There’s only 1 nation in the European Union that’s not in a terrible financial situation: Germany. All the rest – Greece, Italy, Spain, Ireland, Portugal, and even France – are overladdened with debt. It doesn’t make sense to have a monetary but not a fiscal (and physical) union, because ultimately, both things have to be rowing in the same direction for the union to work correctly. So in this dire situation, the European Union only has 3 choices left. These are
- A fiscal union. Instead of the current monetary union, all the Euro nations will let one government control their money purse. In effect, this means that there will also be a physical union, because once you let a foreign government control your money purse, you’re no longer an independent nation. As a result, there will be no Spain, France, Germany, Italy, etc. There will be 1 United States of Europe (USE, anyone?).
- Germany assumes all the debts of other Euro nations.
- The EU dissolves.
Now let’s analyze the probability of each event.
- There are too many diverse cultures in Europe for there to be a physical union. From history, we can see that in order for a union to occur, everyone must row in the same direction. In order for that to happen, 1 of 2 things must occur. 1 – There must be one race that dominates all the rest (E.g. China, where the Han account for 92% of the Chinese population). As a result, there will be one dominate culture. 2 – There must be a melting pot, in which all the old cultures are discarded after a few generations in favour of a SINGLE, new culture (E.g. U.S., where most immigrants discard most of their heritage’s culture in favour of the American way). Neither of these things can happen in Europe, because no race can far outnumber the rest, and the European nations are so steeped in their heritage that it becomes almost impossible to let go of their individual cultures in favour of a new one. Although people like George Soros favour a fiscal (and physical) union, this is a psychological, cultural, and political impossibility. Fiscal/Physical Union = Almost impossible.
- Even if Germany wanted to monetarily help all the other Euro nations, it can’t. There are so many Euro nations asking for money that Germany doesn’t have the resources to help them all! In addition, Germany’s own economy is starting to slide, which means that not only does Germany face external problems, but also internal problems (which hadn’t existed before). Germany assuming all Euro debts = Impossible.
- The previous choice (Germany assuming all debts) is based on the assumption that the Germans will do everything in their power to help the other members of the EU, which they definitely won’t. There will be a breaking point, a point at which the Germans will say “enough of this, we’re better off leaving the EU than we are staying here”. Because the Germans are a tough race, one that isn’t easily pushed around by others, that breaking point will come sooner rather than later, most likely during next year’s German election when German voters express their discontent at helping the other Euro nations whom they consider to be “lazzy bastards taking 4 hour lunches and 5 hour workdays”. Once Germany, the glue that’s holding the EU together, leaves, the European Union will be nothing more than an empty shell, which means that it will be dissolved. The Euro Dissolves = Highly likely.
Investing consists of 2 parts – prediction and implementation. Now that the future is crystal clear, all I have to do is figure out how to make money from my prediction! Since this is bad for the Euro and good for the American dollar, my first thought was to buy the USD and subsequently sell the Euro, betting on a decline in the Euro. However, a couple of complications arise:
- Because currency movements are so small in comparison with stock and commodity price movements, you absolutely must use leverage when investing in currencies if you want to make meaningful returns. This is problematic because:
- Leverage forces you to be careful about your timing. If you’re not leveraged, you can sit through a storm and hold onto your position until you’re right. But not so when you’re leveraged, because a temporary reversal will force you to sell at the worst time (due to margin calls).
- Currencies are meant to be traded (timing is crucial), not invested in.