Excerpted from Elliott Management's Letter to investors (via Paul Singer),
The Euro reminds us of the weather in London: One minute you are basking in sparkling sunshine, and the next minute the sky opens in a deluge reminiscent of Noah’s flood.
Could it really be that peripheral countries’ interest rates are plunging and borrowing costs have converged to pre-crisis levels, Greece is issuing debt, and the euro crisis is over forever, but Mario “Whatever-It-Takes” Draghi is musing about starting QE now? Have policymakers lost touch with reality to such a startling degree that they now reach for the QE bottle like it is some 1850s cure-all nostrum, regardless of what is wrong with the patient? All we can imagine is the good doctor, handle bar moustache and full regalia, sitting behind his desk: “You have the vapors? Take this QE, you’ll feel better. Ma’am, you have a little hysteria? QE is just the thing! Sir, this QE will cure that headache! Son, you need some inflation, so QE is just right for you.”
There is nothing – we repeat, nothing – that is being done at present to enable Europe to perform better economically, to encourage its unemployed to get off the dole, or to empower its peripheral countries to deal with their underperformance on a sustainable basis. In this context, the bloc’s primary focus on generating inflation is nothing short of astounding.
Indeed, one could analogize this currency union at the present moment to a labor camp in the middle of a frozen waste: It is really bad to be locked in, but if you are obedient, you will at least get your next serving of bailout gruel, whereas if you are not obedient, you will be cast out into the howling cold of devaluation and collapse. Lure them in, load them up with debt and whip them into line … is this the plan that the Brussels crowd devised in the 1990s?
This is obviously preferable to constant and terrible continental warfare, but is it sustainable? How will it end? The spectacle is akin to a hair-raising (albeit slow-motion) TV series. Two years ago, it was about to collapse. Today it is working. What will happen on the next episode?
All of this talk may seem flip and sardonic, but it is really amazing that this currency union sans sovereignty has lasted so long – long enough to make Rube Goldberg drool with jealousy. Nobody knows how it will ultimately turn out, but we must admire in a sense the gall of politicians who think they can stay the current course and therefore must believe that citizens will stand for no growth and high unemployment forever.
Below are some specific outcomes that must be assumed to justify continued stability in the Eurozone, given current pricing of stocks and bonds:
1. Italy’s current government will succeed in solving its problems in the promised 100 days, and there will be no talk of elections that might be won by the comedian (who wants out of the Euro).
2. The Spanish and Italian unemployed will wait patiently for the good jobs they want without causing any social unrest or political turmoil.
3. The higher trading value of the euro will not cause even more pain to the countries that would have already devalued their currencies more than 50% against the current euro price if they were not in the Eurozone. (Remember, if you cannot devalue, you have to increase productivity to be competitive with Germany and the rest of the world. Easy, right?)
Do any of these outcomes seem likely? Tune in next year...