The document discusses the structural challenges facing the European Monetary Union (EMU) and whether recent events in Greece represent the beginning of the end of the EMU or are simply a Greek tragedy. It outlines three main structural challenges: 1) maintaining a single monetary policy with seventeen different fiscal policies, 2) a lack of labor mobility, and 3) a lack of an executive body to enact decisive crisis policies. It then provides historical context on the formation of the EMU and predecessors, driven by the goal of ensuring peace through economic interdependence following World War 2.

1. Today, one may justifiably ask whether recent events in Greece are simply a Greek tragedy,
caused by decades of irresponsible economic behavior (falsifying economic data, lax tax
collection efforts, etc.), or if they are symptomatic of the beginning of the end of the
Economic and Monetary Union 1 (EMU).
The forces originally behind the formation of the euro are being supplanted and forgotten in the current European
economic and political climate. We examine the EMU’s structural challenges and how it never recovered from
weak fiscal enforcement. We also examine the remedies needed to ultimately create a successful single European
currency, and explore the need for urgent reform to the EMU.
Is Greece a Gdansk Moment, or just a Greek Tragedy?
“A unified Europe is the result of plans. It is, in fact, a classic utopian project, a monument to the
vanity of intellectuals, a program whose inevitable destiny is failure: only the scale of the final
damage done is in doubt.”
Margaret Thatcher (British Prime Minister, 1979-1990)
…………………………………………………………………………………………………………………….
Back in 1980, in Poland’s Gdansk shipyard, a labor organization known as Solidarność was started by a charismatic
union leader name Lech Walesa. At that time, no one had any way of knowing that the formation of Solidarność
and the subsequent shipyard strike it organized would rank among the pivotal moments
leading to the collapse of the Soviet Union, the removal of the Berlin wall and the
reunification of Germany.
1

2. Waking from the Euro Dream
Margaret Thatcher’s quote suggests that Greece’s debt restructuring could represent an early chapter to a longer
story. That great minds foresaw the fundamental flaws in the EMU long before it was formed suggests we should
carefully consider whether Greece represents a waypoint, rather than a final result.
Concern that a longer story might be in the making stems from the manner in which the European Union2 (EU)
has addressed the symptoms of the malady which today besets the EMU, rather than the malady’s root cause. As a
result of its March 2012 debt restructuring, Greece now benefits from a reduced sovereign debt load and a promise
of financial support from the EU, IMF and ECB, so long as it maintains austerity programs designed to reduce
government spending. Nevertheless, Greece’s economy continues to face fundamental challenges, including sub-par
GDP growth, high unemployment and rich public pensions. Moreover, sovereign fiscal weaknesses continue to
emanate from other EMU member countries, including Ireland, Italy, Portugal and Spain. Many EMU countries
face difficult economic prospects, and requests for further support could weigh on the patience of core members
such as Germany and France. In addition, a changing political landscape could widen the ideological gap among
EMU member countries.
Challenges to an Effective and Sustainable EMU
While current events and economic realities trigger concern, an understanding of certain historical aspects
surrounding the founding of the EMU weakens the assumption that the status quo will prevail.
The EMU is not built upon a solid foundation of widely accepted economic principles, and several key tenets,
or “structural challenges,” create a valid argument against its sustainability. These are:
1. The EMU is challenged to maintain a single monetary policy built upon seventeen different
sovereign fiscal policies; it also lacks a good disciplinary mechanism for reigning-in the profligate
spending of one or more member countries.
2. A lack of labor mobility creates pockets of long-term unemployment within the EU. In the U.S.,
a common language and culture still prevails, and labor flows relatively freely between states. In
Europe, labor moves less freely, as a result of cultural, language and other barriers, a situation
which sometimes creates chronic regional unemployment.
3. The EU lacks an authoritative executive body capable of creating and executing decisive crisis
management policies.
2
Unlike the case of the 2008 U.S. credit crisis, where a single Treasury Secretary (Hank Paulson) exercised authority
to impose changes on the banking system, none of the European governing bodies, including the European
Commission3 (EC), can act in such a unilateral manner. At present, major decisions can, for example, require the
consensus of the EU, the IMF and the ECB, as well as that of the individual member countries. Even then, local
politics often remain at odds with those decisions, a situation exemplified by the conflicting relationship between
the ECB and the Deutsche Bundesbank4.
Throughout this document, we refer to these tenets as the “EMU’s Structural Challenges.”

3. Waking from the Euro Dream
Foundations of the EMU – Peace through Economic Interdependence
How did the EMU reach the point where its potential collapse even merits discussion? To answer this question,
one has to examine the EMU’s origins and understand how, why and when it was formed. In addition, one must
understand the history of politics within the EU.
“Anyone around here who isn’t confused doesn’t understand what’s going on.”
Anonymous Belfast Citizen, 1970
Briefly, the EU’s roots trace back to the European Coal and Steel Community (ECSC), established by the Treaty
of Paris in 1951. The ECSC formed a six-nation common market for coal and steel, partially to ensure peace
among the constituent nations (France, West Germany, Italy, Belgium, the Netherlands and Luxembourg). Later,
the Treaty of Rome (a.k.a., the Treaty establishing the European Economic Community), executed in 1957, built
upon the success of the ECSC, and led to the founding in 1958 of the European Economic Community (EEC).
Ultimately, the EEC was assimilated into the EU.
Already, without looking too far back into history, we see that peace figures as a
primary motivation for European economic cooperation. All the pre-EMU
cooperative markets were supported by European political elites who believed
that economic ties could lessen the likelihood of military conflict. In the
1950s, the destruction caused by two world wars was still visible throughout
Europe. At the same time, with the Cold War gathering pace, a union among
European countries was also seen as a good counterbalance to growing Soviet
influence. As the situation played out and the Soviets settled into economic
defeat, the failings of communism led to the collapse of the Berlin Wall, a
critical event which galvanized support for the formation of the EMU.
“On the day the Wall came down…promises lit up the night like paper doves in flight.”
Pink Floyd
The Convergence Period – 1992 to 1999
Germany struggled unexpectedly during the pre-convergence period, as it
worked to reunify the country following the fall of the Berlin Wall in 1989.
The German people had internalized a healthy aversion to inflation, having
seen their country’s economy twice decimated in the twentieth century by
hyperinflation. Indeed, in the post-war years, the Deutschmark (DM) had
become a symbol of West German economic recovery, independence and
nationalism. Therefore, in 1990, West Germans considered it a bitter pill
to swallow when, as a condition to the reunification, they agreed to a one-for-one exchange between the DM and
East German Mark.
3

4. Waking from the Euro Dream
Ultimately, the process of European monetary unification was accelerated, not so much by the Germans, who had
their hands full with the merging of East and West Germany, but in fact by the French, who saw it as an
opportunity to expand their influence within Europe and contain a newly unified Germany. France likely
abhorred the prospect of being sidelined by the broader spectrum of European politics. So, while Germany
remained preoccupied with its reunification, France provided much of the behind-the-scenes political impetus
leading up to the February 1992 Maastricht Treaty (a.k.a., the Treaty on European Union), which formally
founded the EMU in November 1993. Publicly however, France’s Francois Mitterrand and Germany’s Helmut
Kohl were the two primary public faces of the euro.
Between the demise of the Berlin Wall in 1989 and the signing of the Maastricht Treaty in 1992, civil servants
worked at a frantic pace to draw up the terms of the arrangement,
buoyed by reunification enthusiasm in Germany. Late in the
negotiations, Germany extracted a high price for retiring its beloved
DM in favor of the euro. First, Germany insisted on an independent
European central bank, whose mandate would be to guard against
inflation; this was in conflict with France’s preference, which focused
more on monetary policy. Second, and at the last minute, Germany
insisted that the central bank be prohibited from issuing Eurobonds which could effectively obligate one country
to pay for the debts of another. In fact, the Maastricht Treaty, in Article 103, Section 1, specifically prohibits the
EC from becoming liable for the debts of a member country. Perhaps, at the time, the Bundesbank was already
looking ahead to the possibility that it might become Europe’s financial backstop, and didn’t like what it saw.
Today, the clause effectively prevents issuance of a Eurobond guaranteed by all member countries, and some
maintain it should also prohibit the ECB from directly purchasing sovereign bonds in the open market.
Nevertheless, the ECB has purchased sovereign debt during the current crisis, to the consternation of many critics.
Interestingly, the ECB has recently worked around the prohibition by expanding its long-term refinancing
operations5 (LTROs).
On February 7, 1992, to the sound of classical music, the Maastricht treaty was signed by all members of the
European Union in Maastricht, Netherlands.
As a condition of joining the EMU, the Maastricht Treaty required countries to meet a set of economic
convergence criteria. One of the criteria stipulated that long bond yields of member countries converge. A look at
government bond yields during this period reveals wide discrepancies in 1992 between Germany and weaker
countries such as Ireland and Spain. Thereafter, in the period preceding the launch of the actual euro currency,
some sovereign yields experienced a rapid decline throughout the decade, almost to the level of Germany, to meet
the criteria of the Maastricht Treaty. The rapid decline in yields created a highly stimulated economic environment
for some and began the debt build-up that has become so problematic today. Converging yields also implied that a
potential default by a member country was highly unlikely. This despite the fact that any bailouts were specifically
prohibited in the Maastricht Treaty itself in the so-called ‘no bail-out’ clause.
4

5. Waking from the Euro Dream
5
Five-Year Sovereign Yields 1991−2000
As the euro’s launch date approached, it became clear that some countries couldn’t meet the economic
convergence criteria. In fact, that was the case with Greece, which didn’t join the EMU until 2001, because it still
failed to meet the requirements in 1999, despite significant manipulations of its economic data. Moreover, critics
contend that many of the countries that joined the EMU in 1999 also weren’t ready.
Nevertheless, once the Maastricht Treaty was signed in 1992, the path was set. With the treaty in place, complete
with timetable, a prevailing attitude of political correctness and enthusiasm permitted the loose application of
convergence criteria to some prospective member economies. By 1997, the apparatchiks in Brussels understood
that certain countries fell far short of minimum requirements; but implementation was already set to begin on
January 1, 1999. These countries clearly had not met the convergence criteria and were going to be challenged
from the start. However, given the momentum behind the process, few in the European Parliament attempted to
intervene, and nothing was done. Indeed, the climate was so accommodative that a mechanism for ejecting a
country from the EMU was never written into the Maastricht Treaty. So, speculation today that Greece will be
ejected by other member countries appears unfounded.
Source: Bloomberg
Finally, currency appreciation during the convergence period compounded some of the basic economic
weaknesses faced by certain prospective EMU member countries. Prospective member states were required by
The European Exchange Rate Mechanism⁶ (ERM) to peg their currencies to an every-narrowing band around the
European Currency Unit⁷ (ECU), the composition of which was dominated by the DM. The problem was that
high German interest rates, caused by the costs of reunification, were artificially boosting the value of the DM,
and as a result the ECU. Consequently, some prospective member states began to suffer from declining exports
and competitiveness. This effect was partially offset by lower funding costs, a benefit of membership.

6. Waking from the Euro Dream
6
In September 1992 as strains built up in the ERM, the UK pound came under pressure at the hands of currency
speculators, including George Soros, because the UK government was unable to keep Sterling within the band
required by the ERM. On September 16, 1992 (Black Wednesday), Sterling fell 17% against the DM, forcing
the UK government to ultimately withdraw Sterling from the ERM. With hindsight, the Sterling crisis of 1992
should have been a clear warning that the system was flawed.
Lax Enforcement at the Start Weakens the EMU
On January 1, 1999 the euro was born, weighing in at US$1.18.
Following launch of the euro, the spending of each EMU country was effectively controlled by the Stability and
Growth Pact8 (SGP) and policed by the EC. The SGP required member states to maintain certain economic
criteria, among them a maximum budget deficit equal to 3% of GDP. However, by 2001, Germany’s annual
budget deficit had reached 3.1% GDP. France also breached the requirement soon after, in 2002. Despite these
violations, the EC faced enormous political pressure (mostly from The Economic and Financial Affairs Council
(ECOFIN), the democratically elected European council of economic and finance ministers) not to enforce the
SGP and levy fines required by the pact. From that moment on, France and Germany lost the moral high
ground, and the SGP was largely seen as ineffective.
Greece, A Weak Link, Fails. Who Will Bear the Cost?
Thirteen years after the euro’s launch, Greece defaulted, with unemployment running at depression levels and
its economy in near ruin. To exemplify the seriousness of the situation, Greek Finance Minister Evangelos
Venizelos recently appealed to the Greek people to return funds they had previously held in deposit at the
country’s banks. Since 2009, €54 billion in funds have been withdrawn, but not transferred as remittances
abroad. Alarmingly, in the midst of the crisis, the EC also succeeded in removing the democratically elected
Greek Prime Minister as a condition of further funding. Along with more austerity measures, this has led to an
increase in Greece of anti-EU sentiment.
“The light you see at the end of the tunnel is the front of an oncoming train.”
David Lee Roth, (vocalist with the rock band Van Halen)
In March 2012, a troika comprising the EU, ECB, and IMF, approved a €130 billion
loan package to Greece in exchange for more austerity. In addition, Greece
simultaneously restructured its finances, in a deal which reduced its total sovereign debt
obligations by approximately €100 billion. Although these actions reduced significant
tension in financial markets, we believe they represent an intermediate fix, rather than a
long-term cure, as Greece’s debt to GDP ratio is still estimated to be excessive at 164% in
2012 and 161% in 2013.
Any agreements between the EU and its budget-challenged members (Greece, Ireland, Italy, Portugal and
Spain) will require those countries to reduce debt and ultimately use the markets to self-fund. To accomplish
this, policies must produce healthy economic growth and increased tax revenue, while reducing government
spending. This explains the mandate of the new EC-designated technocrat, Mario Monti, a former European
Commissioner and the current and unelected Prime Minister of Italy. Mr. Monti was mandated by the EC to
‘oversee’ Italian policies in a manner which promotes economic growth.

7. Waking from the Euro Dream
7
So far, policies recently put into place to promote growth throughout the challenged EMU countries do not
appear to be working, despite encouraging comments from ECB Chairman Mario Draghi. Indeed, they may be
making things worse. Unemployment remains untenably high in some regions (reported above 50% among
those under 25 in Spain and Greece in March 2012). At some point, if no path to prosperity is articulated,
political extremism may give way to anti-EU sentiment expressed at the ballot, threatening the long-term stability
of the EMU and possibly the EU.
Austerity Bites
Austerity measures such as layoffs and reduced pensions for government workers, as well as delayed retirements,
cut spending but do not promote growth. For example, Italy’s Prime Minister Monti is now proposing higher
taxes on the super rich, a luxury boat tax and a return of property taxes as a way to solve Italy’s fiscal crisis. In
fairness, he warned German Chancellor Merkel that the EU needs to promote more pro-growth policies.
Nevertheless, however popular these measures are politically, they will likely lead to deteriorating economic
growth. For example, the luxury boat tax ultimately could lead to lower sales and tax revenue, and layoffs in the
boat building and servicing industries, as did a similar tax enacted by the U.S. in 1990. The measures will only
partially solve the problem, which is that these countries ultimately need to grow out of their debt conundrum.
The danger remains that the cumulative effect of many recently-enacted policies may contribute to significantly
lower growth, which could ultimately lead to a downward economic spiral and worsening sovereign fiscal
balances. Furthermore, the propensity of the richer European countries to continue to bail out poorer neighbors
diminishes as their own domestic growth falters. Approximately 70% of Germany’s exports go to other parts of
Europe, so depression-like conditions elsewhere will effect the leading core countries. Presently, German
economic growth is forecast to be only slightly positive in 2012; so the outlook remains uncertain, as does
continued support of the German people towards future bailouts, if things get much worse.
European Unemployment Rates
Source: Eurostat
(a) As of 3Q11, except Japan, which is 2010
(b) As of 4Q11
Youth (a) Total (b)
Eurozone (all 17 countries) 20.9% 10.7%
Germany 8.6% 5.5%
France 22.8% 10.1%
U.K. 21.8% 8.1%
Italy 28.2% 9.7%
Spain 47.8% 22.9%
Portugal 29.9% 14.7%
Ireland 29.9% 14.5%
Greece 45.8% 21.7%
United States 17.5% 8.3%
Japan 9.3% 4.2%

8. Waking from the Euro Dream
8
European GDP and GDP Growth
Other Weak Links Exist
Since the March 2012 Greek debt restructuring, attention has rightly turned to a number of other weaker EMU
countries, namely Italy, Portugal and Spain and their sovereign debt obligations.
European Government Debt as a % of GDP
Source: Eurostat and CIA World Factbook
(a) Or, alternatively, 116% in 2020 on a pro forma basis for the March 2012
restructuring.
(b) Estimated as of 4Q11; $15.36B in total public debt outstanding (US Treasury
Monthly Statement of the Public Debt (comprises $10.57B in public debt and $4.78B in
intragovernmental holdings (includes Medicare and Social Security entitlements))) ÷
$15.06B in 2011 US GDP (International Monetary Fund).
(c) Estimated as of 4Q11.
GDP Growth
2010 GDP 2011 2012
(€millions) Actual Forecast
Eurozone (all 17 countries) 9,191 1.5% (0.3%)
Germany 2,499 3.0% 0.6%
France 1,933 1.7% 0.4%
U.K. 1,697 0.7% 0.6%
Italy 1,549 0.4% (1.3%)
Spain 1,063 0.7% (1.0%)
Portugal 173 (1.6%) (3.3%)
Ireland 156 0.7% 0.5%
Greece 230 (6.9%) (4.4%)
United States 10,958 1.7% 1.5%
Japan 4,122 (0.7%) 1.8%
3Q11
2008 2009 2010 Actual
Eurozone (all 17 countries) 70.1% 79.8% 85.3%
Germany 66.7% 74.4% 83.2% 81.8%
France 68.2% 79.0% 82.3% 85.2%
U.K. 54.8% 69.6% 79.9% 85.2%
Italy 105.8% 115.5% 118.4% 119.6%
Spain 40.1% 53.8% 61.0% 66.0%
Portugal 71.6% 83.0% 93.3% 110.1%
Ireland 44.2% 65.2% 92.5% 104.9%
Greece (a) 113.0% 129.3% 144.9% 159.1%
United States (b) 102.0%
Japan (c) 208.2%

9. Waking from the Euro Dream
To date, the EU-ECB-IMF troika has implemented the LTROs, provided funding for the future European
Stability Mechanism9 (ESM), directly purchased sovereign debt, provided loan packages to Greece and encouraged
austerity measures throughout the EU. However, none of those actions directly address the EMU’s Structural
Challenges.
Some recent measures have attempted to address the EMU’s Structural Challenges. For example, the EU has
proposed legislation to increase the mobility of labor throughout the EU, although language, social and other
barriers could still linger. However, any EU-wide labor mobility legislation will likely face intense political
resistance in certain countries.
Additionally, in a move towards fiscal union, The Fiscal Compact (formally, the Treaty on Stability, Coordination
and Governance in the Economic and Monetary Union; a.k.a., the Fiscal Stability Treaty), an intergovernmental
treaty signed in March 2012 by all seventeen EMU members, legislates that national budgets be maintained in
balance (a structural deficit of up to 0.5% of nominal GDP is allowable) or at a surplus. Violators would face
imposition of structural reforms to ensure compliance and fines of up to 0.1% of GDP. Deficits would be
calculated under normalized growth conditions and would allow governments to run a certain level of shortfall in
economic downturns but, by the same token, require surpluses to accumulate in economic boom times. This
mandate attempts to block the temptation by irresponsible politicians to make commitments that cannot be met
when economic conditions sour, and achieves the appearance of fiscal discipline without actually demanding a
rigorous ‘no deficit’ policy. The Fiscal Compact will become enforceable in January 2014 if, by January 1, 2013, at
least twelve of the countries’ governments have endorsed it at the constitutional or other equivalent level. The
potential effectiveness of The Fiscal Compact has already been questioned, and critics have pointed out that it
would not necessarily have prevented the current crisis. In addition, it appears that enforcement isn’t automatic or
even within the jurisdiction of an established agency; any disciplinary action first requires an EU member country
to file a formal claim in the European Court of Justice against the offender.
9
Currently, the ECB’s recent €1 trillion in long-term financing operations, (LTROs), seems to be holding together
the whole euro ball-of-wax. However, the positive effect appears to be waning. Recent reports suggest that banks in
Italy, Portugal and Spain have expended much of their portion of the recent LTRO funds to purchase European
sovereign debt. With funds at the banks running low and sovereign yields inching higher, some question who will
be the next incremental buyer of these countries’ sovereign debt.
“The (LTRO) program may have a calming effect in the short term, but it is a calm which could be deceptive.”
Jens Weidmann (President, Deutsche Bundesbank)
Portugal’s situation appears to be among the worst, based on the yield of its sovereign debt. Portuguese ten-year
government yields continue to reflect a significant lack of market confidence. Yields at these levels are likely
unsustainable and will need to be significantly lowered by real market forces before the country can again access
public bond markets to enable future funding. The EU’s current recovery plan assumes that Portugal attains self-
funding status by 2013. Currently, that assumption appears optimistic, at best, in normalized market conditions.
It is difficult to see how sovereign yields can moderate while the EMU’s Structural Challenges continue largely
unaddressed.
Possible Solutions

10. Waking from the Euro Dream
10
At least for the time being, from a global markets perspective, European concerns have faded from center stage.
Inevitably, however, we believe the focus will return to Europe, and in particular to the other distressed countries.
In addition, a number of other themes exhibit the potential to impact the sustainability of the EMU (e.g.,
Presidential elections in France and the Irish referendum on joining the Fiscal Compact).
Perhaps the single most important observation that comes out of a historical perspective of the EMU is that
attitudes have significantly changed since the days of Maastricht. With the benefit of almost twenty years of
hindsight, it is possible today to see things that were not readily apparent in the heady days of the Maastricht
signing. It would be easy to conclude that the leading motivation behind the euro was a global march toward a
socialist European federalist state, egged on by post-Soviet communists who still maintain positions of authority in
many European countries.
However, a closer examination today reveals that, in fact, each country appeared to have its own motivation for
joining the EMU. President Mitterrand of France asserted to UK Prime Minister Margaret Thatcher that it was
“1914 all over again.” In addition to France’s fear of the new larger Saxon/Prussian Germany, Spain and Portugal
had no desire to return to the oppression of dictatorship from which they had only recently escaped. Germany’s
interest was economic, in that it saw a unified currency as a method of addressing a weak Italian Lira which allowed
Italian businesses to compete more effectively with Germany’s agricultural and auto industries (e.g., Fiat versus
Volkswagen.) Other countries such as Finland were simply happy to join anything European, following years of
suppression under Soviet influence.
Today, however, much of the motivation for joining together in the EMU has been forgotten. Years ago, politicians
who forged the legislation had experienced firsthand the destructive effects of war; and to them, the peace dividend
was worth the risks posed by joining a unified European currency. Almost two generations later, European
politicians are not as influenced by the experiences of the last century, and instead face new economic realities and
an increasingly disenfranchised youth.
Perhaps nowhere is change more noticeable than in Germany itself. In an ironic twist, German political ambitions
have been exactly the opposite of that originally feared. Since re-unification, rather than seeking to control Europe,
Germany has preferred to empower Brussels through increased Federalism. This has given rise to extraordinary
scenes in the European Parliament, where senior representatives of once-conquered countries have actually asked for
Germany to take a more direct leadership role in the current crisis.
With a worsening economic climate, an ugly and more disconcerting aspect of the crisis emerges. Political
extremism, at both ends of the spectrum, is resonating among voters. For example, Finland’s nationalist True Finn
party, and France’s communist party, have both experienced surging popularity. Finally, the economic center of
gravity in Europe is quickly shifting eastwards towards Asia and the ex-Soviet bloc countries. For example, Turkey,
which has experienced rapid economic growth, is now the sixteenth-richest country in the world on a per capita
GDP basis. Its enthusiasm for joining the EU is quickly waning.
The Times They Are a Changin’
Despite these positive steps, a recent paper written for the EU warned that “The Euro crisis is not over; many of
the underlying imbalances and weaknesses of the economies, banking sectors or sovereign borrowers remain to be
addressed.”

11. Waking from the Euro Dream
11
Conclusions and Investment Implications
Looking back, it is clear today that the euro project was motivated more by politics than economics. From an
economic standpoint, it’s evident that many of today’s seventeen EMU members weren’t ready for a currency
union, and today’s economic malaise reflects this.
In our view, it is too soon to view Greece’s debt restructuring as an end, in and of itself. Declining GDP,
crippling unemployment, civil unrest and a dysfunctional banking system, despite the LTROs, all point to
further economic deterioration and misery for the Greek population under the shadow of Brussels and the euro.
That the same fate could await other, larger European countries should be a legitimate concern and, in our
opinion, discourages any investment in European sovereign bonds, outside of the core countries. EMU members
such as Spain and Italy represent a significantly larger financial challenge than Greece, and well beyond the scope
of the proposed ESM.
For the euro to survive, the region must quickly enact pro-growth policies alongside existing austerity measures
to prevent further GDP contraction. Going forward, more power needs to be concentrated in Brussels so that an
enforceable budget process can be centralized.
But just as Solidarność led to the collapse of a world-dominant political system, the failure of Greece’s economy,
insofar as it required a debt restructuring, may be an early sign that the European Union is unworkable, due to
the varying economic profiles of its member countries. Moreover, even if a modicum of economic consistency
can be attained, there is no guarantee that all the European peoples will accept the inevitable shift of power to
Brussels. Ultimately, the choices are clear. If member countries can persuade their respective electorates that the
EMU is a good thing, further unification policies will have to be enacted to achieve a more workable model. To
the extent a workable model is not achieved, countries may choose to exit the EMU; in the case of Greece, this
will likely occur if the bailout spigot is shut off.
As the post-German unification enthusiasm that helped cobble the EU together in the 1990s wanes, so too do
the benefits of a single unifying currency. Moreover, as the rest of the world grows at a significantly more rapid
pace, as is the case to the east of Europe in the ex-Soviet bloc, and much of Asia, the drawbacks of EMU
membership will become more polarizing to its members. Therefore, it appears increasingly unlikely that the
EMU will continue to exist in its present form. Indeed, we believe there’s a fair chance that the words of
Margaret Thatcher may prove to be highly prescient.
Also, an increasingly unwilling Germany must be prepared to foot the bulk of any costs until EMU members
attain a sustainable economic equilibrium. Gone are the days of the ‘euro at any price’. Further external financial
help through the IMF and other organization could also be forthcoming, if the cost to the global economy of a
European breakup is deemed too high. So far there has been some evidence that this could occur. Ultimately,
perhaps it will be the collective financial clout of the entire world that will be engaged in solving the problem.
Given all of this, can the euro still survive? We believe that changing attitudes and circumstances will force
countries to re-examine the benefits of continued EMU membership. Continued participation will require
politicians able to articulate the vision of a unified Europe to increasingly skeptical electorates. This is still
possible, as the costs of leaving the EMU at this stage appear punitively high. For certain countries, some
analysts have predicted an EMU exit could devalue their currency by 50% or more and risk violence on the
streets.

12. Waking from the Euro Dream
12
This report is prepared for information purposes only. It does not consider the specific investment objective, financial situation, or particular needs of
any recipient. Bradford & Marzec, LLC is not soliciting any action based upon this report, and the report is not to be construed as an offer to sell or
solicit investment management or any other services. The information and opinions contained herein have been compiled or arrived at based upon
information obtained from sources believed to be reliable and in good faith, but we do not represent that it is accurate or complete and it should not be
relied upon as such. Opinions expressed are our current opinions as of the date appearing on this material only and are subject to change without
notice. Past performance is not indicative of future results. Copyright 2012, Bradford & Marzec, LLC. No part of this publication may be copied,
photocopied or duplicated in any form or any means without Bradford & Marzec's prior written consent.
1The Economic and Monetary Union (sometimes referred to as The European Monetary Union) technically comprises a three-stage framework enacted
in the period between July 1, 1990 and January 1, 1999. In its current form, The Economic and Monetary Union establishes a single currency,
coordinates policy, and establishes a single market for goods and services among its members.
2 The European Union is an economic and political affiliation of twenty-seven European countries working together to maintain a common market for
goods and services. Only seventeen EU member countries share the common euro currency.
3 The European Commission is the unelected executive body of the European Union comprising one representative from each EU member country. The
members of the EC, responsible for acting in the best interest of the EU, propose legislation, implement decisions, uphold treaties and tend to the day-to-
day affairs of the Union.
4 The Deutsche Bundesbank is the central bank of the Federal Republic of Germany.
5 Long-Term Refinancing Operation is an ECB program which previously provided three-month to one-year loans to European banks on a secured basis, at
favorable floating interest rates. In December 2011 and February 2012, the ECB commenced two LTROs totaling more than €1 trillion (i.e., significantly
larger than any previous LTRO) and extended the term of the loans to three years. Funds provided by the December 2011 and February 2012 LTROs
were expected to fortify liquidity reserves at European banks and indirectly support bank purchases of new government sovereign bond issuance in order to
reduce tension in European financial markets.
6 The European Exchange Rate Mechanism, introduced in 1979, is a component of the European Monetary System designed to reduce currency exchange
rate volatility. Prior to the introduction of the euro, exchange rates were based on the European Currency Unit (ECU), which was based upon a weighted
average of the member country currencies. After adoption of the euro currency, the ERM continues to govern EU member currencies which aren’t part of
the EMU by linking them to the euro.
7 The European Currency Unit is a weighted average unit of account based upon the currencies of EU member states which haven’t adopted the euro
currency.
8 The Stability and Growth Pact is an agreement adopted in 1997 among the twenty-seven members of the EU which facilitates the maintenance of a stable
EMU by establishing a system for monitoring of members’ fiscal positions to ensure that they essentially maintain the original convergence criteria. The
SPG includes provisions for warnings and sanctions, if needed.
9 The European Stability Mechanism is a permanent €700B rescue fund planned to launch in mid-2012; it is designed to succeed the temporary European
Financial Stability Facility, which expires in 2013.
Other sources: BBC Radio archives.
This paper is available on our website at www.bradfordmarzec.com