By Ambrose Evans-Pritchard, Jan 22, 2014
Ex-Bundesbank head Axel Weber expects fresh market attacks on eurozone this year and economist Kenneth Rogoff says the euro was a “giant historic mistake”.
A top panel of experts in Davos has poured cold water on claims that the European crisis is over, warning that the eurozone remains stuck in a low-growth debt trap and risks being left on the margins of the global economy by US and China.
Axel Weber, the former head of the German Bundesbank, said the underlying disorder continues to fester and region is likely to face a fresh market attack this year.
Mr Weber, now chairman of UBS, said the European Central Bank’s stress test for banks in November risks setting off a new sovereign debt scare, reviving the crisis in the Mediterranean countries.
“Markets are currently disregarding risks, particularly in the periphery. I expect some banks not to pass the test despite political pressure. As that becomes clear, there will be a financial reaction in markets,” he said.
Harvard professor Kenneth Rogoff said the launch of the euro had been a “giant historic mistake, done to soon” that now requires a degree of fiscal union and a common bank resolution fund to make it work, but EMU leaders are still refusing to take these steps.
“People are no longer talking about the euro falling apart but youth unemployment is really horrific. They can’t leave this twisting in wind for another five years,” he said.
Mr Rogoff said Europe is squandering the “scarce resource” of its youth, badly needed to fortify an ageing society as the demographic crunch sets in.
While Europe still has great skills in technology and an established rule of law that is the envy of most emerging market states, it risks loasing footing as a major player in the global economy.
“If these latent technologies are not realised, Europe will wake up like Rip Van Winkel from a long Japan-like slumber to find itself a much smaller part of the world economy, and a lot less important.”
Mr Rogoff said debt write-downs across the EMU periphery “will eventually happen” but the longer leaders let the crisis fester with half-measures, the worse damage this will do to European society in the end.
Mr Weber, who resigned from the Bundesbank and the ECB in a dispute over euro debt crisis strategy, said new “bail-in” rules for bond-holders of eurozone banks will cause investors to act pre-emptively, aiming to avoid large losses before the ECB issues its test verdicts.
“We may see that speculators do not wait until November, but bet on winners and losers before that,” he said.
The danger is that bank strains will turn the spotlight back on those sovereign states that cannot easily afford to shore up their banking systems. While he did not name any country, Spain, Italy, and Portugal are viewed as vulnerable. Even Ireland may be at risk again with a debt ratio of 125pc of GDP. “This is the key issue this year,” he said
Mr Weber warned EU leaders not to have “dangerous delusions” or become complacent about recovery. “Things feel better than they are. The recovery too weak to generate jobs. It’s not about whether things are improving: the levels of growth, jobs, and GDP are way worse than before the crisis,” he said.
He said the issue of whether Germany is doing better than France is a distraction since the whole of EMU is doing badly. “The music is now playing in the US and in China. There is a whole world out there that is more competitive,” he said.
Sir Martin Sorrell, head of Britain’s WPP, said Europe is abandoning the field to a new world order dominated by a “G2” of the US and China, flanked by the rising economies of the BRICS (Brazil, Russia, India, China, and South Africa) and the `Next Eleven’. “The US and China will become the two dominant economies unless Europe changes,” he said.
France is still in the “downstroke of the U” and although Spain is recovering, this is not enough to head off a political crisis stemming from mass youth unemployment (57pc). “Technology is now militating against labour, so inequality and unemployment are going to get worse,” he said.
Sir Martin said the eurozone is pursuing a reverse “Phillips Curve” – the trade off between jobs and inflation – as if it were testing “what level of unemployment it is prepared to tolerate for zero inflation”.
Pierre Nanterme, chairman and chief executive officer of Accenture, said Europe is losing the great battle for competitiveness, and risks a perma-slump where debt burdens of 100pc of GDP prevent governments breaking free by investing in skills and technology.
He said Europe is falling further behind as the US basks in cheap energy and pours funds into cutting-edge technology. “A lot is at stake. If in 12 to 24 months no radical steps are taken to break the curse, we might have not just five, ten, but twenty years of a low-growth sluggish situation in Europe,” he said.
Mr Rogoff said it would be much easier for Europe to cope if the euro exchange rate was $1.10 to the dollar rather than $1.35, up 8pc in trade-weighted terms in the last 18 months.
Mr Weber retorted that the euro will come down to earth as the tightening by the US Federal Reserve and other central banks leave Europe as the odd man out. “The ECB has an easing bias. Fast forward another year or two, and relative monetary policy will become obvious to everybody,” he said.
By then it may be too late.