Eurozone will survive as any alternative is unthinkable for the global economy
Posted on July 23, 2012
Speaking at a GIBS Forum, Scott Thiel, deputy chief investment officer of fundamental fixed income and head of the European and global bond team at global asset manager BlackRock, told the audience that while the imperfection of the European Monetary Union (EMU) has been recognised, the cataclysmic event of trying to split it up makes the possibility unthinkable: “The alternative is too terrible, so we have to keep on going.”
He explained that the sovereign debt crisis has thrown into doubt the two main reasons investors buy government bonds: for their liquidity and their security.
Each bailout package for Greece from the European Union (EU) has had less and less impact, and they haven’t had much impact overall: “The policy responses haven’t fixed the fundamental problems and have merely been a short-term reaction,” Thiel said.
At no time did the EU step in with a new response or programme until there was a crisis. The Greek restructuring, which took place in early 2012, was “an absolute unmitigated disaster” in his opinion and broke the taboo of a developed market’s sovereign bond undergoing a restructuring.
Despite this, Thiel says the one ‘grand solution’ for the EU lies in more co-ordination, integration and convergence in the form of a long-term, multi-step resolution which will include:
• A European Central Bank policy to address the fundamental imbalances and deliver a more flexible monetary policy, including a disregard for inflation rate targeting;
• Continued support of austerity measures, as “once you give up on austerity, every country becomes Greece,” he said;
• Some concept of growth programmes, such as investments in infrastructure development, paired with austerity measures; and
• The establishment of a proper fiscal and banking union for the region, the creation of which could dissipate a lot of market volatility.
Theil said that in the long term, a ‘muddle through’ solution for Greece is most likely, as it is improbable that the country will ever leave the euro. The Greek people will never vote themselves out of the eurozone, as a revaluation of their currency will result in an 80% drop in their standard of living; and the other member countries cannot throw the Greeks out of the EU as there is no mechanism for a forced exit, he explained.
Also unlikely is a breakaway by AAA-grade nations, such as Germany, from the EU, as the reintroduction of the Deutsche Mark would kill off the country’s export industry and destroy growth.
While the possibility of achieving a political, economic and fiscal union may seem remote, Thiel said he believes it can be done.
“The European Union will survive – there has been too much human capital, intellectual capital and financial capital invested in it not too. It is too great to walk away from.”
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