That’s the scenario posited by in an article today by John Dizard, who’s toying with scenarios in which gold would do well. His reasoning goes like this:
Consider … the plight of Spanish property owners, and the workers and consumers who have prospered and borrowed through that country’s boom. According to a European Commission report issued in the spring of last year, Spain, Portugal and Italy have lost between 15 and 20 per cent of their relative competitiveness since euro entry.
Let us say Spain wanted to increase exports to offset the loss of domestic demand because of a contraction of credit available to finance construction. To accomplish that within the eurozone would require a magical increase in labour and capital productivity. Alternatively, the Spanish could impose on themselves a sudden, dramatic drop in nominal wages and prices. That would, in turn, make much of the country’s private debt unserviceable.
Or – whisper it – Spain and the other euro area current account deficit countries could merely contemplate leaving the eurozone to buy market share for their goods and services with double-digit devaluations. Then bank account holders in Spain, Ireland, Portugal, Greece or even Italy would have a Northern Rock-like incentive to move their cash rapidly to Germany or France. The resulting bank funding crisis for deficit countries, and prospective asset losses for surplus countries, does not bear contemplation.
That is why the ECB could reverse its tight policy rather more quickly than is now discounted in the market. There is a limit to how much monetary policy can be allowed to squeeze leveraged, weak economies. And monetary support for faltering credit will power the next big run for gold.
