The death of the euro, like that of Mark Twain, has been greatly exaggerated. However much the evidence stacks up against the single currency, the powers that be in Europe are determined it will survive.
The last rites for the euro were pronounced – though by no means for the first or last time - by Desmond Lachman this week at the Legatum Institute, a think tank based in London but part of a Dubai organisation.
His talk was called Can the euro survive? but Lachman, now at the American Enterprise Institute and with an impressive background at Saloman Smith Barney and the International Monetary Fund, was in no mood to pose such a question. Instead he made clear that it was a case of when, not if, the euro would unravel.
It is hard to argue with his facts or his logic. Most of the figures he produced, along with his argument, have been trotted out by a variety of experts and they are stark. Greece, Ireland, Portugal and Spain all have serious budgetary problems that will remain long after the current round of bailouts.
Yet I feel that one questioner in the audience put his finger on a pertinent point. Many Anglo-Saxon commentators, including Lachman this week, have argued that the euro was a flawed idea from the start and there is a temptation to predict the demise of the euro in order to be vindicated.
This followed on from the point that I raised: every time a European institution comes under threat, politicians and eurocrats become all the more determined to succeed. Thus the response to the crisis in the peripheral euro nations has not been to drum them out, leaving a strong core, but to welcome a new peripheral euro member, Estonia.
Lachman described the decision to allow Estonia to join the euro as bizarre, and I entirely agree. As he said, Estonia has even less in common with Germany, France and the other core members than Greece or Ireland.
But that surely is the point. This is a clear statement of intent. The euro will not be allowed to fail. It will grow and spread.
Lachman also wondered how long the German voters will tolerate the bailing out of profligate neighbours, pointing out that Chancellor Angela Merkel suffered a setback in regional elections. The ones I talked to when I visited Germany last year certainly felt pretty miffed. However, voters can protest all they want but across the continent, as in the UK, major parties are in favour of the European Union. Opposing parties such as UKIP and the BNP do not present credible alternative governments.
In any case, it is in the main the German banks who will take the biggest hits if Greece and other peripheral nations default on sovereign debt. The German taxpayer will end up paying for a bailout whatever happens. With the German economy continuing to outperform the other European Union members, it is well worth paying up and keeping the system going.
Another point made by Lachman was that there is less mobility of labour in Europe than in the United States, where it is easy to nip from a state in recession to one enjoying a boom. Such an argument will sound strange to those people in the UK who complain of the flood of incoming Poles and Portuguese (and to the residents of Provence, Tuscany and the Costa del Sol besieged by colonising Brits).
I suspect that labour mobility is becoming as strong in Europe as it is in the States despite the language barrier over here. Thus, there is scope for enterprising workers to up sticks and migrate, just as it is comparatively easy for companies to establish factories and shops in the less developed parts of the continent.
Lachman foresees a serious debt default by Greece and others, with the weakest countries dropping out of the euro and devaluing. This in itself will not solve anything, not least because the debt is in euros, so devaluation of a reborn national currency will not reduce the size of the debt. Instead it will create an even greater burden. Nor will devaluation solve the inbuilt problems of budget and trade deficits unless other drastic action is taken at the same time.
Much has been made by commentators in the UK of how the weak pound has boosted exports. So it has, but it has also inflated the price of imported oil, which is denominated in dollars. The effect, as we learnt this week, has been to create another record trade deficit in November while the previous record, set in October, had been revised upwards.
Despite all the convincing arguments that the finest political and economic minds can think up for the demise of the euro, the hearts of the politicians and eurocrats continue to rule.
The latest crisis, in Portugal, has been averted by the successful sale of Portuguese bonds and stocks rose in relief. The further the global economy recovers, the greater the chance we will escape comparatively lightly. However, investors should beware that there will be many more lurches in share prices, both up and down, along the way. For now at least, the lurches downwards present a buying opportunity for shares, which remain the best investment prospect.
Armageddon may well come before paradise. However, like paradise, it has been postponed indefinitely.
Rodney Hobson is a private investor writing about his own portfolio. The opinions expressed in this column are those of the individual, and not of Morningstar, and should not be construed as financial advice.
