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Boeckh Investment Letter

Investment and economic commentary by J.Anthony Boeckh and Robert Boeckh

A “Two Euro Solution” to a Terminal Illness

The problems of the euro have been eloquently re-hashed by the press, market letters, economists, policymakers and politicians.  All kinds of suggestions, both good and bad, have been offered.  At the end of the day, it seems obvious that the problems of the eurozone are intractable and the disease is terminal.  It is now time to think through the process of ending the current monetary regime and try to plan as best as possible for what will likely follow. 

The Three Fatal Flaws

The first fatal flaw in the euro creation was that it was a marriage of convenience among countries with fundamentally opposing philosophies.  There are in essence two groups of countries with France straddling the divide. 

Group One is essentially hard money, free market, financially disciplined and competitively focused. Voters in these countries tend to elect politicians that espouse such principles.   

Group Two’s philosophical theme is based on soft money, socialism, statism, union domination and weak fiscal discipline.  They elect politicians who abide by this view of the world.  A deeply entrenched entitlement mentality has been established.  This has naturally led to pervasive, deeply ingrained corruption, as there are so many people feeding at the trough.  There is a constant jockeying of position to obtain more atthe expense of others.   Politicians learn to get elected by bribing voters with the expense of others.   Politicians learn to get elected by bribing voters with their own money.  As there are never enough taxes to pay the bills, the government must use the central bank to make up the difference when the bond market goes on strike. 

The second flaw is that the marriage was consummated without putting in place a federal fiscal union or independent supervisory authority over budget deficits, excessive sovereign debt build-ups and, possibly most importantly, powerful, pervasive, centrally controlled independent bank supervision.  It is entirely understandable why the soft money countries have an aversion to such discipline and strenuously resist when hard money countries try to impose it. 

The third fatal flaw is that the Germans allowed themselves, for various historical reasons, to be pressured into the marriage by smart politicians in the other countries. Their mistake was going ahead with the marriage without appropriate pre-nuptials. 

The Germans acquiesced against their better judgment because they foolishly believed that the rules they laid down in the agreement would be adequate protection prior to the creation of the needed institutional structure.  Their big mistake was to think that those in the Group Two camp would actually do what they agreed to, forgetting that their politicians would continue to promise what they knew could not be delivered.