The problems with the Eurozone are beginning to unravel and it is becoming clear that for the Southern economies, joining the Euro was a mistake. We believe that Greece leaving the Euro is inevitable. The only question is why has it taken so long? Greece leaving the Euro will have significant ramifications for several of the major European banks which makes it complex to negotiate an orderly exit for Greece.
The problems with the EU stem from the fact that the weaker economies in Sothern Europe joined the Euro at too high a rate. This enabled countries such as Greece, Cyprus and Portugal to increase their spending power and enabled it’s citizens to buy expensive goods such as BMW’s and Mercs which they previously could not afford. Similarly, goods produced in the Southern economies such as wine and olives suddenly became expensive to produce and were no longer competitively priced. The impact of the above means that the richer Northern European countries have effectively subsidised their goods and sold them to the weaker economies in exchange for debt. It has now become apparent that the weaker EU members are not able to repay their debts and banks such as the Bundesbank are saddled with significant loans to other European central banks.
The current situation has become unsustainable and there is significant risk that some of the major banks will either collapse or face nationalisation. In our view a break up of the Euro is also likely. A separate currency may well be required for the weaker EU members in Southern Europe. We do not believe it is possible for the Greek economy to recover without some form of currency devaluation. For contractors and small businesses with EU deposits, we recommend that you move your funds to Banks within Northern Europe.