Europe is heading for a crash or rebirth. Ever since the Euro-enthusiasts designed a common currency but put politics ahead of economics, it was inevitable that the currency would be severely tested. The reason is simple. It's impossible to sustain a common currency built on widely divergent underlying economies without central control. Europe got away with it for ten years, allowing member countries to benefit from low borrowing rates but without addressing the underlying imbalances.

Once the credit bubble burst in 2008, the mirage lifted. It seems inevitable that Greece and Ireland will be followed within weeks by Portugal and Spain. Why? Because money pours into Government Bonds for one thing and that is safety. Remove that safety by raising fears of default and you inevitably end up with a flight of capital, not just out of bonds but out of banking systems leading to waves of bank collapses. So what shape can this accelerating crisis take?

Europe Tries The Soft option

As the unfolding crisis hits the Iberian peninsula, European politicians try to talk their way out, providing soothing words to markets while the Prime Ministers of Spain and Portugal engage in macho fighting talk. Left wing politicians blame it on a capitalist conspiracy. Both are playing to galleries. Markets get even more spooked. There is a run on Spanish and Portuguese banks. The bailout fund is doubled but it's too late. Europe stumbles forward with four economies in intensive care doomed to a decade of sluggish growth and austerity. The tensions strangle the EU.

Germany Leaves the Euro

Horrified by thoughts of runaway inflation as the ECB is forced into massive money printing, the conservative Germans announce the reestablishment of their beloved Deutschmark. The Euro falls heavily in value and capital flows out of weaker economies leading to new banking runs. German bunds strengthen from inflows. Borrowing rates rise sharply for other European economies as the Eurozone shrinks by a quarter. Irish bond yields hit the roof. The EU wobbles under the political tensions as Germany moves to the sidelines.

Euro Light is Created

Discussions begin on splitting the Euro into two currencies. Italy is tempted to head a new Mediterranean zone involving Spain, Portgual and Greece headquartered in Florence. Ireland, whose economic strategy to is be the gateway to Europe struggles to remain with the Northern block. The shrunken Euro strengthens and the new currency weakens, providing an export boost for member countries but soured by higher borrowing rates. Eventually industry begins to migrate south to benefit from a cheaper trading environment. The EU begins to crumble from the tensions created by the two competing blocks.

Ireland Goes It Alone

Political turmoil in Ireland creates space for the rise of the hard left and a new type of economic nationalism. Momentum grows to break out of the Eurozone, seeking a competitive devaluation over a slow internal devaluation through austerity. The result is a once off boost to exports but Irish bond yields go sky high and another banking collapse looms as money flees the country before exchange controls are erected. FDI begins to desert. There's plenty of street marches beloved of the hard left and anarchists but little economic recovery, just more poverty.

Europe Integrates

The citizens of Europe finally get it. Either we sink or swim together. The excess borrowing that is overwhelming weaker economies is removed and swept into a consolidated Eurobond supported by all member countries. This allows economies in crisis space to recover. The price is deeper devolution of fiscal policy to the centre. National budgets are required to submit for approval right down to the micro level of tax and social welfare policy. The crisis passes.

What you can do

If you are concerned about the value of holding all your cash in Euros there are other options that will help you diversify. For information about moving money to a strong commodity-backed currency like the Australian Dollar and which is benefiting from massive inflows from natural resource sales to fast growing Asian economies, talk to us about an Aussie Dollar Cash Fund. You can get currency exposure through tax efficient cash funds that trade in high grade cash instruments through funds registered at the Luxembourg FSC and administered by leading international asset managers. Another route to storing value away from Euro is into precious metals. Right now we recommend silver over gold, acquired as certificates from the Perth Mint in Australia. Email us for further information here by answering three simple questions;