The entire eurozone is at risk unless the European Central Bank softens its stance towards the value of the euro and indulges Greece and other troubled member states, a leading Edinburgh-based financial expert has warned.
Speaking at a conference in Edinburgh, Russell Napier, strategist with brokers CLSA, as well as author of Anatomy of the Bear: Lessons from Wall Street’s Four Great Bottoms, and founder of the Practical History of the Financial Markets course, said: “At the moment the European Central Bank is prizing price stability above all else. This has got to change.
“We need a euro that is built around growth and inflation, not one that is built around a hard currency.
“The key goal of monetary policy ought to be structural in nature – to hold the euro together. If that can only be done by permitting higher inflation in the next economic expansion, then that is a price which has to be paid.”
Napier, also a non-executive director of Scottish Investment Trust and Mid Wynd Investment Trust, stressed he was speaking in a personal capacity.
When the eurozone became a straitjacket
The PIIGS countries – Portugal, Italy, Ireland Greece and Spain – remain severely economically-challenged. Their national accounts have been weakened following decades of fiscal irresponsibility and over-dependence on borrowing. Some, notably Greece, are struggling to service their debts and may need bailouts.
Their membership of the eurozone has placed them in a straitjacket where the former means of salvaging a broken economy, using inflation and the devaluation of currencies to restore economic equilibrium, have become impossible.
Although the euro has lost 10 per cent of its value against the US dollar since the end of November 2009 – when the focus of fears about sovereign debt defaults shifted from Dubai to the eurozone – Napier does not believe its value has fallen anywhere near enough.
He said: “The ECB governors don’t seem to recognise that it is politically impossible to impose nominal pay cuts of 20%. Wages are just one of the costs which have to adjust downwards to make Greece competitive.”
He said the ECB’s council of governors, led by president Jean-Claude Trichet, is dominated by academics and out of touch with political realities.
“The only way the euro can survive is as a weak currency,” Napier said. “I remain optimistic the ECB will recognise this before it’s too late.”
Napier said the people of Germany have already paid a high price to bail out the DDR (Deutsche Demokratische Republik), the former East Germany, after the reuinification of Germany in 1990, and might prefer a weaker currency and higher inflation to having to bail out Greece and other countries.
A weaker euro would be negative for UK exporters and tourism. These sectors have been benefiting from the post-credit crisis weakness of sterling.
Napier said the degree of economic pain inflicted by the ECB’s monetary policy may destroy democracy in a European nation. “It may take such a dramatic event to persuade the economists who run the ECB that European society cannot cope with the economic adjustments their current policies dictate.”
This article was published in the Sunday Herald on 18 April 2010
Timeline of eurozone crisis
18 October 2009: George Papandreou’s new socialist government reveals a black hole in Greece’s government accounts. He admits the budget deficit will be double the previous government’s estimate and will hit 12% of GDP.
8 December 2009: Ratings agency Fitch downgraded Greece’s credit rating from A- to BBB+. Borrowing costs began an upwards spiral made worse when two other US-based rating agencies, S&P and Moody’s, launch moves that soon categorise Greek debt as junk.
4 March 2010: Papandreou’s government announces a deeply unpopular austerity plan. An increase in VAT and tax on cigarettes and alcohol is coupled with a freeze on pensions and cap on civil servants’ pay.
26 March 2010: The German chancellor Angela Merkel agrees under pressure to a “last resort” eurozone rescue package for Greece after debt downgrades on Portugal and Ireland force her into a U-turn.