You probably know that I’m a Euro-pessimist. I fully expect the EU to emerge from its present crisis is some form resembling a free trade assemblage with most of the important countries adopting their own currency. Here, however, from Ambrose Evans-Pierce is an intriguing idea for preserving the union via radical surgery.
Andrew Bosomworth, head of Pimco’s portfolio management in Europe, said current policies are untenable in the absence of fiscal union and will lead to a break-up of the euro.
“Greece, Ireland and Portugal cannot get back on their feet without either their own currency or large transfer payments,” he told German newspaper Die Welt.
He said these countries could rejoin EMU “after an appropriate debt restructuring”, adding that devaluation would let them export their way back to health.
Mr Bosomworth said EU leaders were too quick to congratulate themselves on saving the euro last week with a deal for a permanent bail-out fund from 2013.
“The euro crisis is not over by a long shot. Market tensions will continue into 2011. The mechanism comes far too late,” he said.
Like I said, it’s intriguing. Notice the caveat about “absence of fiscal union.” I assume that he believes that with fiscal union the problems are manageable, and I suspect he is right. But, is it politically feasible. I continue to believe that at some point the German electorate says enough and without Germany there is no solution.
Mr. Bosworth of Pimco also said that the EMU is losing the battle of backstopping the debt of the peripheral economies.
Pimco also gave warning that the bond vigilantes have lost faith in the policy and are trying to liquidate their holdings of peripheral EMU faster than the European Central Bank (ECB) can buy the debt, causing a relentless rise in yields, and a vicious circle.
Now Mr. Bosworth may just have learned the art of talking his book from the master of that tactic, Bill Gross, but to the extent there’s truth in this statement could it be that the EU is not all that displeased to accumulate the debt of its impoverished members. If at some time they hold a workable majority of that debt might they not simply move to restructure the debt as Mr. Bosworth advises and force such a plan on those who were too imprudent not to have abandoned the ship? Is that perhaps the end game?
Skeptics will point to the European banks and the damage that would be done to them in such a scenario, but it’s entirely possible that the banks are among those sellers Mr. Bosworth mentions. If not, then some sort of TARP like plan could surely be brought forward to see the banks through in the event of a restructuring.
It seems that the more debt of the PIIGs that the EMU holds the easier and more likely it will be for them to move to some sort of scheme to ease the burden on their struggling members. Am I arguing against my thesis that the Euro disappears. Maybe. I guess I’ve learned one thing during this ongoing financial crisis — governments will do just about anything to maintain the status quo and they really don’t care about the niceties of law in furtherance of that goal.
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