The One Safe Haven Left


by Jim Rickards, Daily Reckoning:

The U.S. in the midst of partisan political turmoil. China is about to fight an all-out trade war with the U.S., Russia hunkering down for a new Cold War with the west, North Korea forcing a new world war, and emerging markets vulnerable to capital flight as confrontations escalate.

In the middle of all this, is there one investor safe haven left in the world?

The answer is, “yes.” It’s Europe.

I expect the euro to soar from $1.17 to $1.25 and higher in the months ahead.

The U.S. and UK media have bombarded U.S. investors with nothing but bad news on the euro and the EU since 2009. This began shortly after the global financial crisis of 2007–2008.

One of the aftershocks was the bankruptcy of the quasi-sovereign wealth fund DubaiWorld the day after Thanksgiving in November 2009. Even as Americans were recovering from the turkey dinners, the financial world was turned upside down by this black swan from the Middle East.

The contagion quickly spread from Dubai to Europe. A liquidity crisis arose. The sovereign bonds of the EU “periphery” of Greece, Italy, Ireland, Portugal and Spain (“GIIPS”) were called into question. A major bailout of the GIIPS countries was quickly organized.

This bailout involved money printing by the European Central Bank (ECB), conditional lending by the International Monetary Fund (IMF), and new lending and guarantees by the European Union (EU) based in Brussels and led by Germany. The ECB, IMF and EU became known as the Troika, and were responsible for a series of bailouts between 2010 and 2015.

At this point, early in the crisis, the critics of the euro came out in force. Led by Nobel Prize winners Paul Krugman and Joseph Stiglitz, and with support from many others including Nouriel Roubini, they screamed that the euro was doomed!

Their argument was that the GIIPS should quit the euro, go back to their original currencies such as the Greek drachma and Italian lira, immediately devalue to lower their labor costs, and grow their economies with cheap labor, cheap exports, and imported inflation.

In the estimation of Krugman, Stiglitz and the rest, the EU should split into a “northern tier” of strong economies such as Germany and the Netherlands. There would also be a “southern tier,” consisting of mostly GIIPS and possibly France. Only the northern tier would be eligible for a common currency.

In effect, the critics said the euro was certain to fail and the sooner it was buried in its grave, the better.

Everything about this forecast was wrong, and I said so at the time in a long series of TV and radio interviews from 2010 to 2016.

To begin with, the intellectual critics of the euro paid no attention to what people in Europe actually wanted.

Despite complaints about heavy-handed tactics by Brussels and “austerity,” the people of Italy, Greece and Spain had no interest in returning to their former currencies.

Citizens remembered that former currencies such as the drachma and lira had continually devalued. They were an easy way for governments to steal money from savers by such constant devaluation.

The euro was the first stable currency that most of the citizens of Europe had ever experienced in their lifetimes. Polls showed citizens of Greece and the other GIIPS consistently supported the euro, notwithstanding their complaints about austerity.

The other development the critics ignored was that the EU was moving quickly to fix the flaws in the design of the Eurozone, the 19 countries that use the euro.

Originally, the Eurozone had a common monetary policy administered through the ECB. But, there was no common fiscal policy.

This led to fiscal abuses. Countries like Greece and Portugal ran huge deficits with money borrowed cheaply in euros. Eventually they could not meet their obligations, which led to the European sovereign debt crises of 2010 to 2015.

For intellectuals such as Paul Krugman and Joe Stiglitz, the solution was to break-up the euro.

But for political leaders in Europe, the solution was always to move toward a common fiscal policy to go alongside the common monetary policy. This is what leaders such as Angela Merkel meant when they proposed “More Europe.”

The EU has always been a political project more than an economic project. Europe had come through four hundred years of constant violence and warfare — from the counterreformation, the Thirty Years War, the wars of Louis XIV, the Seven Years War, the Napoleonic Wars, the Franco-Prussian War, World War I, World War II and the Holocaust.

By 1945, Europe was politically, morally, and financially exhausted. The project of European economic integration that culminated in the EU and the euro was an effort to put an end to war forever by integrating the member nations as closely as possible.

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