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Beginning of the middle of the Euro story

by Aaron McCormack on May 16, 2012

The overall economic statistics emerging from Europe this week, coupled with what Paul Krugman calls a “jog on the banks in Greece” (not fast enough to be called a run on the banks) shows us that reality is starting to bite in Europe.  We are now going to witness what a disorderly default and Euro exit looks like.

There may still be some interesting twists and turns – what odds on some form of unity government in Greece springing a Euro exit quickly?  But Greece will leave the Euro and a massive hole in the balance sheets of a number of global lenders – both private and public.

Then we see the contagion set in.  The only real limiting factor on all this will be the election situation in Greece, because someone needs to be in charge to handle all of this.

Of course Greece is small fry – but this will signal the end to the Eurozone’s efforts to keep the currency completely and resolutely intact.  Just as surely as the economic data (showing that the Eurozone was flat in growth-terms last quarter) signals that Europe won’t be able to inflate its way out of the debt crisis it has built.  Spain is now under pressure.  Italy is still under pressure.  Portugal and Ireland haven’t gone away, you know…

Just a note on the Greek bank run.  It will be the rich and the well-connected who know how to get their Euros from the bank and put them somewhere safe overseas.  Once again the average joe will find their savings cut in half, or worse, in the currency reset and devaluation that will have to happen.

Buckle up.

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