Montreal, Canada

What are the odds that the single European currency will still exist in 24 months? What if the Germans do a flip-flop and decide they don’t want any more bailouts? More bailouts imply the single European currency is being driven to devaluation as traders and speculators continue to eat away at its core – meaning a full-fledged attack one day on German bond markets – widely considered to be a safe-haven in Europe.

Germany was pressured to accept a political compromise last week; the next round of crisis management might not only lead to a EUR break-up but also the dissolution of the Franco-German alliance that’s dominated EMU since inception in 1999.

For Germany to continue on this path the rest of the union will eventually have to accept a fiscal union whereby everyone operates the same budget deficits. And that scenario is almost impossible because it would imply even harsher austerity measures.

If the 1992 European Exchange Rate Mechanism (ERM) fiasco is any guide, the odds are high that one or more of the euro’s weakest members will leave EMU or European Monetary Union. Greece and Portugal are possible outlaws. Belgium and Spain might also drop out.

The consequences of a euro-zone break-up would be devastating for its weakest members whereby interest rates on the reinstalled drachma, escudo or peseta would be much higher than current rates. For those nations, printing their way out of misery would result in a sharp decline in living standards; but it would also allow central banks to create money to inflate their way out of short-term misery and the current deflationary policies of the European Central Bank (ECB) and the International Monetary Fund (IMF). Given a choice, most central banks would prefer to inflate their way out of a monetary crisis.

The crisis unfolding today is not unlike what happened back in late 1992. Only the political consequences now would be far more devastating for a united Europe that has gone 65 years without a major conflict disrupting harmony in the European Union (EU).

Suffocating Greece, Spain and Portugal with harsh austerity measures won’t win friends in Brussels where the ECB is based. Deflation is on the menu for Southern Europe. That will help to prolong the crisis, entrench protracted economic recessions and ultimately lead to civil chaos – not unlike what’s already happening in Athens.

The Greeks won’t take their medicine and neither will the Portuguese or the Spanish.

The British and the Italians couldn’t handle a rigid monetary policy in the fall of 1992 when they devalued from the grid and bid “au revoir” to ERM. I expect the same to occur in the euro-zone at some point.

If and when the weakest EMU members devalue or leave the euro-zone what’s left of the single currency might actually be bullish for the EUR because it will leave stronger credits in the grid. I would be compelled to accumulate the EUR if Greece and other big spenders were out of the single currency.

Alternatively, it might result in the reintroduction of single European currencies again as we all wake-up to a new world dominated by high inflation, civil strife and economic disharmony.

Unfortunately, European monetary union never worked before. The Currency Snake failed more than 35 years ago and Bismarck couldn’t make it work in the late 19th century. Just because the EUR is real and legally tender doesn’t mean it won’t fail.

The U.S. dollar is already loaded with more than 100 shots of vodka at the bar. The Japanese have swallowed close to 75 shots and now the Europeans are heading to 50 shots. Is it any wonder that amid a widening currency vacuum to protect our wealth that gold is in a bull market?

Note: It’s a busy week in Montreal as The Sovereign Society hosts its first event in La Belle Province. I’ll be back next Monday. Have a good week.