Are we too hard on the Euro ? Was the negative gloom of 2010 misplaced ? Perhaps the debt fears highlighted by the bond markets were exaggerated and the fiscal impropriety of Ever Greater Statism, descried by critics, was too negative? The Euro in 2011 is up 6% against the US Dollar. The economy of Germany is growing at the fastest rate in the past 20 years, well over 5% in real terms – or so the 'official' numbers state. Overall the EU-Topia is expected to grow by almost 3 % in 2011, perhaps this growth will generate new revenues to pay for the fiscal imbalances which are 5-10% of all peripheral countries GDP? Is all well with the Euro wonderland?

I doubt it. Nothing has changed since 2010 except better marketing and PR on behalf of the Euro elite. Calling the Euro the ZEuro is of course politically incorrect, no matter how accurate that forecast will be in the future. There is little that has changed since 2010 within Euro Communism. The market 'sentiment' is bullish simply because the Euro-crats and the EU Central Bank are committed to bailing out the failing periphery no matter what the costs in debt, printed money or future obligations. The Euro is after all a political project designed to knit together disparate nation states who have very little in common, except a shared Judeo-Christian culture.

Currency areas which are unnatural however, do not survive in the long term and only plod on, due to political management and distortions. This leads to social and economic costs which are very real for the citizens concerned. Within Europe, outside of the Benelux and Germany there is no natural currency area. Business, economic and investment cycles are dissimilar as are fiscal programs, interest rates and social development. At some point the very real dislocations both fiscal and monetary will make themselves felt. The probable bankruptcy of a handful of EU states – a very real liklihood going forward – will most likely be the end of the Euro, regardless of political rhetoric to the contrary. The costs of supporting the Euro, especially for Germany, will become higher than the costs of maintaining the currency. When that happens is anyone's guess.

One expert on credit crises' is Shah Gilani and he is pretty sanguine about the Euro. He wrote an interesting op-ed in a money magazine on the future problems that will beset the Euro. Gilani has a tendency to be right about fiscal and currency catastrophes so it pays to heed his analysis. Of particular concern is the 'shell game' that the Euros are creating through the fraud known as 'The European Stability Fund' or ESF, which sounds an awful lot like the US' TARP. The ESF is simply an exercise in hiding debt. At some point this off the balance sheet liability – which is criminally prosecuted against non-governmental agencies and firms – will have to be addressed. Gilani writes:

In order to stoke investor demand for the sovereign debt of EU member countries – and to provide badly needed liquidity – the European Financial Stability Facility (Fund) was created. The $520 billion (440 billion euro) rescue package had several mandates. It was designed to provide capital to buy bonds of issuing member states and to infuse capital directly into banks and financial intermediaries to ensure their continuing viability.

But there’s a giant problem with the fund: It was structured as a “special purpose vehicle,” or SPV, a type of venture that can be used to hide debt. SPVs, and the collateralized-debt obligations (CDO) they often housed became household names after the collapse of Enron Corp. and the onset of the global financial crisis.

The ESF will be an endless source of taxpayer money. As countries and their state owned and managed banks go through the inevitable debt crisis, more monies will be appropriated from member states by the EU Commission. The only way to fund the future needs of the ESF is through more debt issuances at the national level, or by printing more Euro notes at the supranational level. Both of these will lead to a variety of results including higher interest rates and payments, downgrading of national credit ratings and a run on the Euro:

The European bailout fund is backed by the individual guarantees of all members. If a member fails to contribute its share of capital based on its guarantee to do so, all other members are required to pony up additional guarantees and capital, as needed.

And that’s where the problem with the whole structure begins. As failing members tap into the fund, it’s absurd to believe that those same countries can guarantee the fund they are drawing from with capital they don’t have.

If other countries are then going to be called upon to make up for what a drawing member isn’t able to contribute to the fund, that will only put that much more stress on other members. Some will opt to draw from the fund themselves – before it dries up, or before they are called upon to add to the fund at the same time they are being undermined by capital markets that recognize their financial vulnerability.

Yes, the top tranche of the fund is rated “AAA.” That’s why Japanese investors are offering to buy as much as 20% of the fund. It’s also why China has indicated that it may want to buy the securities that the fund issues so that it may be capitalized.

But while outsiders buy up the “AAA”-rated tranches, European member states will be left to buy up the lesser-quality tranches. That puts Europe on the hook for the first financial hits the fund takes if faltering Eurozone members can’t climb out of the holes they’ve dug for themselves.

The idea that Japan and China will 'save' Europe is naive and blind.  Both China and Japan will not guarantee more than a small percentage of future EU bond sales, and neither will have much appetite to buy the non-AAA rated debt which is a certainty given the parlous state of EU and member state finances. 

It is also clear that German economic growth can't fund the entire EU experiment, nor solution the aggregated debt of its member states. The EU banking system is irrevocably tied to, and intertwined with the state and its debt. If the states go bankrupt and many of them will, the EU banks cannot avoid insolvency.  Thus the Eurocrats will be faced with two irresistible forces, both are them interconnected; an unstable banking sector and bankrupted states unable to meet loan, pension and social obligations. Grecian unrest in 2010 is but a weak preview of what could commence across the Socialist nirvana when these forces present themselves. When it happens is the only question.

The moral of Europe's story is of course the obvious one; Socialism fails. The creed of communalism fails at the state, regional, local and program level. There are no exceptions. Politicians, the media, and grinning bureaucrats can hide the failure with off-the-balance sheet accounting, rhetoric and emotive calls to save the children, the poor, the old and dear Mother Earth. But eventually the immoral Wizard of Oz show must stop and it usually does so with a violent shudder and a thunderous clap of collapse.