By Andrei Skvarsky.
Geneva-based Lombard Odier, one of Europe’s largest private banking firms, predicts that the euro will survive as a currency, albeit significantly restructured, but that the eurozone will inevitably part company with some of its constituent countries.
The currency needs restructuring if it is to survive, according to Paul Marson, a top Lombard Odier economist with jobs at the Bank of England, JP Morgan, Goldman Sachs and Morgan Stanley on his record.
A “two-tier” euro with the “euro” and the “euro light” might be a solution, Marson suggested at a recent media event in Moscow.
Another senior Lombard Odier banker, head of fixed income and currencies Stephane Monier, argued a few weeks before that keeping the eurozone going in its current form would stop politicians in EU countries delivering on their lavish welfare promises.
High-powered economists elsewhere have contended, however, that saving the euro in its present form is both possible and essential.
Dieter Wermuth, a co-founder of German investment firm Wermuth Asset Management and its chief macroeconomist, says that “important backstops” have been evolved to keep the zone together, and that the European Central Bank (ECB) has been vested with “unlimited firepower”.
“There is still the risk of a breakup, but because it is so costly, euro area politicians do all that needs to be done to avoid it,” Wermuth said in an emailed interview with EmergingMarkets.me.
One backstop is an ECB promise to buy unlimited amounts of bonds with maturities of up to three years from governments that have applied for bailouts and are willing to accept very tough and procyclic conditions set by the International Monetary Fund, according to Wermuth.
Another is a plan to set up a banking union, a scheme that would include deposit insurance for all account holders and a system where the recapitalisation of a troubled bank would be the job of a new ECB-supported agency rather than that of the government of the bank’s home country.
“I guess that debtors will be given more time and favourable conditions (including some debt foregiveness) to make debt service bearable. Better that than sovereign bankruptcies and uncontrollable domino effects! The banking union is a stepping stone towards a fiscal union. A monetary union can only survive if member states coordinate their fiscal policies,” Wermuth said.
“Markets are now buying this story,” he said.
Earlier on, both Wermuth and others had warned that, given the multitude of transactions worldwide that are set in euros, scrapping the currency would trigger a crisis far worse than that of 2007-2008 or the Asian financial crisis of 1997.
Charles Wyplosz, a professor at Geneva University and a member of the board of Paris-based think tank En Temps Reel, a French economist who has done a great deal of research on the European Monetary Union, has warned that the sheer recalculation of all euro-based contracts would be a horrendous job.