The end of the euro

Is there anything Mr. Hubble isn’t right about?

As if we needed it, yesterday we got more evidence that Nick’s ‘End of the Euro’ thesis is correct. Having been sent away to rework its spend-heavy budget by the European Commission, the Italians came back with… more or less the same deal.

I’m not sure the rest of Europe really understand how serious the Italians are about challenging the institutions that make up the foundation of the euro system. But they need to wake up quickly.

The harder the Italians press, the further Italian bonds fall and the closer we get to a Europe-wide banking crisis. Just earlier in the week an Italian lender had its shares suspended as it seeks a bailout.

Nick’s been making this case all year. But you still haven’t claimed your free hardback copy of his book. I think that’s a mistake. I think every serious investor and saver in Britain needs to read this. That’s why I’m willing to give it away for free.

Your book is waiting for you. But I need the green light from you to send it out. You can let me know here.

In the meantime, here’s a free sample of Nick’s book. In it, Nick lays out his argument for why the euro is a stack of dynamite, and Italy is the spark.

Over to Mr. Hubble himself…

Nick O’Connor
Publisher, Southbank Investment Research

The end of the euro

This book is about how the euro dies. I’m talking about the end of Europe’s common currency. A disorderly bust-up of the greatest political project in history. It sounds extraordinary, but it’s nothing new.

There are two key arguments:

The euro was always doomed. For the same reasons that Europe’s other monetary unions died in the past. A steady build-up of imbalances that eventually gets out of hand.

Secondly, the eurozone’s reckoning is approaching fast. A specific default will trigger the end. And the largest financial crisis in history along with it.

These two arguments are intertwined. And they are true for four simple reasons, which form the structure of this book:

  1. The Unholy Trinity – this economic law dates back to the 60s and exposes the fatal flaw of the eurozone. A flaw which predicts the inevitable demise of the euro.
  2. Target2 – Europe’s backdoor bailout mechanism reveals that capital flight taking place inside Europe is far worse right now than during the European sovereign debt crisis of 2012. Watching Target2 is like watching the probability of a financial crisis in a mirror. And it’s at record levels.
  3. Democracy – at some point, the people have had enough of the economically sadistic euro project. Just as Britons did in 1992. And the voters in Asian countries did in 1998, when they gave up fixed exchange rates. Europeans will vote to leave the euro system, as the British government did. But they’ll do it with a clean slate, not with the trillions in euro debt they’ve accumulated.
  4. Europe’s rescue is used up – The ECB’s capital key and issuer limit rules prevent the ECB from bailing out its members by limiting how much government debt it can buy. And the limit is approaching. Even the new ECB bailout rules are compromised, with ratings agencies poised for a dramatic comeback.

These four horsemen of Europe’s debt-pocalypse are why I’ve decided to go public with my extraordinary prediction – the largest bankruptcy in history and the death of the euro.

But there’s something crucial you need to understand.

All four factors of the euro’s demise apply in only one place

It’s only when you put all four factors together that a major financial crisis is exposed as unavoidable. And there’s only one place that meets the criteria of all four. In coming months, they’re all coming to a head in one country.

The country suffering worst under the thumbscrew of the euro has had enough. Unable to devalue its currency, it can’t compete economically. It has barely grown since it joined the euro thanks to five recessions.

The ECB’s monetary policy is about to stab its biggest victim in the back by tightening policy and raising interest rates. And a rescue effort is out of the question.

A huge government and private debt burden is slowly crushing the government and the banks. Which is why money is fleeing for the safer banking systems of the north. Put all this together and the conclusion is clear:

Italy will go broke, leave the euro and trigger the greatest financial panic in history.

Just as Lehman Brothers’ troubles quickly spread around the world, and Thailand’s in 1997, a sovereign debt crisis in Italy will quickly go global. Britain serves Italy as a financial centre and the eurozone is our biggest trading partner. This means we are one of the biggest stakeholders around when it comes to Italy’s financial health. And so we’ll be among the most harmed.

Unless you’re prepared.

But what makes me so sure I’ve discovered something others have missed? You’ve probably heard about the death of the euro and Italy’s debt crisis for years now.

I think I’m the only one predicting the imminent bankruptcy of Italy and the failure of the euro for the four reasons mentioned above. And like I said, you need all four for a proper crisis to play out.

But don’t take my word for it. Let’s see if I can convince you…

And let’s get started with what I call the fatal flaw of the eurozone.

How the Unholy Trinity is destroying the eurozone

If you want to understand why the euro will inescapably fail eventually, you need to know about the Unholy Trinity.

In more politically correct textbooks it’s also known as the Impossible Trinity and the Trilemma. And they call it that for a reason. It’s an impossible three-way dilemma. It can’t last – something has to give. And that’s when you get a crisis.

Unfortunately, the entire eurozone is built on a violation of this simple economic law. And that’s why it was doomed from the beginning.

The result will be a global banking crisis thanks to rapid contagion, tumbling asset prices across the board, and the destruction of the euro. The Unholy Trinity says it has to happen eventually. But what is this fatal flaw of the eurozone?

The basic idea is that a country cannot have all three of the following at once: a fixed exchange rate, independent monetary policy and free capital flows. (Capital flows are transfers of money in and out of a country.)

One of those three has to act as an economic pressure valve. Otherwise, there will be an economic crisis.

History is full of the economic wreckages of countries who tried to violate this economic law. Just about every sovereign debt crisis can be explained in terms of the Unholy Trinity.

A country attempts to fix exchange rates, control monetary policy and allow freely flowing capital, all at the same time. Eventually, faced with a resulting economic crisis, it is forced to abandon at least one of the three. Britain did in 1992 and repeatedly in the 70s, when it gave up fixed exchange rates.

Britain’s miserable experience with the Unholy Trinity is one reason the country evaded the eurozone in the first place. As I’ve mentioned, Brits used to call the ERM the Eternal Recession Machine. And for good reason, which we’ll get to in a second.

The Unholy Trinity also applies to currency unions like the eurozone. They make things more complicated, but the idea is much the same. That’s why Europe’s many currency unions of the past all failed. Including those in the run-up to the euro.

Here’s how the foundation of the eurozone is built on a bizarre violation of the Unholy Trinity:

  1. Fixed exchange rates between member countries thanks to the euro.
  2. A messy, semi-independent monetary policy for the eurozone through the ECB.
  3. Free capital flows between countries, which means money can flood into or flee from parts of Europe, as well as international capital flows into and out of the eurozone itself.

The Unholy Trinity predicts that one of these three policies will fail. Either countries will abandon the euro’s fixed exchange rate and return to their own currency, capital flight will see money leave southern Europe for the north triggering a banking or sovereign debt crisis, or countries will seek to regain control of their monetary policy… by leaving the euro.

I’m expecting all three. In fact, one of the three has already begun. As I’ll show you in Chapter 3, it accelerated to record highs in 2018. And that will most likely lead to the end of the euro.

To keep reading, get your free hardback copy of How the Euro Dies here.

Nick Hubble
Capital & Conflict

Category: The End of Europe

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