Can The Euro Last?

"This crash is not going to have much effect on business." - Arthur Reynolds Chairman of the Bank of Chicago 24 Oct 1929

As you can tell from the above quotation, I do not believe that the Euro will last.  To me it is almost impossible to keep it together.  The facts seem to point to the obvious that either Europe needs to go back to individual currencies or at best split into a couple of currency baskets.  The reasons are simple:

1. The only way (barring some miraculous discovery of massive oil reserve or some technology) in the short term to make an uncompetitive economy competitive is to depreciate the value of its currency.  Once a currency is depreciated fully, the country's products are automatically priced to compete.  Furthermore imports become so expensive that locals are forced to buy goods produced locally.  This insulation protects local companies from imports, allowing them to gain local market share and slowly but surely things start to turn around.
2. Piling more debt onto already over leveraged nations is a sure fire way to disaster.  Without repairing the internal structural problem of a balance of trade it is only a matter of time until the borrowing nation once again runs out of cash that was lent to it. 
3. The more that is borrowed the higher the cost of the debt.  As we have seen, interest rates are spiralling higher in weaker nations in Europe and this eats quickly into the budget increasing the deficit and weakening the country further.
4. Political differences will not in our lifetime be put to bed.  These are countries that have disputed borders, fought wars against each other and had a history of centuries of conflicts and disagreements.  Until all of these political ideologies are put to bed and a common political platform is set, there will be no possible way for the currency to survive in its current state as politicians will try to push their separate rather than unified agenda on a diverse group of nations.

So what will be the outcome?  I believe that once again there will be an attempt to push the problem further down the road, however the $130 billion given to Spain is just a drop in the bucket.  If you want to completely clear the slate trillions will have to be lent and re-packaged.  The only country that has even the remotest chance of pulling this off is Germany and believe me, they will not step up to that large a plate.  However, it does nto appear that the politicians are ready for the catastrophe that a Euro meltdown would have on Europe as a whole.  As such they will continue to meddle along for as long as possible.

Eventually (and I think that eventually will be relatively soon and probably before the end of next year) economics will win out over politics and no matter what political posturing is presented, the Euro will have to change.  This will be dumped on the politicians through market forces.  Personally I believe that this will push parts of Europe into a depression and this will have repercussions around the globe.  Germany, Britain, China  and the United States will be pushed into a severe recession due to the fallout of this mess and the ensuing financial crisis.  To think that the United State will escape unscathed is a mistake as our banks and economy are heavily reliant on a fully operational Europe. 

Depending on how deep the crisis in Europe goes will determine if there is a shift (at least temporarily) to closer ties between Asia, South America and the United States from the current Europe/US union.  Interesting times are ahead and this certainly warrants an air of caution particularly with the Greek election occurring this weekend and a time to take exposure out of the markets.