I'm always very surprised by how fixated people are on equity markets, and how little attention they pay to the fixed income markets. As far as I am concerned, spread differentials in bond markets are like the flight of a bird that is trying to tell me something about the weather to come. I'd be silly not to heed its warning.
This morning the differential between Irish bonds and German bunds widened once more. But then differentials between the bonds of peripheral Europe by relation to core Europe have been widening steadily for quite some time now, and people just shrug their shoulders. They are busy reading Alice in Wonderland.
To me, this just means one thing: as currency, the Euro is a political reality, but an economic fallacy. The problem is that there is no constitutional mechanism to exclude a country from the eurozone. That being the case, three scenarios are possible.
The first is that peripheral Europe willingly abandons the Euro, so that it may devalue and restructure its debt. Yet, if it does not shrink the weight of the state machine to realistically sustainable levels and does not reform labour laws, the effort will prove fruitless.
Not being able to throw any country out of the common currency, Germany may decide on its own that it is tired of the continual mess, in which case it may readopt the Deutsch Mark and leave the rest of the fellows to sort themselves out.
Lastly, in order to maintain its export market, Germany may take the political decision to continue to pay for the reverie, which would be good, for example, for the Greeks, because that would enable their hairdressers to continue to retire at 50 and their dead citizens to go on claiming old-age pension forever.
So, when I look at the widening bond spreads and consider the three scenarios, I remain extremely pessimistic about the Euro. So much so that I no longer care to listen to the press conferences of the European Central Bank. And why should I? We are not facing a monetary policy problem. We are staring at a problem of fiscal disarray, economic inefficiency and plain corruption. Therefore Jean-Claude Trichet has become totally irrelevant to me. Even when he tries to speak his best English.
