Photo: Wikimedia Commons
Economic default. Street riots. Political disunity: the EuroGeo-Political world as we know it is ending. We’re in the process of watching Greece default. Portugal’s Next. Ireland’s after that. In fewer than 16 months, the European Union will be no more.
As we predicted on June 29, and the Moody’s ratings service essentially confirmed by dropping the country’s rating to junk-status, Greece is set to default (even the current “best case” French scenario means is predicted to end in a “selective default” situation). And soon. Given that the “not-possible-to-think-about is suddenly exactly what we’re-thinking-about-and-planning-for”, we have to wonder who’s next – now that default is suddenly an option?
On July 5 Portugal joined Greece at the “bottom of the economic barrel” (per Moody’s), disqualifying the country from an index of sovereign debt and generating a mass selloff in the markets. Portugal need not feel financially lonely, however; it seems that economic misery apparently loves company. Ireland, of course, is next.
Despite being the first of the “Failing 3” to apply for a Euro-and-world-sponsored bailout in November, 2010 and a harbinger of all default things to come, the Celtic Tiger has mostly flown under the economic “the sky is falling” radar for the past few months. We can postulate on the variety of reasons for this: Maybe it’s because the more-settled, less-riotous ways the Irish population responded to the austerity measures (enacted almost exactly a year ago). Maybe it’s because the specters of Greek and Portuguese default were mere whispers in the world’s financial ears, thereby making Ireland seem an isolated case. Or maybe it’s just because Ireland appeared, at least in November 2010 (and onward) a secluded case of over-development and under-planning – an island righting its macroeconomic ship in these turbulent economic times.
Whatever it was – why the world ignored the obvious economic writing on the wall in the case of Ireland, and, until only a few weeks ago, that of Greece and Portugal – cannot change what will be. These peaceful economic times are over. Last week’s riots in the streets of Greece are just the beginning of the end for the European Union. Get ready. It’s going to be a wild economic ride that, by the end of next year, will result in a wildly different geo-political map. What’s the blueprint for this massive change about to take place?
As Greece continues running up both its Euro-and-international economic bills, with Portugal slowly yet deliberately and inevitably catching up, Ireland will, as early as the beginning of Autumn, 2011, cease “taking it on the financial chin” (i.e. peacefully adhering to austerity measures, etc.), and will began demanding its own “generous” bail-out package similar to that intended to prop up Greece that’s currently masking the underlying economic tensions coursing just beneath the European Union’s politically sensitive surface. After all, sure, Germany (and, to a lesser extent, France) can save Greece. Maybe co-sponsor a Portuguese rescue mission. But Ireland, too? What if it doesn’t stop at even Ireland – then what?
Taking a 10,000-foot view of the economic realities of the European Union, it’s obvious that, in some order (or perhaps even at the same time), Spain and Italy are set to go the way of Greece, Portugal, and Ireland. Spain is already begging the financial world to take it’s bonds (through unsustainably high interest rate payments, which coincide with the notes falling dramatically the past 4 days), while Italy’s bond pricings are already showing the stress the Italian economy (to point: the spread difference between 10-year Italian notes and benchmark German bunds has reached a euro-era record of 225 basis points, signifying an underlying market belief – whether spoken or not – in the haves-and-have-nots across the European Union’s economic map). Whatever we’ve learned or ignored throughout the Greek crisis, we can’t help but notice the economic warning signs in these bond and market pricings and the inevitable role Germany and France will have to play in propping up Spain and Italy. This on top of Greece, and Portugal, and Ireland, and…
So…looking at these facts, it’s easy to see: as goes Greece, goes Portugal, follows Ireland, then Spain and Italy (though not necessarily in that order). This is happening. And it’s happening soon. And not in a “well, if we pull ourselves together we can delay or possibly eliminate this possibility” soon; but more in a “this is happening, let’s try and stem the inevitable financial and political bleeding of a failed European Union.” For while one or two country defaults a disunion does not make, a six-country mass-fail does.
The European Union’s “core” members – Germany and France – would do well to stop financially finagling bail-out-package-after-bail-out-package for first Greece, then Portugal, then…and should instead start focusing on what’s next post-European-Union as we know it. Delaying the inevitable economic and financial pain will be a financially expensive, politically explosive, and potentially globally dangerous and destabilizing exercise. The world has to start planning for a defaulted currency, and stop hoping it simply won’t happen.
Up next in this predicative corner? What a Euro-default means for the USD generally and China/the Yuan specifically. Hint: one currency/country is a winner, while the other…
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