Manny Mondays: Whither Europe?

Happy MLK Day everyone! Since the U.S. markets are closed today, I thought I'd focus my sights across the pond on Paul Krugman's Sunday NY Times Magazine's article about Europe's burgeoning currency crisis and whether the European Union can be saved or not, as well as the consequences for them and the rest of the world if it is not held together.

In the rather long article, Krugman takes a deep, detailed historical look at how Europe got to this point and what's likely in store for them down the road:

Here's an excerpt:

The tragedy of the Euromess is that the creation of the euro was supposed to be the finest moment in a grand and noble undertaking: the generations-long effort to bring peace, democracy and shared prosperity to a once and frequently war-torn continent. But the architects of the euro, caught up in their project’s sweep and romance, chose to ignore the mundane difficulties a shared currency would predictably encounter — to ignore warnings, which were issued right from the beginning, that Europe lacked the institutions needed to make a common currency workable. Instead, they engaged in magical thinking, acting as if the nobility of their mission transcended such concerns.

Krugman also looks at the bind many Euro-denominated countries now find themselves in, as they lack the flexibility to devalue their currency to help spur a recovery in their respective local economies and make themselves more competitive in the global economy:

Still, there are obviously benefits from a currency union. It’s just that there’s a downside, too: by giving up its own currency, a country also gives up economic flexibility.

Imagine that you’re a country that, like Spain today, recently saw wages and prices driven up by a housing boom, which then went bust. Now you need to get those costs back down. But getting wages and prices to fall is tough: nobody wants to be the first to take a pay cut, especially without some assurance that prices will come down, too. Two years of intense suffering have brought Irish wages down to some extent, although Spain and Greece have barely begun the process. It’s a nasty affair, and as we’ll see later, cutting wages when you’re awash in debt creates new problems.

If you still have your own currency, however, you wouldn’t have to go through the protracted pain of cutting wages: you could just devalue your currency — reduce its value in terms of other currencies — and you would effect a de facto wage cut.

He argues that despite some of the positives that the Euro brought to Europe, it's lack of "fiscal integration" (along with lack of a common language and shared culture) was, and still is, one of the main problems with maintaining its viability over the long term. Krugman even makes a comparison to the situation in Argentina back in the 90's when it continually tried to save its peso link to the dollar and culminating with them defaulting on their debts and only paying back about 35 cents on the dollar.

He then proceeds to outline four potential "plot lines" for the Euro and the likely effects of each on Europe, the U.S., and the rest of the world.

Go read the whole article here:

Can Europe Be Saved?

My question today is this: What's the ultimate end game here for the Euro? And, if the European Union fails to survive, and the Euro goes the way of the dodo bird (or in very least continues its slow descent), what are the ramifications for them, the U.S. (particularly the U.S. dollar) and global economy itself? One thing I'm thinking is perhaps a stronger dollar at least temporarily? And, yes, as a renter of both TLT and UUP, I am talking my book, but what does everyone else think?