institutions and majority of the population were affected.
    Reducing systemic risk called for lowering correlation, i.e. “firebreaks”, de-coupling, etc.
    Instead, governments’actions since 2008 have been increasing correlation:
    Fiscal Policies –sovereign debts are higher than ever and still growing fast;
    Monetary Policies –broken price mechanism = system-wide misallocations and mispricings;
    Too-Big-To-Fail –bigger than before the crisis;
    Euro Zone Crisis –“solutions” keep increasing interconnectedness – a “mutual suicide” pact;
    Financial Regulation –was supposed to reduce the risk but stalled through stiff opposition:
    A single JP Morgan trader is reported to run $100 bln CDS book?!?!?!?!?! [ZH: now confirmed, and we all know the story since]
    Lack of Transparency –more opacity since the crisis; mark-to-market remains suspended.

    Everyone knows this but only few are willing to accept the implications; fewer still are willing to act.

    What are the key systemic risks:

    The already unfolding crises:
    The Euro zone, Argentina.
    Redistribution of wealth:
    ZIRP –Taking from net savers for the benefit of net debtors.
    Inflation targeting –Debasing debts at the expense of savers and bond holders.
    Pending tax hikes for top earners.
    Financial Marshall law:
    FBAR and FATCA raise penalties and tighten reporting on all financial assets held offshore.
    Argentina –Currency controls; “Dollar-sniffing”dogs at the airports and border crossings.
    Governments co opt banks to police the assets within the system:
    FATCA – all foreign financial institutions to report on all US customers or face 30% withholding.
    Swiss banks have been firing US clients; deal on reporting is inthe works.
    Swiss banks have agreed to report on their German and UK customers’accounts.

    FINANCIAL REPRESSION IS AN ARRAY OF POLICY TOOLS THAT PRECLUDE CAPITAL FLIGHT AND ENABLE WEALTH TRANSFER FROM THE SAVERS TO THE DEBTORS

    What to look for:

    There are always losers and winners –many more losers than winners.
    Majority has “normalcy bias” – tendency to underestimate risk of disaster.
    Only a few heed the risks and make proper contingency arrangements.
    Historically, financial disaster preparedness has enabled accelerated wealth creation.

    Systemic Insurance is the only way to protect wealth from “High Correlation” events.

    But more than anything, the one biggest giveaway is near endless complacency: the more the pros exhibit it, the closer we are:

    Western economies have enjoyed V-shaped recoveries and domestic peace for over 65 years.
    Mainstream investors have never experienced a “reset” or repression, financial or political.
    Disdain for history and post-WWII Western exceptionalismunderpin collective hubris:
    “There can be few fields of human endeavor in which history counts for so little as in the world of finance.Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of the those who do not have insight to appreciate the incredible wonders of the present.” – John K. Galbraith

    Complacency is misplaced – despite apparent normality, the risks are high and growing….”

    http://www.zerohedge.com/news/big-reset-coming-here-what-do

  78. Spain seeking $100 billion BAILOUT for its’ ZOMBIE BANKS? I have a better idea: Delete all derivatives, and use the $$$ for rebuilding/new infrastructure. Absent this, the world wide depression deepens and self-perpetuates.

    http://www.huffingtonpost.com/2012/06/09/euro-zone-agrees-to-lend-_n_1583452.html

  79. I’ve spent the last few days in Belgium and the Netherlands. Despite being in the Euro, which the British press continually reminds us is in a state of economic chaos, and will collapse by the end of next week, things felt rather good.

    The people I spoke to sounded positive, no one was in a state of panic, and overall it felt less gloomy than the UK. Despite a slumping real estate market, I spotted a number of new apartment buildings in Rotterdam and Amsterdam that hadn’t been there 18 months ago, and there’s a significant amount of infrastructure work going on. Other than some austerity measures, and a slow economy, life has been going on.

    I have neither the economics training nor knowledge of the financial markets that Messrs Boone and Johnson possess, but I’m a bit more sanguine about the single currency’s prospects than I was.

    Of course, I’ll probably be proven to be spectacularly wrong in the near future. :)

  80. “The people I spoke to sounded positive, no one was in a state of panic….”
    The people I spoke to in 2008 while Lehman was collapsing sounded positive, no one was in a state of panic. Normalcy bias is a powerful thing.

  81. Massive Spain bailout may be a STOPGAP measure:

    http://marketday.msnbc.msn.com/_news/2012/06/10/12151561-massive-bailout-for-spain-may-only-be-stopgap-measure?lite

    Stop recapitalization of ZOMBIE BANKS!! Its an endless black hole!!!

  82. Credit Suisse Explains “The Real Issue”, And Why There Is Two Months Tops Until France Is In The Bulls Eye

    http://www.zerohedge.com/news/credit-suisse-explains-real-issue-and-why-there-two-months-tops-until-france-bulls-eye

    “Here we go:

    EU SOURCES HAVE DISCUSSED IMPOSING CAPITAL CONTROLS AS WORST CASE SCENARIO IF GREECE LEAVES EUROZONE – RTRS
    IMPOSING BORDER CHECKS, LIMITING ATM WITHDRAWALS ALSO PART OF WORST-CASE SCENARIO PLANNING – EU SOURCES – RTRS
    SUSPENSION OF SCHENGEN ALSO DISCUSSED

    In other words, that money you thought you had… You don’t really have it. We can only hope this message was not meant to restore confidence and prevent future bank runs. Because if Europe wanted a continental bank run, it may have just gotten one.

    This is getting scary very fast.”

    http://www.zerohedge.com/news/europe-brings-out-capital-controls-bazooka

  83. So if the end is near for the Euro, why has it been rising the last 10 days or so?

  84. “When a top letter says that the ‘similarities to 2008 are becoming almost eerie,’ you just have to pay attention.”

    http://www.marketwatch.com/story/eerie-comparisonsto-the-crash-of-2008-2012-06-18?link=home_carousel