With pressure mounting on European Union leaders to regain control of the eurozone debt crisis, the keynote speaker at Markets Media’s inaugural European trading conference late last week told delegates that an economic solution to Europe’s problems could be at hand.
Speaking in purely a personal capacity as a businessman, Lord Stanley Fink, widely known as the ‘godfather’ of the U.K. hedge fund industry, was the star billing at Markets Media’s European Trading Investing Summit.
During Lord Fink’s 40-minute Q&A with the audience at the May Fair hotel in central London on October 11, many topics were openly discussed. One that stood out was Fink’s answer to the eurozone debt crisis.
“If you weren’t bothered about politics and self-interest and you looked at it purely as an economics proposition, the best solution would be for Germany and some of the northern European countries to leave,” said Fink, who is also treasurer of the Conservative party and a Tory peer in the House of Lords.
“Greece probably has to leave anyway but, if you think about it logically, every European country has debt. So If you leave the euro and then you devalue then by definition you have to suffer a real increase in that debt, which might well lead to a default on the debt.
“However, if you leave the euro at the top, as your currency will increase in value, your euro liabilities effectively reduce and also the euro falls so everybody’s liabilities become easier to service.
“So if the northern European countries, Germany for example, leaves, the euro would drop and the southern European nations would become comparatively much more competitive and enjoy reduced liabilities.
“The euro would just become a weaker currency like the Mediterranean countries used to be. From a fiscal point of view, it is a way of avoiding a major default and instead having a soft default. But it is never going to happen politically.
“As even though the Germans hate subsidizing the Greeks, they love having the benefit of an undervalued currency that lets them become extremely competitive in the export markets as well as keeping full employment. So having a weak currency is very good domestically for Germany but it is awful for the rest of Europe.
“My guess is that if Germany leaves, the euro will probably depreciate 30% or more and the German currency will probably appreciate by the same or more. But if you look at how to prevent a sovereign default having the currencies at the top exit is better than having the currencies at the bottom being spit out.”
Later this week, an EU summit is being held with the leaders of the 27-nation bloc likely to decide the fate of Greece. Greece is locked in talks with the EU, the European Central Bank and International Monetary Fund on a new set of spending cuts and reforms in exchange for the next tranche of loans saving the debt-crippled country from bankruptcy. Greece hopes to agree a new package as Athens says its money will run out at the end of November without the next tranche.
Many financial market participants believe that Greece is a forlorn case, and will exit the euro within months, despite the salvage efforts of Greece itself, the EU, ECB and IMF. It is the threat of contagion to the other bigger struggling southern European economies of Spain and Italy, for instance, that market users fear most as that could potentially cause more damage to the global economy than the 2008 collapse of U.S. investment bank Lehman Brothers.
The IMF, for one, is urging the EU to stop ‘kicking the can down the road’ and spur itself into real action and give a boost to the global economy. The IMF also wants to see more fiscal union within the 17-nation eurozone to help shore up the whole euro project.
In the summer, the ECB established a program to buy unlimited bonds off ailing member countries, but only if a nation actually applies for a conditional bailout loan from the European Stability Mechanism, which would mean accepting stricter austerity measures in return. Spain is thought to be the country most in need of this help—and economists believe it is only a matter of time before this happens—but is hanging on grimly without help so far as applying for a loan is politically controversial for Madrid as it would have to cede a measure of economic sovereignty to the EU. No country has yet taken up the ECB on its offer.
"The ESM and the OMT [the ECB’s Outright Monetary Transactions bond-buying program] need to be deployed, banking union advanced and national authorities should implement strong policies to credibly ensure fiscal consolidation over the medium term,” said IMF managing director Christine Lagarde last week.
