Fisher Investments: Is the Euro a Relic in the Making?

Since Greece’s debt-figure fudging first came to light in October 2009, Europe—and specifically, the eurozone—has garnered tremendous media and investor attention. Along the way, a major source of concern has been the common currency’s future. Today, headlines continue nearly daily regarding the euro’s viability. Above all else, many speculate a sudden, disorderly breakup of the euro is on the horizon.

But as we’ve written, our view is a sudden abandonment of the euro isn’t a likely outcome in the here and now. Let’s review and explore essentially two concepts: Why a quick end to the euro would likely be problematic, and why that isn’t likely in the immediate future.

Assuming we can agree a return to the barter system is off the table, if the euro is abandoned, something must fill the void—seemingly, national currencies. If this scenario did occur, it’s likely 15 or 16 of the eurozone’s 17 member nations would be seeking to replace the euro with a lower-valued currency—the probable exception being Germany (and possibly France). For the majority of these countries, the likelihood is the euro, a currency individuals and businesses use daily and have confidence in the purchasing power of, would be replaced with a question (not German) mark. Assuming a government can effectively enact such a switch is quite a stretch.

Contracts, loans and other matters currently denominated in euros would likely have to be rejiggered—no small matter for eurozone corporations, individuals and other business and government entities. And there are other issues. Take Greece. (Please.) Greek euro-denominated debt would either become much more expensive for them to repay—the exact opposite of what Greek leaders might hope to achieve through abandoning the euro—or bondholders would take huge losses, either through outright default or new bonds denominated in a less valuable currency. And it isn’t as though stalwart Germany would be unaffected: Its economy is highly export driven, and much of its trade is within the eurozone. Through September 2011, German goods exports totaled €791.7 billion. €317.4 billion went to other eurozone nations, or just north of 40%. Moreover, Germany has many multinational firms with pan-European business interests. Simply, the complications involved could be enormous.

All those are possible problems. But in our view, they’re not probable—not in the near term.

We’re no staunch defenders of eurozone politicians by any stretch, but it’s relatively clear they get this issue. Consider the following (lengthy) list of actions or proposed actions: The EFSF. The ESM. PIIGS austerity. French austerity. Competitiveness reforms in Spain, Greece, Italy, France, Portugal and more. Talks continue on the Pact for Competitiveness (now called the Pact for the Euro). Bailouts have been agreed to, restructured, amended and then re-restructured. Two plans for voluntary Greek bondholder haircuts have circulated. European Commission meetings galore have occurred. Bank stress tests and recapitalization plans have happened not once, but twice. And prime ministers taking the blame for PIIGS debt woes have been uniformly sacked. And lately, talk has been of greater fiscal oversight—essentially involving a European entity to review sovereign budgeting. That’s right—they’re talking about Germans rubber-stamping Greek budgets.

It’s fair to quibble with some of the specifics involved in these plans. But the big picture is eurozone leaders have put forward a ton of financial and political capital in the euro’s defense. The likelihood they suddenly decide all they’ve spent—all their efforts—aren’t worth it and change course in the foreseeable future is quite low indeed. The fact the eurozone has actually grown from 16 to 17 members (Estonia joined in January) while all this drama was ongoing echoes that. And more nations want in.

While we don’t think the euro’s going to be a relic any time soon, that doesn’t mean it wouldn’t happen over a long time period. But such a gradual move wouldn’t likely carry the dramatic consequences of a sudden breakup, as time would allow a more orderly unwinding. In the absence of a shocking, sudden disbandment of the euro, it seems likely the eurozone continues its arduous process of peripheral competitiveness reform. That might be problematic for the countries involved in the near term, but it likely lacks the global reach an imploding euro could carry.