The Death of the Euro Will Occur in Response to the Sudden Emergence of a “Deflationary Interlude”

A big US monetary inflation bang brought the euro into existence. Here’s a prediction: Its death will occur in response to a different type of US monetary bang—the sudden emergence of a “deflationary interlude.” And this could come sooner than many expect. . . . 

We find the existential vulnerability of the euro and the next US monetary shock will present the severest test yet. The shock is most likely to take the form of a sudden arrival of a “deflationary interlude” in a long and likely intensifying monetary inflation over the long-run beyond.

Specifically, as the virulent asset inflation stoked up in the present global monetary cycle (as always led by the Federal Reserve) proceeds into the final stage of unwind (asset deflation) and recession, there will be a period of overall credit contraction. This will be reflected most likely in the broad money aggregates. Prices and wages could come under some downward pressure, though this is not in itself evidence of monetary deflation.

In this asset deflation phase, accompanied by global slowdown or recession, Europe would be in a particularly dangerous situation. The vastly over-extended export sectors of Northern Europe are vulnerable, not least to the emerging market credit bubble turning to bust. Weak banks and sovereigns across Europe would descend into an insolvency zone. The weak euro and market share boosting measures of the big northern European exporters are likely to attract Trumpian ire.

There would be zero tolerance in Washington for continued or new-style monetary radicalism in Europe. If this is what holding the euro together requires, meaning that currency’s perpetual weakness, then it should not be held together.

—Brendan Brown, “How a Fragile Euro May Not Survive the Next Crisis,” in Anatomy of the Crash: The Financial Crisis of 2020, ed. Tho Bishop (Auburn, AL: Mises Institute, 2020), 81, 83-84.