Blogs & Comment

Will the euro rise, fall or die?

Believe it or not, market watchers say Greek support for austerity no longer matters to the big picture.

(Illustration: Medioimages/Photodisc/Getty)

John Mauldin, an influential Texas-based financial advisor to the rich, just returned from Europe, where he spent three weeks meetings with bankers, institutional investors and money managers. The trip was designed to give him a better handle on the sovereign debt situation. What he found was a wide range of opinions, not all of them clear.

Nevertheless, please be advised that nobody Mauldin met on his trip thinks the raging battle for political support for more austerity measures in the Greek parliament really matters all that much beyond the short term. The “only thing there was seeming consensus on in Europe was that Greece will eventually default,” he writes in the latest issue of his popular Thoughts from the Frontlines newsletter.

While wining and dining at the country home of a Swiss banker with 15 power brokers, Mauldin asked for a show of hands from folks who thought the euro would be higher in value in one year’s time. Some party guests abstained, but six hands went up.

Mauldin then asked how many at the table thought the euro would fall. This time, 12 hands were raised, making a total of 18 votes from the group of 16, not counting abstainers or Mauldin—who thinks the euro will hit parity with the greenback in the near term. “Clearly,” he says, “there were at least three economists in the group who voted both ways.”

Whatever the case may be, one of the most influential voices at the table insisted the questions were entirely irrelevant. “The euro,” announced Charles Gave, chairman of financial services firm GaveKal, “will not exist in a year. The whole thing was dysfunctional from the beginning.”

According to Gave, a collapse of the euro is now the best that global markets can hope for. “The demise of the euro and the return of national currencies will allow for proper allocation of investments and resources. It is the best thing that could happen.”

If true, of course, the best we can hope for is another rough ride, since the North American economy is joined at the hip to Europe. “The potential for a real crisis is far too high for comfort,” Mauldin notes. “It would mean another recession for sure, with the [U.S. economy] already close to stall speed and global growth slowing. I hate to sound alarmist, but I am worried.”

According to Mauldin, the EU needs to stop throwing good money after bad, trying to stop German and French banks from taking losses on Greek bonds. “Europe,” he says, “would be better off just taking the money they are giving to Greece and using it to recapitalize their banks. Let Greece go. Give it up. Let them enter a 12-step program or whatever it is that insolvent nations do. That is harsh, but it is also the truth.”