EUROPE & SOVEREIGN DEBT DISTRESS

BACKGROUND ON DECONSTRUCTION

◄$$$ EUROPE STANDS AT HIGH RISK FOR SOVEREIGN DEBT. THIS HIGHLY IMPORTANT TOPIC REQUIRES A PREFACE. RISK ABOUNDS. POSTURING IS WIDESPREAD. AN AGENDA IS BEING WORKED. MANY PUNDITS MIGHT BE WAY OFF IN THEIR ANALYSIS OF THE SITUATION. GERMANY IS IN FULL CONTROL, BUT MUST GIVE THE APPEARANCE OF TRYING TO HALT THE DEFAULTS SO EAGERLY DESIRED. $$$

Consider the Wall Street Journal. No slouch as a journal, but perhaps not with a resident European expertise. A handful of keen experts aids the Hat Trick Letter. They counter the conventional viewpoints. The WSJ claims half of the 16 Eurozone countries are at 'High Risk' in terms of the sustainability of their public finances. Read: their sovereign debt viability. The Euro Central Bank has an unforgiving charter, since new and not entirely federalist. The common Euro currency was a bad idea, whose time has come to conclusion. Severe seemingly merciless changes are to come swiftly. Ewald Nowotny is the Austrian member of the Governing Council to the EuroCB. He said in a December interview, "One has to be very clear. The ECB has no mandate or intention to take into account the situation of a specific country, especially not with regard to public finances." The tale of the European housecleaning and fat carving begins in January with Greece, which will submit its fiscal overhaul. Their defiance seeps through the pages onto the streets. The timespan for the altered European Monetary Union (EMU: region sharing the Euro currency) will not take two years as the WSJ claims, but less, as events will unfold very rapidly. See the Wall Street Journal article (CLICK HERE).

The Wall Street Journal put out the above clumsy graph, which exemplifies the INCORRECT risk assessment that floats in the financial press networks. The graph is way off, with half the nations improperly classified. Focus on the bigger and more important nations that will shape the future course of Europe. Corrections come with the contributions of certain knowledgable and reliable European sources. Comments display the misconceptions, each to cause some alarm if not shock. The graph shows high risk nations in red. Italy and Portugal are dead in their debt situation, each deserving red like Greece, Spain, and Ireland. The Netherlands is shown at high risk red, but it is at zero risk and deserves green, a gross error. Belgium is shown at medium risk in blue, but it is at zero risk and deserves green. The entire Benelux group is strong. Germany and the Netherlands are the powerhouses keeping the Euro currency and European Union afloat with their trade surpluses. Germany warrants a green code. The WSJ has almost nothing right on the national map.

A short comment came from a German banker contact, with an excellent track record. He said, "The EURO will die a sudden death, much faster than the USDollar, since the underlying economics of the EURO are only political in nature. The coming adjustment will be hard and violent. We expect things to come to a boiling point and blow up in 2010. The US$ will die its own death, with death being redefined multiple times while that happens. Like going from Used Cars to Pre-Owned Cars to Re-Certified Cars. It is bullshxx window dressing to camouflage the demise until all snaps and comes crashing down." Another short comment came from a second German banker and former corporate conglomerate executive, one with past ties in advisory capacity to the Euro Central Bank. Dieter Spethmann said, "Problems lie much deeper. Casino capitalism enriches some but makes many poor and fills nobody's stomach. Europe needs as the United States does a new understanding for the financing of their Realwirtschaft (Real Economy). The world needs altogether a new Bretton Woods III, which implies flexible exchange rates and the legal obligation to use them for revaluation in case  of sustained current account surpluses. Credit needs new definitions and new certainties, [enforced and dictated by] Gold."

The German political and banking leaders are walking a narrow risky path to handle the situation diplomatically and with a deft hand, so as not to inflame emotional reactions or even national retaliation. My personal belief is that Germany wants to carve off Portugal, Italy, Greece, and Spain from the shared Euro currency usage, to permit them to return to their former domestic currencies, to go through the debt default and restructure process, and to QUIT relying upon German welfare program to sustain their undeservedly high standard of living at heavy German expense. They will therefore give the appearance of offering more aid than is delivered in a delicate situation. Chancellor Angela Merkel said the mounting Greek budget deficit risks hurting the Euro, claiming the currency faces a very difficult phase. Merkel has openly questioned the fiscal discipline of other countries using the Euro currency, like with pension policies. The first test case and breakdown clearly comes in Greece.

For an excellent review, background, and brief analysis of the European financial and sovereign crisis, see the Kitco article entitled "The Euro/Dollar Dance" by Sol Palha (CLICK HERE). The author distinguished himself in my view by correctly forecasting the paradoxical rise in the USDollar that was seen in autumn 2008, based upon derivative contract and debt liquidation, the beginning phase of the virtual death of the US financial structural foundation. He received little accolade or credit, since his description of the unfolding events was laid out in the year 2003.

INSANE MEDICINE & DEBT DEATH SPIRAL

◄$$$ SLOW DEATH COMES TO SOUTHERN EUROPE AS GREAT CHANGES DEVELOP. THE DEBT RATING AGENCIES ARE DOING THEIR JOB FINALLY. IRONY COMES AS E.U. DIRECTIVES FOLLOW I.M.F. DEADLY DISASTROUS COUNSEL, WHICH THE DEBT RATING AGENCIES MUST HIGHLIGHT AS DESTRUCTIVE. DEBT ROLLOVER WILL NOT HAPPEN. IN ORDER TO ACHIEVE A RECOVERY WITH STABILITY, A DEFIANT STANCE MUST BE PURSUED THAT REVERTS TO THE FORMER DOMESTIC CURRENCY. $$$

Moodys has stated that Greece and Portugal might face a terminal situation. In my view, all four of the PIGS nations (Portugal, Italy, Greece, and Spain) face a certain death in the sense of a sovereign debt default, and forced radical restructure. The first will be Greece, the second Italy. Moodys focuses on the Greek and Portuguese economies as facing a 'Slow Death' in their words. The nations dedicate a higher proportion of wealth to paying off debt while investors demand a premium to hold their bonds, according to Moodys Investors Service. That means the debt ratio to economic size is higher and bond yields must be set higher. Their commission forecast stated that the UKGovt debt burden will amount to 80% of GDP this year, the Italian Govt debt to 117% of GDP, and the Greek Govt debt 125%. The high risk for Greece is reflected in a higher cost of their sovereign debt insurance premium. Insurance costs against a Greek Govt default leapt to a record after the Moodys assessment. See the Bloomberg article (CLICK HERE).

The heavy lifting on federal response, urged by the European Union, comes from typical tired toxic responses that follow the failed IMF guidelines such as tax hikes, spending cuts, and reduced programs both of social and infrastructure. Unfortunately, they are utterly disastrous without a single past historical precedent of success. The result is a downward death spiral for nations that accept the IMF-style ruinous medicine. Ireland has done so, and should be watched as ruin is almost assured. Since the nations under distress cannot devalue the common currency, the government debt remains unchanged and burdensome. The usual stupid suicidal medicine is reduced federal spending, higher interest rates, broad job cuts, reduced projects, but without the required stimulus from a devalued currency. The lack of currency discount means both the debt remains impossible to pay, and exports cannot be revived when urgently needed to bring in foreign capital and cash flow. The higher interest rates restrict capital formation and job stability. The reduction in projects and worker income puts the brakes on the economy and imposes greater strain on the federal governments. Federal deficits rise drastically. The nation is crippled further, to the point that the austerity measures eliminate its ability to repay the debt. The IMF directives basically drive the nation into ruin, probably the actual plan. One last piece to the IMF poison pill. The interest charges imposed for the IMF loan act like draining blood from a prone patient in the hospital bed, after the accepted medicine sends it from the sick ward to the intensive care room.

Evans-Pritchard calls the standard IMF toxic reform approach 'Medieval Leech Cures' very appropriately and colorfully. Mark Weisbrot from the think tank Center for Economic & Policy Research released a report in 2009 from a study of 41 nations following IMF reforms. The study concluded that the IMF austere policies did more damage than help the affected economies. Marshall Auerbach rivals Evans-Pritchard in colorful metaphors. When describing the IMF damage done to former Soviet states, Auerbach said "The West has viewed them as economic oysters to be broken up to indebt them in order to extract interest charges and capital gains, leaving them empty shells." The IMF practices have been to extract capital and weaken the economic engines, precisely the opposite of what is urgently needed for a distressed nation. Unlike a bankruptcy process, the IMF orders passage through a slaughterhouse. In my view, the IMF and World Bank have a very clear unmistakable track record of causing ruin toward maintenance of the US and UK in dominant exploitative roles. The World Court should step in to declare the IMF as criminal, commiting crimes against humanity in economic chambers. A revolt is due. It might come from a defiant Greece, or possibly Latvia. The key to recovery is to refuse the IMF reforms, to return to the former domestic currency, to devalue it right away, to force deep foreirgn debt reductions, to convert commercial contracts, and to instill a positive psychology at the national level. The nationalism can be set on a positive course for reconstruction, or it can turn ugly and destructive as it results in riots and anger directed at the IMF or EU, even its own leadership that accepts the restrictive reforms based in a tradition of stupidity. Some precedent exists for defiance in a successful path, such as Argentina in the last 20 years.

Defiance must come against the lunatic economic grenades tossed into distressed nations and their financial structures. Auerbach suggest defiance in a formula: 1) do not communicate with creditors, 2) declare banks insolvent with debt converted to equity and deposits fully guaranteed in the local currency, and 3) offer local currency jobs with health care insurance. Evans-Pritchard suggests that Greece break the death spiral by restoring its drachma currency, devalue it immediately, switch Euro debt to drachma debt, and restructure foreign contracts. What he described is a bankruptcy restructure, as opposed to the IMF toxic treatment and slaughter. See an excellent article by Ellen Brown entitled "European Union Debt Revolt" on Market Oracle (CLICK HERE). We could soon see the global discredit of the IMF on reform counsel. They are but a hammer used by the US-UK field bosses to kill nations.

LEGAL BASIS FOR EXPULSION

◄$$$ THE EUROPEAN UNION IS PREPARING THE LEGAL BASIS TO REMOVE GREECE, ITS WEAKEST LINK, ACTUALLY ITS BROKEN LINK. A QUICK SURVEY OF MANY ISSUES FILLS THE BACKDROP. GREECE WILL NOT BE RESCUED. ITS HERITAGE HAS ALMOST NO BLOODLINE LINKAGE. $$$

The Euro Central Bank prepares legal ground for dismissal of Greece as the crisis in Athens escalates toward an inevitable climax. The Dubai debt default set the stage for debt intolerance. As Greek Govt debt will not be refinanced and rolled over, a default will occur, even orchestrated. Greece will be the first nation in the European Union (EU) to abandon the Euro currency, in retaliation for refusal by the Euro Central Bank to refinance their debt. Bear in mind that on a tribal hereditary basis, Greece is not a Germanic or Latin nation by blood. It lies on the periphery of Europe. It has no traditional bank heritage. It has no vital industry. It thus serves as a perfect test case for default, dismissal, contractual rework, and more. Its failure and restructure will offer a model workbook written for application elsewhere, immediately. Plenty of hypocrisy to go around here, since the Maastricht treaty calls for limits on federal deficits and total government debt. Violations are aplenty within the EU.

Ambrose Evans-Pritchard wrote an interesting essay on the topic, worthy of comment. He states from the start that Europe is preparing the course for exit from the union in urgency. Withdrawal and expulsion from the EU and EMU will go hand in hand, as abandoned currency usage requires exit from the political structure as well. He is implicitly critical of the EU lawyers, when he wrote, "The author makes a string of vaulting, Jesuitical, and mischievous claims, as EU lawyers often do. Half a century of ever-closer union has created a 'new legal order' that transcends a 'largely obsolete concept of sovereignty' and imposes a 'permanent limitation' on the state rights. Those who suspect that European Court has the power pretensions of the Medieval Papacy will find plenty to validate their fears in this astonishing text. Crucially, he argues that Eurozone exit entails expulsion from the European Union as well. All EU members must take part in EMU (except Britain and Denmark, with opt-outs). This is a warning shot for Greece, Portugal, Ireland, and Spain. If they fail to marshal public support for draconian austerity, they risk being cast into Icelandic oblivion. Or for Greece, back into the clammy embrace of Asia Minor. ECB chief Jean-Claude Trichet upped the ante, warning that the bank would not bend its collateral rules to support Greek debt." The Euro Central Bank could not be more clear.

Trichet signaled clearly that the Greek Govt debt will not be aided, certain to default. The Hellenic Socialists (PASOK) from Athens endured a shock recently when ¬1.6billion (=£1.4B, =US$2.2B) in Greek debt auction fell on its face. The interest rate on 6-month notes rose to 1.38%, versus 0.59% only one month ago. The yield on 10-year Greek Eurobonds reached 6%, as the spread ballooning to 270 basis points above benchmark German Bunds. The breakdown will come from the premium paid on short-term borrowing costs immediately. The nation of Greece must raise ¬54 billion this year, with a big front load in the first half of 2010. Moodys regards Greece and Portugal at grave risk from rising interest costs and debt refinance. Severe stress fractures are likely next. The fix will be like carving off the fat on a slab of steak, from the edge of the EU core. As debt within their banking systems is written down and losses are absorbed, great stress will come to their entire financial structures, exacerbating the sovereign debt into a collapse. Restructure will follow.

Many fallacious arguments are built upon the wrong premise that the German juggernaut will rescue reckless Club Med nations like it did for East Germany. NOT TRUE! The bloodlines were strong from the old German Federation to East German brothers, under the Soviet thumb for 40 years. In every conversation made by the Jackass with German natives centered on why take on such a huge Reunification project with such huge costs, they all replied the same, saying "they are Germans; they are our brothers" in clear fashion. The Greeks are nobody's brothers, and the Southern Europe Latin nations have angered the Germans to the extreme. In fact, something is rarely mentioned in the press but always cited by my German contacts. The Southern Latin nations have cost Germany $300 billion per year for ten straight years, thus reducing the German standard of living and adding to their debt burden. That is $3 trillion welfare cost to German in the experimental ruinous decade. They are sick of it, and finally will carve off the Latin fat and remove the drag to Berlin. The legal basis is being forged to do precisely that.

Evans-Pritchard points out that in Western Europe only Greece treats the military budget as a state secret. Rating agencies guess it is a ruinous 5% of GDP. The country of Greece has 1700 battle tanks, 420 combat jets, and eight submarines in contributions to NATO, with an 11 million population. Maybe they can sell half this military arsenal to China and raise significant funds. They border Turkey, whose natives look to a different deity. Next comes the climax events with retrenchment, all direct consequences to faulty IMF pathways. Evans-Pritchard wrote, "But devaluation is ruled out. Greece must take the pain, without the cure. The policy is conceptually foolish and arguably cynical. It is to bleed a society in order to uphold the ideology of the European Project." The Greek debt spiral will end in default, a situation clear to anyone with common sense, which excludes most mainstream economists. The Greek national debt will be 120% of GDP this year. Standard & Poors expects it will reach 138% by 2012. A harsh spending reduction and tax increase without any lower interest rate or currency devaulation will cause tax revenues to collapse, without any shadow of doubt. Debt will rise higher on a shrinking economic base, which does not include any semblance of strong export trade. Greece is caught in a vise. Labor minister Andreas Loverdos claimed unemployment would reach a million this year, equal to 22%. Some believe he broadcast the forecast with a hint of menace, as if he wanted Europe to squirm. See the UK Telegraph article (CLICK HERE). Two can play brinkmanship. The EU from Brussels, run by Berlin bankers, will just say NO to Greece. The Greek leaders might just say NO to the kooky killer reforms. Prepare for debt default, the next sovereign debt default after Iceland.

MODEL FOR ADDITIONAL EXPULSIONS

◄$$$ THE E.U. WILL NOT BAIL OUT GREECE. IN FACT, IT WILL BECOME A TEST CASE, EVEN TO CREATE A MODEL FOR IMITATION IN ITALY, SPAIN, AND PORTUGAL. EUROPE WILL STUMBLE ALONG AS IT PRESERVES ITS CORE. $$$

The Euro currency seems to be a thermometer for EU fever over the Greek Govt debt situation. A sudden tumble was seen in the Euro after comments came from a Euro Central Bank executive board member Jurgen Stark. He stated clearly that the European Union would not save Greece from its fiscal problems. A tactical approach seems clear. Watch the highest leaders address larger problems but speak promisingly, while lower officials speak more plainly and realistically. That way the leaders can lay responsibility for decisions upon expert counselors who make decisions impartially. The Euro currency soon recovered though, when fickle investors combed through a report that showed the Eurozone service sector was expanding at its fastest pace in more than two years. Stark is the ECB chief economist and the German member on the bank's inner council to the central bank. Read: the most powerful voice on the EuroCB. He stood on legal ground when he called Greece's problems entirely home grown, not having met the terms required to trigger the rescue mechanism under EU treaty law. A clear legal stipulation refers to aid to be limited to countries that face severe difficulties 'beyond their own control' ominously. So weak industry, lack of export trade, and heavy social network costs constitute a home grown problem. That makes sense. It will build a platform for rejection apparently. Stark said, "The Treaties set out a 'no bail-out' clause, and the rules will be respected. This is crucial for guaranteeing the future of a monetary union among sovereign states with national budgets. Markets are deluding themselves if they think that the other member states will at a certain point dip their hands into their wallets to save Greece." See the Financial Times article (CLICK HERE). Germany could not be more clear.

A key global banker contact shared some comments. His strongest ties are from Central Europe with Swiss and German bankers. He shared what he believed to be The Plan in the following. The European Union will not break. Instead the EU will consolidate into a strong core. It will force a currency realignment to deal with regional differences. The Greek experiment in default will provide much useful information, employed in a guinea pig role. The nation will be used to lever its relatively small deficits into a devalued currency. They will revert to the drachma, whence they came. The Germans will no longer tolerate carrying via subsidies the debt burden of inefficient and deficit ridden Southern Europe nations. Germans are angry at their lost purchasing power and have tired of pulling the European load. The Lira currency is consistenly cited on transactions and contracts and will return to Italy. In fact, immediately after the Greek debt default has concluded, Italy will be forced into a debt default of its own, and the path will be followed from the manual written from the learned Greek experience. From Italy the default path will include Spain and Portugal, post haste. He mentioned how some learning from the Greek breakdown is necessary. My interpretation is that much must be monitored on the uncertain outcomes regarding discounts for defaulted bonds, for choosing banks to survive, for reworked contracts in the reverted domestic currency, and even damage from civil response in riots as nationalism is displayed in stark terms. This learning will write the manual applied to Italy right away, then Spain and Portugal.

Enormous differentiation exists among European nations that render impossible a common currency, seen vividly in non-homogeneous EuroBonds. For two years, reported by the Hat Trick Letter, the German type EuroBond has not been interchangeable with other national EuroBonds. That has been my premise for establishment of two Euro currencies, or a Core Euro currency and reversion to former currencies. The other nations differ greatly from Germany in trade surplus, federal deficits, interest rates, price inflation, productivity, and tax structure. Cultural contrasts expose work ethic differences and tolerance to corruption also. The same global banker contact coldly stated something that exposes the lack of heritage connections, when he said nobody in Central Europe cares about the PIGS nations. He fully expects France to follow the default path of the PIGS nations, as he called the doomed group of nations the F-PIGS. France is unique, however, as it owns an extensive nuclear weapon arsenal, and more importantly the Bundesbank owns 95% of the French Govt debt. He anticipates France will be kept under the German aegis of protection, spared the shame of default, but only at a hidden cost paid behind the curtain. The French will be denied a prominent role, since so utterly obnoxious when given power, in his opinion. The generous global banker made a few general Euro comments. He was harshly critical of EuroCB head Trichet, who has led the Euro currency into an unsustainable role of serving as the global secondary reserve currency, not the original intention. The inevitability of trading Euros in US$ terms via heavy FOREX trading platforms has caused undesired problems. See the German export reaction to the 160 Euro exchange rate peak 18 months ago. The Euro was not designed for such a reserve role in actual structure. The EuroCB was not designed to provide aid and stimulus or to promote growth, but rather to promote price stability. It was not designed to respond to regional differences. In fact, my added comment is that late in the generational cycle, any currency utilized as a secondary reserve will suffer from primary Competitive Currency War damage. Its exchange rate will rise to the point of inflicting notable damage to the resident export industry.

NEXT FALLOUT ZONES

◄$$$ SPANISH DEBT IS A DEFAULT READY TO HAPPEN. ITS DEBT LEVELS SHOULD DOUBLE QUICKLY. VOICES WITHIN SPAIN EXPECT GERMANY TO SAVE THEIR SKIN, BUT THEY WILL NOT. $$$

Alvaro Guzman is Managing Partner of Bestinver, a leading fund in performance. His words carry weight. The crash of a Spanish real estate market, which caught banks with ¬324 billion (=US$462 billion) in loans to developers, will limit economic growth and tax revenues, perhaps forcing an eventual bailout of the country by Germany, according to Guzman. He describes rows of skeletons in the Spanish closets. He said, "We are very pessimistic on Spain because we think there are still skeletons to come out of the cupboards, basically marking to market the true value of real estate on the balance sheets of the banks. It is not just the banks we [exited from investments] but anything that has a Spanish cyclical component." Guzman acknowledges that Spanish debt levels could quickly rise, even though they currently compare favorably to countries like Greece. Spain stands almost entirely alone in the lunatic practice of NOT writing down bank loans backed by property, since the collateral properties have not come down in price much at all. Big losses come, most likely born by the Spanish Govt, thus rapidly lifting the sovereign debt level. He makes the assumption that Germany will ride in like a white knight and help Spain. He might be in for a shock. Germany has helped them for a full decade, and has reached its limit. Standard & Poors lowered its outlook on Spanish Govt debt to a AA+ credit rating on December 9th. The S&P credit analyst Trevor Cullinan expects their debt burden to quickly more than double to as much as 90% of gross domestic product. Guzman is but one in a crowd negative on Spain. Budget and debt finance concerns that damage Greek bonds are spreading to other Southern European economies. Jim O'Neill is chief global economist at Goldman Sachs. He is watching whether further damage to the Greek credit ratings sparks a 'cascading game' where the credit market attacks Spain and Portugal in quick succession. See the Bloomberg article (CLICK HERE). The cascade is exactly my forecast.

◄$$$ FITCH WARNS FRANCE AND ENGLAND RISK AAA RATING. SOVEREIGN DEBT DOMINOES ARE MOVING INTO POSITION FOR A STRING OF FAILURES. NO NATION IS SACRED, EVEN ENGLAND. $$$

Debt ratings agency Fitch has warned that Britain and France risk losing their AAA rating. The delivered message was an important shot across the credit bow of two leading nations. Fitch said that none of the arguably benchmark AAA states (leading industrial nations) can safely rely upon their top debt rating for much longer. Emphasized was what they called 'unpleasant fiscal arithmetic' faced by states across the Old World. More directly, Fitch forecasted that sovereign debt in both Britain and France will reach 90% of GDP by year 2011, higher than the 80% level held by Japan when it lost its AAA rating earlier this decade. See the UK Telegraph article (CLICK HERE).

FROM THE HERETIC HIGH PRIEST

◄$$$ MILTON FRIEDMAN PITCHED IN WITH THOUGHTS ON THE EURO CURRENCY RISK OF FRACTURE. HE CORRECTLY FORESAW ITS DOOMED FATE IN TEN YEARS TIME. IT WAS BADLY DESIGNED AND STANDS AS UNWORKABLE IN A HETEROGENEOUS EUROPE MIX. $$$

Milton Friedman is responsible for the Quantitative Theory of money, as response to demand for money results in altered supply in optimally unregulated markets. The current financial situation is somewhat an extension of his espoused principals. The Supply Side economists argued for de-regulation, but in doing so they opened the doors wide for corruption, which Friedman almost never touches, not even remotely. Where is his chapter on syndicates and criminal control of the USDept Treasury? Nowhere! Friedman and Samuelson have served as the two high priests to justify ruinous economic ideology for a generation, as every Ponzi Scheme requires resident high priests for psychological sanctification. Despite my criticism of his failed economic principles, Friedman made some comments on Europe worthy of retort. The parenthetic responses are by Bryan Rich of Weiss Research, from their Money & Markets publication. The following are comments by Friedman about a risk of fracture for the Euro currency and implications to the European Union. See the Money & Markets article entitled "Will the Euro be the Most Hated Currency for 2010?" (CLICK HERE).

A one-size fits all monetary policy does not give the member countries the flexibility needed to stimulate their economies. (The European Central Bank's mandate is inflation targeting, not growth. A premature exit from easy money policies could drive weaker European countries further into recession.)

A fractured fiscal policy forced to adhere to rigid EU rules does not enable member governments to navigate their country specific problems, such as deficit spending and public works projects. (A majority of the sixteen countries in the monetary union have completely disregarded the EU's Stability and Growth Pact by running excessive deficits.)

Nationalism will emerge. Healthier countries will not see fit to spend their hard earned money to bail out their less responsible neighbors. (The cornerstone of the Euro, Germany, has rejected the notion of big spending to bail-out troubled countries. And German citizens are in a protectionist mode.)

A common currency can act as handcuffs in perilous times. Exchange rates can be used as a tool to revalue debt and improve competitiveness of one's economy. (Under the Euro, weak member countries are helpless. Italy has a history of competitive devaluations of the Lira during sour times. Now, in the Euro regime, its economy is left flapping in the wind.)

Today, the most challenging issue facing the Euro might be addressed in this statement by Friedman: "Political unity can pave the way for monetary unity. Monetary unity imposed under unfavorable conditions will prove a barrier to the achievement of political unity." He foresaw the vulnerability of this single currency concept coming and predicted the Euro's demise within a decade. Implications extend to European political cohesion. The Euro has not outlasted his prediction by much, only a year. If a sovereign debt crisis defines 2010, look for the viability of the Euro currency to come under attack again.