When are you leaving the club?
The eurozone departure of countries like Greece and Portugal was one of the main topics at the international conference organised by City Week in London, which gathered finance experts from more than 40 countries. Accenture’s Head of UK Research said that his clients don’t see it as a major problem if a small country abandons the eurozone. According to a managing director of Nomura International, Greece hired lawyers to look into a eurozone exit strategy as early as March 2010.
At the panel session called “Impact of the eurozone crisis on banks and corporations”, the tone was not very optimistic with regard to countries like Greece, Portugal or Ireland still being part of the eurozone in the future. Gabriel Stein is Director at Lombard Street Research. To him there is a great chance that Greece will leave the eurozone by the end of 2012, closely followed by Portugal. One of the reasons for this bleak outlook is the pressure Germany is putting on the government in Athens. “According to the media, Germany wanted the Greek budget supervised by an EU-Commissioner. To my mind, this is the Germans saying: we are not going to give you anymore money but we are going to treat you so badly that you want to voluntarily leave the eurozone,” Mr Stein said.
Gabriel Stein supported the ideas put forth by James Sproule. The head of UK Research at Accenture reminded the audience of the promises made by the Greeks 16 or 17 months ago that they wanted to make improvements. But the words were not followed by actions, so the message to the market has become: don’t trust the Greeks.
Even the Greeks don’t seem to believe in their own future within the eurozone. According to Dr Nick Firoozye, the country hired lawyers in 2010 to look into a eurozone departure strategy and prepare for its legal impacts. Besides, he doesn’t trust the sentiment that Greece’s situation has improved recently, primarily because of the flood of liquidity the European Central Bank has provided. “Many clients see it as resolution is at hand. We certainly have reduced the risk of a banking crisis but the measures are temporary. The liquidity that has been provided by the ECB is not the same thing as solvency. The ECB has been helping, but this help is only available from time to time in the market. These interventions help to stabilise but it is not clear if they have a significant long term impact.”
One fiscal union, many definitions
Europe has an economic and monetary union but needs the third pillar in order to survive, namely a fiscal union. And it is not about the different languages or cultures of Europe, but about its diverging definitions on this topic. “If you ask a German or a Finn, a fiscal union means imposing fiscal discipline on other countries. If you ask a Greek or an Italian, a fiscal union is where you live above your means and where you get money from somebody else,” Gabriel Stein perfectly illustrated the general mess.
In the national press, the leader of Britain’s top employers’ body has called on politicians to stop bashing businesses for fear that it is damaging the already-fragile economy. In this panel, it was the other way round. Political leaders were severely criticised by the business community. According to Gabriel Stein, European decision makers had made three mistakes. “They ignored the fiscal imbalances in the past. When they couldn’t ignore them any more, they treated them as a liquidity problem, which they are not. It is a solvency issue. And finally they sent out mixed messages”.
James Sproule of Accenture did not send out mixed messages but instead painted four possible scenarios of the future of the eurozone. Scenario number one is the most optimistic: “In this case, a solution is found. This is possible if some sort of solution for economic growth is found.” But he is skeptical that Europe will be able to find a way to grow substantially. The second scenario is the one where a country leaves the eurozone. Not dramatic for businesses and customers, argues James Sproule. “ If Greece departed, businesses don’t see it as a big deal”. Another scenario is that of a eurozone divided into a Hanseatic North and a Latin South, but this is a pretty unrealistic one. The fourth and last scenario would be the breakup of the whole eurozone, “a scenario which is not really that far-fetched, if we consider the situation we are in right now,” Mr Sproule concluded. CW