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Views on Europe

Back from a two-day trip to Paris, it is no surprise to find that the markets are still obsessing about Europe. In the absence of elections political change is rarely a straightforward business, as this week’s tortuous attempts to form new governments in Italy and Greece are demonstrating. The markets remain volatile, but as yet nothing has happened to change my view that we are moving towards an endgame that will ultimately prove beneficial, howver messy it becomes in the short term.

What is noticeable is how opinion is at last slowly shifting away from arguing over how the eurozone in its present form can be saved towards the (more sensible) view that the eurozone cannot continue exactly as it is, whether or not it survives the immediate crisis.. See for example an excellent piece by Lord Owen, the former Foreign Secretary, writing in The Guardian on Monday which begins:

A eurozone may survive, but it will not be the present 17 member state eurozone. What will emerge, if it is to survive, will be smaller and more focused around German financial and monetary disciplines

Or have a look at John Plender’s observations in the Financial Times yesterday, in which he writes: “If the obvious escape routes are too difficult, something has to give. And it may be, to a greater or lesser extent, the eurozone itself”.

Following the failure of the Cannes summit, both President Sarkozy and Mrs Merkel have finally owned up to the possibility that Greece might eventually have to leave the eurozone.  It is worth reiterating again that Greece’s problems are all fundamentally to do with its dysfunctional fiscal system and the economy’s lack of competitiveness, of which its worsening debt problems are a symptom, not the cause.

The US money manager Ken Fisher, whom I also quoted in my most recent Financial Times column, makes this point well in his firm’s most recent quarterly stock market outlook, pointing out badly Greece scores on this measure and how competitive, in contrast, the Irish economy is. The Irish are also one of those countries, like Portugal and (soon) Spain, which have changed their governments after an election. They can at least claim legitimacy for their efforts to restructure their economies – something that both Greece and Italy will find hard to do if they opt for the kind of technocrat-led new governments which the Eurozone leaders now seem intent on encouraging.

Another well-known London market commentator, Charles Dumas, at Lombard Street Research, argued in a note two weeks ago that the most likely outcome of the eurozone crisis is that a full-scale writedown of Greek debt (meaning at least 50%) will have to be agreed soon. Then, once that has happened, and time has passed to “enable its ineffectiveness in restoring Greek solvency within the euro to be obvious”, the next step will be a negotiated exit, some time after the French elections in May-June next year.  Other permutations are clearly possible, but this is not an implausible scenario, fast though events are moving.

Written by Jonathan Davis

November 10, 2011 at 3:02 PM