Saving the euro by destroying its value

If there’s one thing that the leaders of the eurozone seem to agree on, it’s the need to “save the euro”. The problem is their plan for saving the single currency actually involves destroying its value.

Over the past few months we have heard from IMF chief, Christine Lagarde, and several leaders of the eurozone including Angela Merkel and Mario Draghi, all of whom claim to have a plan to “save the euro”. The problem arises when we examine their preferred method for achieving it.

At his latest news conference in Frankfurt on 2 August, ECB President, Mario Draghi, read the following statement:

“Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The euro is irreversible.”

The ECB’s Governing Council voted unanimously to include this sentence which effectively confirms that the sooner or later the European Central Bank will begin purchasing massive amounts of sovereign bonds (debt) in order to bring down the cost of borrowing for nations such as Spain and Italy.

The plan to “save the euro” seems to involve a two-prong assault in which the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) will buy sovereign bonds directly from governments at their primary auctions. The ECB will then back that up by buying sovereign debt in the secondary, publicly traded markets.

These purchases will need to be huge, since Spain and Italy alone need to refinance £472 billion between now and the end of 2013, and that figure doesn’t include any of the new debt that they will need to issue.

The problem is that in order to purchase these bonds, the ECB will need to create, that is print, a massive amount of new euros. This process dilutes the value of the money already in circulation and thus reduces its value.

Therefore, the more aggressively the ECB tries to “save the euro”, the more it will destroy its value.

The bottom line

In their attempts to try to prevent the sovereign debt crisis from spiralling out of control, leaders in the eurozone are about to turn a sovereign debt crisis into a currency crisis. Those with wealth denominated in euros would do well to consider moving it to the safety provided by hard assets such as precious metals.

The euro is likely to continue its recent decline versus other paper currencies such as the British pound and US dollar, however it’s important to remember that these too are paper currencies and are subject to money printing by central bankers.

All paper currencies are losing their value and the best way to protect yourself from their devaluation is by moving your wealth and investments into hard assets such as gold, silver, prime residential property, farmland and precious metals mining stocks.

For more information, see The 247Bull investment strategy.

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