When it comes to the Euro there are two schools of thought: either the Europeans are going to work things out and hold things together, or it’s all going to break up. Either the politicians rise to the occasion or there is a catastrophic break-up, with serial sovereign debt defaults and financial contagion spreading around the world.

But this is the fallacy of the excluded middle. There may be a way for countries to make fiscal and monetary adjustments that doesn’t sound like a cock-eyed optimist. There may be a way for countries to leave the Euro that doesn’t involve a second round of the financial crisis and Depression 2.0. In short, there may be a middle ground

I still believe that there are strong institutional and economic reasons to believe that Europe will pull through. But if it does not a European core could still remain integrated: Germany, Holland, Finland, and France. Of the 300 million or so consumers in the Euro-zone, this includes over half, and it includes the fastest growing economies. Italy and Spain are problems—their combined population is almost equal to France and Germany, but their economies are stagnant and mired in debt.

But should the core countries hold together in a “Nouveau Deutschmark” while the periphery drop off and devalue their currencies, the core would retain many of the benefits of the Euro—a large monetary space for corporate finance, a facile way to facilitate intra-European trade, and a potential competitor to the Dollar as a reserve currency—without tying the highly-productive Germanic economies to the over-indebted periphery.

The dream of a United States of Europe would be over, but waking up from this dream need not necessarily involve an economic and financial nightmare.

Douglas R. Tengdin, CFA
Chief Investment Officer
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