One of Scotland’s leading investors has added his voice to the growing chorus of analysts who see 2011 as a year of possible meltdown for the single European currency.
Euan Munro, head of multi-asset investing at Standard Life Investments, said that a combination of German reluctance to support troubled and heavily-indebted EU member states, together with further social unrest and riots in countries forced to accept austerity budgets in order to remain in the euro, could spell the demise of the single currency.
Munro, who oversees Standard Life Investments’ £8.6bn global absolute return strategies (GARS) fund, said that the German chancellor Angela Merkel “might just stoke this up too far.”
The European sovereign debt crisis, which saw Greece and Ireland require massive bailouts from the EU and International Monetary Fund last year, might “reach the stage where a number of countries have to leave the eurozone,” added Munro.
Munro said there’s a distinct possibility that a number of countries that use the euro — including possibly Portugal, Ireland, Italy, Greece and Spain — may decide they are better off outside the eurozone and revert to currencies such as the punt and drachma.
The triggers, said Munro, would be “rioting on the streets and enormous social problems” sparked by citizens’ opposition to austerity imposed by the EU. He said: “If they just cannot see themselves living with the level of the euro and the level of the debt, then once you’ve got social disorder, you’ve got to the point where a break-up of the single currency becomes a possibility.”
He added that the situation facing the eurozone has become “too serious to be allowed to fester very much longer — we are short the euro.”
Last month Bob Diamond, who became chief executive at Barclays on 1 January, told Sky News that the eurozone could shrink, with “one or two” countries leaving the single currency.
Munro said an alternative scenario is that Germany becomes more “communitaire”, showing greater willingness to assist weaker peripheral countries, in line with its support for East Germany following reunification. In this instance, Munro said the Frankfurt-based ECB would embark on quantitative easing (“printing money”) and there would be “a more community-minded, joined-up approach to solving the problems of the periphery.”
Euro’s future hanging in the balance says SLI
However in a research note, “Global Perspective”, published last month, SLI favoured the more negative scenario. In the note it said: “The future of the single European currency is in the balance. Despite the Greek and Irish support packages, we are not yet convinced that European policymakers have put all of the necessary mechanisms in place to prevent renewed and serious sovereign debt or banking crises.
“The difficulties in reaching agreement among so many EMU members mean that the ECB may be forced to act more decisively to calm markets down, while only at times of crisis does the market force politicians to press forward with the necessarily difficult decisions towards some form of fiscal union.
Douglas McWilliams, chief executive of economic consultancy CEBR shares Munro’s concern about the prospects for the single currency. He gives it just a one-in-five chance of remaining intact by 2020.
McWilliams expects to see a further eurozone crisis this spring if not before, when Spain and Italy need to refinance over €400 billion of bonds. “The euro might break up at this point… I suspect that what will break up the single currency will be the failure of most of the countries to take the tough medicine necessary to make their economies competitive over the longer term.”
At a summit last month, EU leaders opted to rewrite treaties to create a permanent financial rescue mechanism for troubled eurozone member states. This will take effect from 2013, replacing the temporary €750 billion stabilisation fund. But details remain sketchy. However analysts are concerned that EU leaders failed to adopt more effective solutions such as common bonds, bigger bail-out funds; or even their more flexible use, say, to extend short-term loans.
This leaves the ECB in the hot seat. The Frankfurt-based institution has in recent months been a hyperactive buyer of eurozone debt and supplier of liquidity to stretched European banks. In December, the ECB was forced to request a near doubling of its capital in order to counterbalance its risky assets.
An edited version of this article was published on Herald Scotland on 9 January 2011