I was surprised to see the headline in Friday’s Financial Times “Seven days which shook Europe” looking back over the fall of the Dutch government, the election of Francois Hollande in France and the Greek elections. As I have been predicting for more than a year that Greece will leave the Euro and that this will produce a domino effect which will probably see Portugal, Spain and Italy follow suit, I am surprised that anyone could be surprised by these events. But then I suppose I don’t spend my life swallowing a diet of PR spin from the Eurozone “elite” and their acolytes.
As ever, people are looking in the wrong place for the source of trouble. All eyes have been on the bond market, whereas they should now be on bank deposits as most Greek bonds are now in official and/or local hands so the bond market is no longer playing a central role in the Greek tragedy/farce. There is an old saying that a currency can endure despite a lack of faith in it from foreign investors, but not when it is rejected by its own population (see Argentina in 2001 for details). Greece’s bank deposits have been fleeing its banking system as its citizens fear that they will wake up one day soon and discover that they are New Drachma deposits rather than Euros. When this happens, the €3 trillion of deposits in Italian and Spanish banks are going to try to do the same. This will represent a tsunami which no amount of Eurozone spin can prevent and which will require drastic action - like exchange controls.
Whilst we await these events, herewith a piece of research which tells you why the Euro was doomed from the outset: