Why the Eurocrisis is here to stay and what it means for investors
No recovery without exchange rate realignment
Postponing the inevitable is not a solution. This simple truth seems to be having a hard time in the sphere of European economics and especially politics. Constant calls for transfers of power to Brussels and a fiscal union, most recently voiced in the “Five Presidents” report by Jean-Claude Juncker, Donald Tusk, Mario Draghi, Jeroen Dijsselbloem, and Martin Schulz, are a misleading solution to the eurozone crisis. What the five presidents propose is nothing more than a long-term implementation of a transfer union.
From an economic perspective it is quite obvious that fiscal transfers can do very little to solve the underlying problem of a lack of competitiveness. Nor can the proposed national and European Competitiveness Authorities solve this problem. The paper of the “Five Presidents” aims firstly at the implementation of a joint European deposit guarantee scheme, which would pool the risk of existing national schemes. Countries with already comprehensive depositor protection would see their liabilities increase, as risk is transferred from the periphery to the core of the eurozone.
The approach advocated by the Troika and the Eurogroup, namely internal devaluation, is also a self-defeating option if the need for devaluation is significantly high. According to a study by the Ifo-institute, a well-known German economic think tank, by spring 2015 Greece had managed to internally devalue about 8 of a necessary 21 percent it would need to restore competitiveness.
The first and foremost problem of the eurozone is the reluctance to recognize what is at its heart: the misalignment of exchange rates within the eurozone. Until this central problem is resolved, the eurozone will struggle to emulate the recoveries seen in the United States and the United Kingdom. The consequences will be slower growth and higher unemployment, lost business opportunities, and below potential returns for investors.
Performance magazine issue 19, January 2016
Performance is a triannual digest, dedicated to investment management professionals, which brings you the latest articles, news and market developments from Deloitte’s professionals and clients.