24 May 2015

Betting Against the Euro Zone

About a dozen friends sign a pact. They are going to become better people. They debate a few variables and finally agree to the same workout regime (jog three times a week, weights twice), same diet (2,500 calories max each day, dessert just twice a week), same education goals (one TED talk and one book a month), and same social calendar (one big outing with friends every month, one smaller one each week). And they are going to all contribute 20% of their take home pay to an investment account, on track to early retirement.

This sounds pretty good. By the end of the year they will all be fit, socially healthy, richer, and smarter. This is going to be amazing.

But of course it won't work. Some friends will be too stressed by their job to spend even more time with people than they've spent during the week. Others won't be able to resist that new pizza place down the street and will gain 5 pounds in a month trying their exotic new flavors. Someone else will need to run out to Vegas, liquidating their 401(k) betting on football. People are different and none of us are as impressive as our intentions.
Jean-Claude Juncker, President of EU

Which brings me to the eurozone. I'm no expert on European nations but I know they have very different cultures. More importantly, they are at different levels of development and they're probably even on different development paths. While they may have common goals for spending and deficits, it's not obvious that they'll be able to converge on these goals. Plus, given they face different realities, they likely need different policies.

I've never really understood how they might get their very different countries aligned enough to benefit from very similar policies. It seems to me that they need different monetary policies from one another but of course that's a very difficult thing to do when they share a currency.

38% of investors expect the euro zone will break up within the next 12 months. That, it seems to me, is a fairly reasonable bet.

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