Thursday, 6 September 2012

Euro in the last chance saloon

Today's 'surprise' announcement by the figurehead of the ECB, Mario Draghi, that the Euro would be defended with another dose of a highly addictive drug, i.e. paper money in hitherto unimaginable amounts, also amounts to the end of any rational economic policy in the Eurozone. Trying to patch up a wrongly designed currency zone with more and more desperate measures may buy time, even quite a long time, before the next - and terminal - crisis erupts. Banking union, fiscal union etc may all happen - without a shred of democratic legitimacy - but in the end there is no guarantee that no member state of the Eurozone will not some day give notice of its intention to quit - and leave all its obligations behind. This Damocles's sword will from now on always hang over the heads of all investors that have a financial stake in the Eurozone. Like our warning back in 2005 when we argued that investors were deluded to buy Italian government bonds that yielded a tiny spread versus German paper this warning may also sound premature - the Commentariat will certainly pour scorn on it - but investors ignore it at their peril.