Easter read (3) | Two years digging an empty grave for the euro

Many economists and the Anglo-Saxon financial gurus have been killing the euro month after month since early 2010. But, even if their doomsday predictions have miserably failed so far, their negative influence over the markets can not be neglected.

By Fernando Barciela, in Madrid | PART 2 | Euro mayhem? The fall of Brussels? Russian domination? German isolation? An article like this has already been published by a serious magazine, The American Spectator, supposedly devoted to calm, profound analysis. Flipping through the pages of Fortune, Time, Forbes, or any other news outlet on the other side of the Atlantic we are met, however, with very similar exercises. MarketWatch, with which investors are familiar, had little doubt last year to affirm that the euro and the EU were already dead in its current format. And Policy Economic Journal accused Roubini of being too optimistic when saying in June 2011 that there were several years ahead for the euro to disappear.

All these media and commentators, The Corner’s readers probably guessed by now, have often marked the day when Greece, Italy and even Germany would leave the euro zone. Last November, with the Italian risk premium at around 570 basic points and yields on 10-year bonds at 7%, Roubini wrote in the Financial Times, one of the bibles if not the bible of the euro soothsayers, that Italy had no choice whatsoever but to quickly return to the lira. He said that it would almost certainly happen. Weeks later, however, the premium would begin to relax so in December it stood at below 300 bp. Did the global economist acknowledge he had been mistaken? What he said still weeks later is that, indeed, the ECB’s liquidity injections had boosted the markets.

Germany, as many of these analysts would have it, should have also left the euro time ago. Some have been announcing the event since as far as the spring of 2010. The safest prediction recently came from Philippa Malmgren of Principalis. ‘Pippa’, as her friends call her is a fund of funds manager, consultant for the Deutsche Bank, former director at the OECD and eventually member of the Working Group of Financial Markets set up by president Bush. She announced in September that Germany not only should leave the euro but, according to privileged information she had had access to, Berlin was already planning studiously doing so. She said the German government had in fact prepared the machines to return to print Deutschemarks.

It wasn’t the case that ‘Pippa’ was in possession of any actual secret. It was simply that Stephane Deo, an economist at UBS, came to do a report on the costs of a Germany’s euro exit (bankruptcies, bank recapitalisation and falling exports) for the country, which concluded that it would take away €8,000 per capita, and 20% of GDP only during the first year.

Under this constant buzz, the British ended up intoxicating themselves with their augurs. In late November, it jumped in the front pages of British newspapers news about the British Office having begun to instruct their embassies in Spain, Portugal, Greece and Italy to prepare for the possible expatriation of thousands of British citizens faced with imminent riots and tumults of nightmarish proportions. Quoting official sources, several newspapers published that the first citizens to be aware of such contingency preparations were residents in the Algarve and the Costa del Sol. The Spanish magazine Consejeros contacted the UK embassy in Madrid to uncover more details: there were none, it had all been a fabrication. Surprise.

* TO BE CONTINUED TOMORROW SUNDAY.