Full fiscal union or a break-up of the eurozone are the only lasting solutions to the region’s debt crisis - and union is unlikely to be seen, according to F&C’s Ted Scott.
The argument by Scott, the director of global strategy at F&C Investments, comes after a number of senior European officials offered fresh warnings on the severity of the crisis spreading through the bloc.
Scott says measures such as the European Central Bank embarking on quantitative easing (QE) or the International Monetary Fund lending directly to periphery countries are “just bigger sticking plasters than all the solutions that have been tried already”.
Successful currency unions tend to be bound by political and fiscal union as well, he notes. Citing the example of the US, Scott says the country’s wider union allows it to overcome the financial weakness of some states.
“That model has really got to be applied by the eurozone if it is going to survive as it is at the moment with 17 countries.”
Scott claims this option has the chance of being approved by the electorates of Germany and other strong members.
However, it is unlikely to be approved of on the periphery, where countries would essentially be asked to cede their economic sovereignty to the nations at the eurozone’s core.
“It’s likely to get worse before it gets better,” the commentator continues, adding that steps such as QE could be used to try and save the bloc, but will ultimately prove ineffective.
“We’ll have more measures being applied and then they’ll fail so bond yields will go up in the periphery countries. Eventually the bond markets will force a break-up in the eurozone.”
Scott concludes that the euro will probably survive the crisis as a currency although only in Germany and other core nations, while most of the countries on the periphery will return to their former currencies.
However, he argues this will create a buying opportunity for equities. Scott expects stocks to fall by up to 20% in “one more significant sell-off” after the eurozone’s break-up, creating the chance for investors to buy into equities.
Eurozone finance ministers last night agreed on measures to boost the firepower of the European Financial Stability Facility, although it is unlikely to reach its €1 trillion (£860 billion) target.
At the meeting where the agreement was reached, Herman Van Rompuy, the president of the European Council, warned: “The trouble has become systemic. We are witnessing a full-blown confidence crisis.
“Some may blame it on the irrationality of the market. But it’s a fact and we need to confront it.”
Olli Rehn, the European monetary affairs commissioner, said yesterday that the region has a “critical period of ten days” to complete its response to the crisis.
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