At a dinner with a fund manager the other night, I was sitting next to a very pleasant German journalist. Feeling perhaps a tad mischievous, I asked: "So when is Germany going to leave the euro?"
She bristled a little. "Why should Germany leave the euro?"
Not wanting to offend, I explained: "For the eurozone to work, the Greeks and Germans need to be more alike. But the Greeks don't want to be German, and the Germans don't want to be Greek. So either the Greeks leave or Germany does.
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"More countries in Europe are like Greece so why doesn't Germany just leave, enjoy a strong currency, and leave the slacker countries with the euro?"
She thought for a moment. Then answered: "But you know that Europe is about more than economics."
And she was right. It's a political project and always has been. But for politics to triumph, something extreme will have to happen on the economic side.
And no one neither German nor Greek is going to be entirely happy about it
There are lots of reasons to worry but only one new one
You can point to plenty of reasons for the current slump in global markets.
The Federal Reserve is about to stop printing money. American economic data has been infuriatingly consistent in pointing to a recovery so far. So markets can't hope for a "there's so much bad news, it's good!" bailout from that direction not yet at least.
China's economy is slowing. That's been the case for a very long time years, not months. But for some reason, investors are just catching up with the idea.
Geopolitical tension is on the high side. Russia and Ukraine. China and Japan (and everyone else in the South China Sea). The Middle East (for a change). Ebola (horrendous, tragic and scary, as were swine flu and bird flu and Sars).
On top of all that, US stocks are just generally expensive and overbought.
But none of these factors is particularly new. If we're going to pin this latest slump on one thing, then there's a standout candidate for blame the eurozone.
Back in 2011, the eurozone was pulled out of crisis trajectory by Mario Draghi saying that he would do "whatever it takes" to save the euro. He has managed to eke out the credibility he won from that single statement over the course of three years. As I've said before, I'd hate to be across a poker table from the guy.
Draghi has effectively got a lot of the benefit of quantitative easing (QE)without actually doing QE. He made Europe investable again, which meant that a lot of money that had fled the continent came back.
Share prices surged. Bond yields in even the most troubled nations plunged from bankruptcy-threatening levels to never-before-seen lows. But now it looks as though he's gone as far as he can without major political change in Europe.
The ECB is running out of ammo just as Germany is running out of steam
The European Central Bank (ECB) is planning to buy lots of asset-backed securities and covered bonds. These are basically parcels of loans, bundled up and sold to investors. The idea is that it'll encourage banks to do more lending if they have a guaranteed buyer waiting at the end of the line to take it off their hands. If banks lend more, then the European economy should pick up.
It sounds like a good idea. Trouble is, the existing European market for these bonds is tiny. And banks already have plenty of ways to raise finance for lending if they so desire.
So it's not the shock and awe' bazooka that markets were hoping for. And it's a long way from being full-blown QE. On top of that, Jens Weidmann at the German central bank is already at loggerheads with Draghi over what he's done so far. Bloomberg quotes German magazine Focus as saying that "Draghi finds cooperating with Weidmann almost impossible' he no longer divulges his plans to him beforehand".
So markets are worried that there's going to be more infighting at the ECB, and that as a result, this is as far as it goes for money printing for now.
That's disappointing enough for investors who were hoping for the ECB to pick up from where the Fed leaves off. What makes it worse still is that, as this is all going on, Germany's economy is sinking fast. Industrial production has slumped, as have exports. The country might even now be in recession.
Given that it's seen as Europe's economic engine', that's not a good sign. Interestingly, Greek bond yields have started to climb again rising from a low of just above 5% to around 7% on the 10-year bond now.
We're seeing another stand-off in the eurozone. And at some point these philosophical differences have to come to a head. Germany wants balanced budgets. Almost no one else in the eurozone can handle that, and they're not prepared to put in the reforms needed to make the change.
Eventually, you have to compromise. That can happen by turning the eurozone into a United States of Europe where German taxpayers fund Greek dole queues. Or it can happen by the euro splintering into smaller groups of like-minded countries. Or disappearing altogether.
But as Cullen Roche puts it on his Pragmatic Capitalism blog: "no matter what happens, it's likely to be hugely controversial and hugely disruptive to the markets and the economy. And if and when this does happen it will likely ripple through the entire global economy as uncertainty overtakes markets."
We'll have more on the return of the eurozone crisis in an upcoming issue of MoneyWeek magazine. If you're not already a subscriber you can get your first four issues for free here.
Meanwhile, we'd still be happy to invest in European markets for the long run. The recent slide has just made them look all the cheaper. And we suspect that before any make-up or break-up' crunch comes, we'll see the ECB press the case for QE hard enough to get past political resistance. But it's a good idea to drip feed money in rather than sticking a lump sum in, so that you get the benefit of falling prices.
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