The Death of the Eurozone

Jeff Macke

Yesterday German Chancellor Angela Merkel and French President Nicolas Sarkozy held a join press conference announcing the death of the Euro currency and eurozone as we currently know them. The increasingly embattled leaders didn't say so directly, because officially kicking 10 or 15 countries out of Club Euro would be simply unwise. What Merkel and Sarkozy did instead was begin to separate France and Germany from the zone by announcing standards only their two countries will be able to meet.

The news from the joint presser which generated the most immediate response was the announcement that France and Germany will propose a "financial transaction tax" in September. With the possible exception of Merkel and Sarkozy, nobody has any idea what this transaction tax proposal will entail, but that didn't stop traders from guessing.

The knee-jerk reaction was to bail on the exchange stocks like NYSE Euronext (NYX), which fell 8.3% and Nasdaq OMX (NDAQ), which dropped 4%. Whether this tax will be paid by traders in order to stem transaction frequency, or by the exchanges to reduce ECB debt is unimportant. Higher fees mean fewer trades, which means lower earnings and stock prices for the companies involved.

As my partner Matt Nesto noted, the second response of note was a UK Treasury Official quickly suggesting that a transaction tax must be applied globally in order to be effective. Lets cut through the suspense: Every exchange on Earth is not going to unite in an effort to impose a transaction tax upon their markets.

As one example of globalized markets resulting in companies and traders voting with their feet, Manchester United just announced plans to go public and will be listed in Singapore. This is a akin to the Yankees listing in Toronto. In a globalized world, corporations and traders will migrate to the exchanges which have the fewest restrictions. Driving trading out of Europe surely isn't the goal of Sarkozy's financial transaction tax scheme, but it will be the unintended consequence.

While Sarkozy and Merkel were crushing industries they went ahead and snuffed the euro as well. Ironically they did so through a statement of unity. "Germany and France feel absolutely determined to strengthen the Euro as our common currency and continue to develop it," said Chancellor Merkel. The omission of nations other than Germany and France from this statement is notable, but perhaps a formality lost in translation. Less subject to interpretation was Merkel and Sarkozy's joint demand, er, fervent request, that all 17-members of the eurozone produce balanced budgets by 2013.

There are exactly two European countries with any chance of balancing their budgets by 2013: France and Germany.

As I've been saying on Breakout for months, the eurozone is a series of treaties, not a suicide pact. The death of the euro is a foregone conclusion. With global economies melting down, the only question is how long it will take for the leaders of relatively strong European nations to stop propping up the weak. When France and Germany announced second-quarter GDP growth of 0 and 0.1% respectively, the idea of dumping more money into the ECB became suicidal for Merkel and Sarkozy. The breakdown of the Eurozone has begun; it's just a matter of where all the pieces land.

Nesto opened and closed the show with a riff on The Beatles' Taxman, a song written in response to Britain's 95% supertax. The notion of avoiding taxes is timeless and universal. The same could be said of European nations shredding contractual vows of unity. To paraphrase both Santayana and Eddie Vedder, "those who forget the past are destined to remember." Something to keep in mind as we watch the latest attempt at European unity unravel.

As always, your comments are welcomed below or via email:

View Comments (161)