What the End of the Euro Looks Like
Large devaluations and debt write-downs will create fiscal space and boost growth. This week, I am explaining why the Euro must come to an end. This is not driven by bias but by economic necessity.
Europe faces numerous external threats, including Russia's invasion of Ukraine, Chinese mercantilism, and US tariffs. To respond effectively, fiscal space is crucial, yet many European countries are overindebted and lack this room.
So far, Europe has dealt with the issue in a typical "kick-the-can" style—pretending the problem does not exist. The European Central Bank (ECB) occasionally caps government bond yields to create the illusion of available fiscal space, as I discussed earlier this week. However, this is just a facade.
"Neither Spain nor Italy are able to give meaningful assistance to Ukraine because they’ve run out of fiscal space."
When illusion confronts reality, reality prevails. The path to regaining fiscal space involves cutting spending and raising taxes, but Spain and Italy lack any incentive to do so under the ECB’s protective measures.
This traps the Eurozone in a harmful equilibrium that, over time, weakens rather than strengthens the region. The most viable way forward is for Germany to leave the Euro, which would trigger a return to national currencies.
The main opposition to dissolving the Euro is the fear of causing market chaos.
Author's Summary
The Euro’s collapse is driven by the need to restore fiscal flexibility amid external threats, with Germany’s exit as the catalyst, despite fears of financial turmoil.