Forget the Talk of Bail-Outs and Eurobonds, the Euro Is Doomed. but That Doesn't Mean We Should Jump Ship

The Mail on Sunday (London, England), December 4, 2011 | Go to article overview

Forget the Talk of Bail-Outs and Eurobonds, the Euro Is Doomed. but That Doesn't Mean We Should Jump Ship


Byline: MEGAN GREENE THE ANALYST WHO PREDICTED THE EU/IMF BAIL-OUT

IT'S probably too late to save the eurozone. EU leaders will meet on Friday to try to cobble together a response to the crisis, but I doubt they'll come up with a plan to address the fundamental issues underlying the situation: there is too much debt, too little competitiveness and too little growth in the weaker eurozone countries. Thus we'll see Portugal, Italy, Greece and Spain (the PIGS) default on their debt and eventually abandon the euro.

EU leaders are discussing three key plans for addressing the eurozone crisis in advance of the December 9 meeting, but none is likely to work. They are:

1.'THE BIG BAZOOKA'

Create a huge fund that incorporates cash hailing from the IMF, the European Financial Stability Facility (EFSF) and the European Central Bank to bail out Italy and Spain.

Italy and Spain together have nearly [euro]3trillion in debt. EU leaders could only cobble together enough money to bail them out until they are expected to run out of cash again - the middle of 2013 at best.

When the bail-out runs out of cash, Italy and Spain will have to return to the markets. In mid-2013, the Italian and Spanish governments will have implemented harsh austerity measures as demanded by the EU.

Austerity measures undermine growth, and GDP will fall in both Italy and Spain. Both countries will have taken on expensive loans from the IMF/EU and will have seen their respective GDPs fall, making them look even less likely to pay back any future debts. Investors won't want to lend them any more money. With no more cash on hand from a bail-out and no access to the markets, Italy and Spain will have to write down their debt, possibly as early as end-2013.

2. 'ECB SAVES THE DAY'

The ECB steps in to buy up all the unwanted eurozone country debt. According to the treaties, it is illegal for the ECB to do this in an unlimited manner, and Germany is dead set against it. Support from the ECB is likely to be limited.

If the ECB announces that it is willing to spend a certain amount each week to buy up the sovereign debt of weaker countries, investors will line up to dump the debt they have on their balance sheets.

It's as if you have a wreck of a car in your driveway that you haven't been able to sell to anyone. All of a sudden, a used car salesman comes to town and announces he has [euro]100,000 to buy whatever cars you present to him, no matter the working condition. You would get as close to the front of the line as possible.

Bondholders of Italian and Spanish debt will do the same if the ECB announces it is about to enter the market.

3: 'FISCAL UNION'

Make small treaty changes to move towards a fiscal union. Once fiscal union is established, German chancellor Angela Merkel has indicated that she is willing to consider allowing all eurozone countries to pool their debt by issuing joint Eurobonds.

This is a nice idea and Eurobonds could help solve the eurozone crisis, but it does nothing to stem the immediate crisis. The last treaty changes took eight years to finally ratify and implement. Even if this round of changes is faster, it is bound to be rife with problems.

Any steps towards fiscal union will require a referendum in Ireland. It is difficult to imagine the Irish agreeing to give up fiscal sovereignty only a week after the troika denied our Finance Minister Michael Noonan debt relief for the umpteenth time.

Realistically, Greece, Portugal, Italy and Spain will eventually be forced to default on their debt because they can't pay. They are fundamentally insolvent. The PIGS have all seen their competitiveness dwindle significantly, and so far attempts to regain it by cutting wages and prices have not succeeded. …

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