Euro: The New Sick Man of Europe

While there are at least four European countries competing, though not willingly, for the new title of the Sick Man of Europe, the prize goes to the eurozone's ailing common currency.
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The following guest commentary was written by the staff of the YieldPig investing blog.



) -- William Shortly before the Crimean War in 1853, Tsar Nicholas the First of Russia referred to the Ottoman Empire as a "very sick man...who has fallen into a state of decrepitude." It's ironic that the original "Sick Man of Europe" was a Mediterranean country that had fallen on hard times politically and financially which seem to go hand in hand.

While there are at least four southern European countries competing, though not willingly, for the new title of the Sick Man of Europe, the prize will probably go to the eurozone's ill advised, ailing common currency hands down. While the northern countries scoff at their freewheelin', carpe diem, southern neighbors as the cause of the current crisis, the cause is much more obvious than the Greeks running up a huge tab at the café.

The problem lies in the idea of the euro itself. A common currency that joins diametrically different nation states? Ludicrous. For a common currency to work correctly, a central government comes in handy (see "The United States: The Early Years"). There's a loose confederation and a central bank, but no one can truly pull the trigger and make it work. It's like building a car without a steering wheel.

Even Milton Friedman, whose school of thought the EU claims to strictly follow, opined that the eurozone would not survive its first significant crisis. The crisis is here and the fact that the great experiment's philosophical godfather doubted its success is not encouraging. I rarely agree with Milton Friedman. The whole Ayn Rand unbridled, consequence be damned style of capitalism seems a bit naïve and sophomoric. Capitalism is great, don't get me wrong. But it can serve a greater good and should respect some sort of moral framework. OK, please pass the band aids for my bleeding heart.

What's the solution? There are a few and they all suck. Greece and the rest of the southern countries get fiscal austerity religion and practice it while the more successful northern countries bite the bullet and help their brothers out. Will that happen? Probably not. These are countries that at one point over the last nine centuries or so conquered, raped, plundered, and pillaged each other. Forgiveness comes slowly in the old country. Just because we have Starbucks and wi-fi and cool cell phones every thing's OK now? To quote Dr. Evil, "Rrrrrriiiiiiiiiight."

What's the easiest route? Greece pulls out of the EU and does it's impression of Argentina. The tougher choice is to stick with the program, slash spending, and outlaw burning tires in the middle of the Athenian streets. Either way the Greeks are screwed, the EU suffers massive body blows that may take it down for the count, and the euro is ushered into the dustbin of history. If the EU breaks up, rest assured it will be ugly.

Did we see this coming? Some may have.


's purchase of

Anheuser Busch

and EADS' eagerness to build tanker planes for the U.S. Air Force were toppy indicators. At the time, their currency was strong and it seemed like a good idea. The Japanese thought the same thing in the 80's when they bought Rockefeller Center.

Where does that leave U.S.? Apparently, the U.S. Treasury Bond has received a stay of execution. The dollar is looking pretty good now isn't it? You wouldn't have thought so a year or two ago. The terms "United States" and "Banana Republic" were interchangeable. Inflation? Missed its flight. Can't catch another one for a year maybe.

That doesn't mean everything's ducky for us. Business in and with Europe will suffer which will continue to drag on the earnings of American companies that do business over there. Chaos will still reign supreme on occasion. Markets will be constantly jittery. As an investor, play defense. Own things that are tested and all-weather that pay you something just for showing up. Enjoy capital appreciation but don't expect it or bank your retirement on it. Things are weird and they will probably get weirder.