F&C’s Scott: Eurozone ‘escape velocity’ elusive without closer union


F&C Asset Management director of global strategy Ted Scott feels structural reform is still required in the eurozone, despite recent growth.

The eurzone recently exited its longest recession in history after figures from European Union statistical office Eurostat showed its GDP grew 0.3 per cent in the second quarter.

However, Scott is critical that this alone is good enough – pointing to remaining disparities between the economies of the nations in the eurozone.

He argues that the different political attitudes, cultures, languages and fiscal policies of the 17 eurozone members means the end to region’s crisis requires more than just a return to growth.

“The point needs to be reiterated that for the eurozone to work successfully it requires the policy makers to necessary measures for a full political and fiscal union,” he comments.

In particular, Scott is sceptical that the economic situation will accelerate to an ”escape velocity” where growth is sufficiently fast enough for debt levels to fall and credit growth to emerge.

“The constraints on growth are likely to remain too large for this to happen because of the political and financial architecture of the currency union,” he says.

Without this, Scott believes that the troika of the ECB, the EU and the Interrnational Monetary Fund will have to continue giving necessary “crisis support” but that this is not a satisfactory long-term solution for growth to be stimulated.

“It is not a solution and the divergent nature of the currency union will mean that growth remains elusive without the necessary fundamental reforms,” the strategist says.

“This requires significant strides towards a fiscal and political union as well as a common currency and major structural reforms in the periphery countries to remove the obstacles to growth. Such a transformation, if it does happen, is likely to take many years and without it the outlook for growth remains subdued.”