Clem Chambers: Feverish speculation over how eurozone sickness will play out

CONTAGION is out of the bag in Europe. The course will run through Italy to Spain and onwards through France to the rest of the world.

The situation is simply “weird”. While not prepared to suffer inflation, Germany is blocking the necessary changes for the European Central Bank (ECB) to get inflation going to erode the unbearable debts built up by European Union states; dooming Europe to a great depression and its own collapse.

If France falls, so then will the US. Interest rates will rocket across the globe and the vast monies locked up in bonds will be incinerated.

This untold wealth will go to “money heaven” never to return. There will be a massive money supply squeeze.

The result of this will be a global recession that will, in the end, land on the doorstep of Germany.

Germany’s intransigence and refusal to endure 5 to 7 per cent inflation seals not only Europe’s fate, but also that of the US.

Setting itself a deadline of October to fix the problem, Germany then missed it completely, sparking the end game that is now underway.

If that isn’t weird enough, the euro is still amazingly strong.

The euro should not be €1.36 to the US dollar and €1.17 to the pound, if indeed it is going to implode. €1.10 to €1.20 to the dollar maybe, but the euro is strong just as it seems impossible that the currency will survive at all. How can this be? The choices are limited and stark.

The most obvious Occam’s razor answer is that the whole crisis is baloney.

The “them” that paranoid traders talk about already know how this mess pans out and it has a happy ending. I keep focusing on this, because as Occam posited, the simplest answer is often the right one.

It is clear that no-one has a remedy or even a sketch of one, so Occam doesn’t cut it for me. Germany could be ready to bite the inflation bullet, but if so it is hiding it brilliantly and at the same time exacerbating the meltdown it needs to halt.

More likely is the answer that the sovereign markets are so huge and the day-to-day momentum of currency and bonds so vast that, like a super tanker running aground, the euro just grinds on across the land, disintegrating in slow motion.

Stocks crater in minutes but when they crash it is like a bar brawl, short and brutal. A currency crashing is like a war with a prelude, unfolding conflicts and final ghastly resolution. The sovereign markets could be just too big to crash and burn fast; this drawn-out torture could just be a function of giant scale.

The last option is that the market thinks that the weak European countries will simply flunk out of the euro and that the frontier of the currency will pull back into the states that have their economies in order. This contraction will automatically strengthen the euro as its membership gets smaller.

• Clem Chambers is chief executive of stocks and shares website ADVFN