The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Sunday, June 10, 2012

Westpac's brilliant Russell Jones on the Euro crisis and its solutions

Russell has been way ahead of me on Europe, and is really an expert on the subject. He has been characterised by consistent pessimism, although most of the solutions he proposes are ideas I've discussed here before, and seem reasonably achievable:

Overall, it is difficult to escape the conclusion that the response to the Eurozone's crisis remains piecemeal, if not chaotic, and that this in large part reflects the many and various shortcomings in the institutional architecture and decision-making processes of the underlying edifice of the single currency. These failings also continue to set politicians against central bankers and Germany and one or two other creditor nations against the rest in a high stakes game of "Chicken" that could go horribly wrong at any moment. Indeed, the increasing parochialisation of European capital markets and the slow but sure exodus of bank deposits in the peripheral economies are signs that this moment of catastrophe may not be far off. Back in 1999, US economist Martin Feldstein warned that the Euro was likely to tear itself asunder as the leaders of different countries turned against each other. At the time he was pooh-poohed by most commentators. Now he is looking more prescient with almost every day.

At the risk of boring readers (I have forgotten how many times have I sat down to type up my weekend commentary and found myself consumed by Europe), the answers to the crisis remain the same: first, recapitalise all the Eurozone's banks directly rather than by actions that merely serve further to bloat sovereign balance sheets. Second, create a Eurozone wide system of deposit insurance via new bank levies. Third, develop a new bank resolution scheme that leaves unsecured bank credits on the hook as well as governments. Fourth, introduce a European wide system of deposit insurance. Fifth, significantly reduce the risk of Euro exit by any individual country via aggressive ECB monetary easing (QE), fiscal expansion in the core, slower fiscal adjustment in the periphery and accelerated structural reforms. Finally, embrace more debt restructuring in the most heavily indebted nations and debt mutualisation - Eurobonds - in some way shape or form. In other words, rapidly seek to render the Euro an optimal, rather than a distinctly sub-optimal, currency zone.

In the absence of significant progress in all of these areas, the Euro is probably doomed. And the cost of Euro disintegration to Germany and the other creditor nations are likely to be far greater than the costs of implementing this plan. Germany, for one, should not forget that it has been the prime beneficiary of the Eurozone. More than two fifths of its exports go to other Eurozone members and since 1999 net exports have been responsible for the entirety of its GDP growth.