What The Gurus Say About The Eurozone Crisis

Published in Investing on 5 October 2011

Three experts explain how a eurozone calamity might be averted.

We investors are living in torrid times, with many of us suffering substantial losses. I don't know about you, but what really gets me at the moment is the sheer uncertainty. We are all peering through a cloud of fog, trying to distinguish the faint shapes in the distance.

At this time, more than ever, we need guidance from the experts. So in this article I have summarised the views of three of the world's leading financial gurus.

Joseph Stiglitz

Joseph Stiglitz is a Nobel prize winner and a former World Bank chief economist. He argues that when the euro was created, the task was not completed. Too many adjustment mechanisms had been removed and nothing had been put in their place.

Stiglitz believed what made a common currency in the US work was a common fiscal authority and high migration, but the eurozone has neither. So the framework for allowing for an effective common currency was not there.

Instead, Stiglitz says: "What they did fiscally was tie themselves to the stability and growth pact, which was a pact for recession rather than for growth because limiting deficits when you have a shock is a recipe for recession, which is what is happening in Greece."

Stiglitz adds: "The question was always: when a crisis occurred would they be able to finish the task? And I think the jury is still out."

He praises the eurozone meeting in July but feels things are moving too slowly. He thinks the European Financial Stability Facility (EFSF) needs to be larger, or leveraged. In the longer term he thinks there should be Eurobonds, but he also thinks austerity is not the way to go.

So what's going to happen now? Stiglitz answers: "I suspect that we're going to see a lot of volatility... I think there is a reasonably good chance that a year from now you would find the eurozone smaller than what it is today."

Finally, he makes a worrying prediction: "The view is that some of the weaker countries will leave and that will lead to a very large trauma in the global financial markets, such as freezing the credit markets... a repeat of 15 September 2008 (when Lehman Brothers collapsed)."

George Soros

Renowned speculator George Soros does not mince his words about the eurozone:  "We need to take action now to avoid a second Great Depression." He lists three bold steps which need to be taken.

First, the governments of the eurozone must agree in principle on a new treaty creating a common treasury for the eurozone.

Second, while this is being put in place (which will take time) the major banks must be put under European Central Bank (ECB) direction in return for a temporary guarantee and permanent recapitalisation.

He adds the ECB would then direct the banks to maintain their credit lines and outstanding loans, while closely monitoring risks taken for their own accounts.

And third, the ECB would enable countries such as Italy and Spain to temporarily refinance their debts at a very low cost.

According to Soros, these steps are necessary to protect Europe against 'contagion' from the increasingly likely possibility of a Greek default.

Taking these actions should stabilise the eurozone so that it can put together a longer-term plan for growth.

Nouriel Roubini

Nouriel Roubini is clear on his view: greater European economic and political integration is needed to get us out of this mess. After muddling through and fire-fighting time and again, real action is required.

Roubini reckons the EFSF should be expanded so it can cope with a run on Italian and Spanish debt. The eurozone needs to ensure that the banks are adequately capitalised.

He also believes fiscal union needs to go alongside monetary union, and Eurobonds should be created. Preparation must be undertaken for an orderly Greek default, with orderly debt resolution for both public and private liabilities.

And, according to Roubini, we must also not undermine any fragile recovery in the short run. So there should be monetary easing by the ECB, a weaker euro to restore competitiveness, and fiscal stimulus in the core countries to counteract the 'fiscal drag' from austerity in the periphery.

Indeed, Roubini feels there should be a complete programme for growth and employment to boost competitiveness and long-term productivity.

A large part of the problem is political -- we need a greater commitment from the general public. As Roubini puts it: "The greatest task of European leadership today is to re-sell the European idea. They need to remind the public that the absence of war, the freedom of mobility and the rising prosperity they have taken for granted since the end of the cold war has been due to the path toward unity and away from the nationalist demons of the past."

Your guru advice is needed

So there we have it -- three gurus, three views. There seems to be a consensus that more integration, not less, is required, and that integration requires more commitment from the hard-pressed public in the eurozone nations. But there are substantial differences in the method of implementation.

So, do you agree with these three experts? And do you think enough will be done to avert calamity? Answers in the boxes below, please!

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pickepics 05 Oct 2011 , 2:25pm

Roubini is the nearest to answering the question, at least in the short term. And the short term is undeniably the most urgent. For the first time since its inception, I am now beginning to consider that planning the euro zone's future break up would be the EU's most logical step to follow that. Germany would suffer, as would any of the more successful current zone members which joined it in a new monetary alliance, because their exchange rate would immediately go through the roof. I think Merkel recognises the cost would be far higher than baling out the laggards now but is finding it impossible to sell the fact at home.

I fundamentally disagree with one of Soros' points. He seems to be saying keeping an eye on banks' levels of speculation will suffice. That is wrong. It misses what banks are about by a a sea mile.

The purpose of a bank, as a separately constituted legal entity for the purpose of conducting business is to create a return for its owners, although their behaviour leads many of us to believe it is to line their own pockets. It is not to lend to business nor private individuals, nor to trade in government bonds or derivatives, nor to deal in stocks on their own accounts. It is their duty to undertake those activities open to it which it perceives as most profitable, whether or not including some or all of the above, and to eschew all those activities it deems less profitable. That, fundamentally, is why we are where we are now.

Attempting to regulate or legislate to prevent banks from doing exactly that will not do. They hire very clever people to find ways to continue making the highest returns at high salaries on a full time basis. Our "servants", on the other hand, however clever they may be, can only spend enough time to react when, inevitably, the banks run rings around our regulations once more.

The only answer is to stamp our consumer feet, or at least tell our representatives to do so on our behalves. Central banks, under government edict, should refuse to allow banks which are going to use our bond allocation activities to finance their other unwelcome (by us anyway) activities, thereby enforcing the traditional, visible, enforcible separation of the business of banking from the businesses of all the other trading and broking enterprises. Hence the only ways they could profit from being allowed the very great privilege - please, banker, stop telling me the privilege is all mine in dealing with you - of dealing in our tax receipts would be in recognisable banking activities.

diddyda 05 Oct 2011 , 6:57pm

Ask any number of economist's / experts and you will receive as many different answers to the question. In fact no-one can predict the outcome and history shows that often something quite unexpected happens, that determines the future.

The basic facts are as follows: Germany is considerably more productive that any other country and on a sliding scale, generally from north to south you can arrive at the least vibrant economy, Greece.

All the Eurozone countries have fiddled their figures to some extent (even Germany) again on a similar sliding scale.

The general population of Europe have had almost no say in how their future is determined. This last of democracy is dangerous as the population feel they are being rail-roaded along a path which no mandate has been sought.

In its present form the only way the Euro can survive is if Germany is eternally prepared to transfer money to less efficient countries. In the UK we have a single currency and it is kept in balance because the richer parts of the UK, England is prepared to transfer money to Scotland, Wales and NI. Because we have political union and a single tax system is works.

My guess is that the Euro will not survive in its present form, but the unravelling of it all will be an interesting event. The analogy of 'a burning building with no exits', is pretty apt. I just hope the mess remains only financial and political. Conflicts around the world have begun with less!

mcturra2000 05 Oct 2011 , 7:29pm

Nobody knows what to do, and if they did, the people in charge wouldn't listen. Whatever they do will be a disaster in the long-run. How do I know this for a fact? Because if people in charge knew what they were doing, we would never have gotten ourselves in this mess in the first place.

Learn, my son, with how little wisdom the world is ruled. -- Julius III

ayshf 05 Oct 2011 , 10:44pm


The answer they are proposing is a non-starter. Effectively they are saying Germany will stand guarrantor for the debts of Club Med (and also if we're brutal for France, which is also going to be screwed when it nationalises it's banks).

Merkel doesn't have the mandate for this, worse it's clear that an attempt to cross that rubicon would finish her government..

So whats going to happen is that the European banks will be recapitalised to bear the writes downs, the various soverigns will default and will be booted out of the Euro. The collateral damage from this is going to be considerable, but there is no other way this can end.

The quicker it gets done the cheaper it'll be in the end.

ANuvver 09 Oct 2011 , 5:47pm

I find it interesting that two of the big three Euro leaders are as good as resigned to losing power - with Merkel still on a knife-edge. This might provide some va-voom to proceedings. A politician facing defeat is possibly more likely to focus on how they will be regarded long-term.

PRMARJORAM 12 Oct 2011 , 10:09am

Bring 10 economists into a room ask them for a solution and get 10 different answers

Flutist 12 Oct 2011 , 11:01am

mcturra2000 has it right - the 3 gurus are hopelessly wrong.
The Euro-zone was a political contstruct to woo the ex USSR satellite countries and the EU is noy quite as corrupt as the USSR but not far off.
The answer(s) to the crisis?
1) Outlaw short selling - immediately
2) Let Greece fail along with Italy etc.
3) Let the banks take their long overdue haircut
4) Hope that politicians actually learn something for once (not much hope there I'm afraid)
5) Wait 25 years for things to sort out, i.e property prices take their 20% drop, more local food production, the EU morphs back into the EEC which is what we the people wanted anyway.

For more sense - see www.ruskinweb.co.uk

Flutist 12 Oct 2011 , 11:01am

URL incorrect - see www.ruskinweb.co.uk/blog

JohnBeeblebrox 18 Nov 2011 , 7:14pm

"At this time, more than ever, we need guidance from the experts."

I thnk these Gurus are "Wise"

(Is TMF forgetting it's roots?)

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