23rd December 2010
The chances of the Germans gladly putting their hands in their pockets may seem small, but surely the idea of a vacation or breather – call it what you will – from euro membership is even less likely. Politics and economics suggest such a change would be permanent or as permanent as anything is in economic and political history.
All this has to be taken in the context of a belief across markets that the permanent safety net for the Eurozone agreed by European heads of state last week is simply not good enough. Indeed there is something approaching a consensus in bond markets and among credit agencies that the 2013 start date is actually making things very much worse for now.
In light of this, Pimco's head of portfolio management in Europe Andrew Bosomworth, talking to German newspaper Die Welt said: "Greece, Ireland and Portugal cannot get back on their feet without either their own currency or large transfer payments."
He is not alone in this belief. Some fund managers now see the odds of break up rising. Smith & Williamson European Growth Trust fund manager Mark Pignatelli believes there is a 50/50 chance that the euro will split in six to twelve months and is positioning his portfolio accordingly. Here he is giving his views in an Investment Week webcast.
Pignatelli talks of avoiding stocks in the periphery, which may end up in a soft euro zone, and investing in domestically driven firms in a German-led core. He also suggests avoiding export-led stocks even in the core which, initially at least, could be hit as the hard euro appreciates dramatically.
Others are not so sure that events will follow this course.
Creditwritedown's Edward Harrison says while break up is one way out of the crisis, he believes that Europe will come to another solution. This could be a combination of monetization with the European Central Bank having to stand behind sovereign debt in much the same way as central banks stood behind banks in the first phase of the crisis and default by some countries or at least default on some of the debt. For example he suggests Ireland could make a distinction between junior and senior debt passed to it from its beleaguered banks.
The Economist recently gave its views on the barriers to leaving the euro using Argentina's abandonment of the dollar peg as the closest thing to a global case study. Among other extreme measures, it suggests a country might try and impose restrictions on travel to stop capital flight but surely that is next to unthinkable in a modern European democratic context.
Looking at the rest of Mr Bosomworth's reported remarks, he said these crisis countries could rejoin the currency "after an appropriate debt restructuring", adding that devaluation would let them export their way back to health.
But, if you accept the Economist's assessment, then consider the pain these countries are facing now, the pain they will have to be going through before they decide to quit and the pain they will go through if they do, surely it means any split will be permanent. That's before you consider whether any core countries would ever want them back anyway.