Germany is Right to Propose Euro-Zone Expulsion

Montreal, Canada

"We need to have an agreement under which, as a last resort, it's possible to exclude a country from the euro zone if again and again it doesn't fulfill the requirements."

German Chancellor, Angela Merkel, March 17, 2010

Germany proposed axing European Monetary Union (EMU) members if they consistently fail to reduce bloated deficits. The remark, addressed by Angela Merkel yesterday to the German lower house of parliament, or Bundestag, came as a warning shot to Greece, which has yet to receive a firm bail-out from the European Union (EU).

Greece has thus far secured short-term financing but requires an estimated €40-€50 billion ($55 to $68 billion dollars) more EUR in fiscal 2010 to plug its budget gap. Thus far, the EU has surfaced the idea of a European Monetary Fund, or EMF, a quasi financing body similar to the International Monetary Fund, or IMF. But to-date, nothing has been legislated to bail-out or guarantee loan-assistance to Greece.

Germany is increasingly deviating from mainstream EU members, including France, on the Greek bail-out dilemma. Germany is right to refuse a bail-out of any EMU member.

The Germans should not anchor a broad-based EU bail-out of Greece or any other struggling member. The Greeks work about 60 days less per year than the Germans yet the latter should feel compelled to provide loan guarantees to a country that has repeatedly failed to balance its books and, for all intents and purposes, fudged its accounting to enter EMU. The whole idea of bailing-out Greece is a joke.

I say let the Greeks exit EMU and reintroduce the drachma. The Greeks would immediately devalue the reintroduced drachma thereby buying time to repay bloated deficits – something most countries already do anyway since the Roman Empire.

If you harbor out-of-control finances then the best thing to do to ensure your operational finances is to devalue your currency. The United States has been doing this ever since Nixon broke the gold window in August 1971. America prints all the money it needs and then devalues its currency thereby paying back nominal debts in inflation-adjusted dollars. It's a great con-game.

If Greece and other weak EMU members exited the single currency, the end result would be a stronger, not a weaker, EUR. The problem with this outcome is that it's not politically feasible. Once weaker members exited the system EMU is basically dead in the water – even if the Germans stay aboard.

The odds are rising that some sort of EMU crisis will either force weaker nations to exit the system or the EUR will dissolve. It won't happen overnight. But increasingly, it seems quite possible that if the Germans continue to break from the rest of the EU on the contentious bail-out issue, the EUR won't survive as a single currency.

If it does survive, which is the likely outcome, then this decade will be marked by discontent and volatility for EUR investors as the single currency struggles amid bulging deficits and political discord.

Germany is right to refuse a Greek bail-out. Unfortunately, the European Union will somehow coerce its largest economy to cave in and throw good money after bad.

For EUR-based investors, gold remains the only alternative as a new round of currency chaos seems almost unavoidable.

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