How The European Union Will Fall
The Dynamic Wealth Report
October 12, 2011
by Karl Stevenson, Editor
As the EuroZone debt crisis drags on, the options for resolving it are
getting thin. We’ve seen virtually every economic expert weigh in with
their opinion on how the EU can be saved…
If we step back and look at all the news over the past year, adding up
the parts of the puzzle… there’s only one way the crisis in Europe will
ever be completely solved. And that’s transforming the European Union
into a type of “United States of Europe”.
But somehow, I can’t see them making it across the finish line…
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While the 17 EU countries are wrapping up approval of their
bailout fund, the stage is setting up for a massive collapse of the
EuroZone. And the expansion of the European Financial Stability Facility
(EFSF) is a disaster waiting to happen.
The wheels are in motion. Like a runaway locomotive, the destruction of
Europe is already speeding along the tracks.
Before I get into where this crisis is headed, I think it’s important
you know a few of the key workings of the EFSF. We hear the term all the
time in the news, but few people know much about it…
You see, the EFSF is similar to the United States TARP program in a few
ways. As you recall, the TARP program was the US mechanism used to
prevent a total financial meltdown in 2008.
And that’s exactly what the EFSF is designed to do for Europe… but using
a much different method.
The TARP program allowed the US Treasury to purchase troubled assets
directly from any financial institution. Without getting into the messy
details of TARP, let’s just say it allowed the US government (and
taxpayer) to become equity and debt owners in exchange for capital.
In contrast, the EFSF was established with the goal of preserving the
financial stability of Europe’s monetary union. The EFSF is designed to
provide “temporary financial assistance” to troubled European
governments.
Here’s the big difference…
While TARP actually exchanged capital for assets with banks, the EFSF
offers to “issue bonds or other debt instruments on the market to raise
the funds needed to provide the loans.”
So who will buy these bonds and debt instruments? As usual, it’ll be the
banks, pension funds, central banks, insurance companies, etc…
These bonds are backed by the EFSF, currently funded up to €440 billion
($607 billion). Without the backing of the EFSF, no one would touch
them.
Doing some basic math, it’s obvious the EU will need more than €440
billion. Italy alone has well over $2 trillion in public
debt. In reality, the original EFSF was set up to save say, Greece, and
other small EU members.
However, the contagion and fear of default has spread far beyond the
borders of Athens…
The limited funding of the EFSF has created a new fear that if Greece
defaults on its debt… some of these other countries will follow.
A risk of contagion is why the EFSF now needs more backing.
For investors to have faith in the newly issued EFSF debt, the
EU needs to ramp up the guaranteed funds. Rumors put the needed funds
over €3 trillion ($4.14 trillion)!
Here’s the bottom line…
If EU nations pony up that much coin to save their union, they’re going
to be in too deep to back out of any commitments. This new fund may work
for quite some time, and the internal workings of the EU may continue
functioning… for now.
But with 17 member nations, a peaceful accord will not last. Remember,
each country is required to vote changes to the monetary system into
law.
In the end, all 17 countries will be married at the hip by over €3
trillion ($4.14 trillion) in shared debt (think EuroZone bonds). Remember, these 17 European countries are steeped in tradition and
independence.
There’s no way they’ll all relinquish their independence for statehood.
So when the political infighting gets too much to deal with, the EU will
explode! If you think we have a crisis now, wait until there’s over €3
trillion in shared debt involved. How will they divvy
that up?
It will be like a megaton bomb dropped on the financial world… and it
will be centered in Europe. Simply put, breaking off a €3 trillion
($4.14 trillion) commitment would end the EU in a very ugly fashion.
Instead of letting the weak members of the union fail now and getting
the pain out of the way, the EU is simply driving toward total meltdown
by passing the expansion of the EFSF.
It may not happen this year, but I can’t see how they’ll avoid it. You
won’t want to be holding any Euros then.
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