Europeans Need to Embrace Radical Change to Save the Euro

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• Publié par: saxo-capital-markets
• Nombre de lectures: 13
• Langue: English

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Europeans Need to Embrace Radical Change to Save the Euro

PR Newswire LONDON, December 3, 2012

LONDON,December 3, 2012/PRNewswire/ --

A Greek exit and profound restructuring could be the least painful scenario for saving the Eurozone Latest e-book from Saxo Capital Markets argues Eurozone needs to reach rock-bottom before recovery

The Eurozone will bounce back only once its leaders and inhabitants end up in such a desperate situation that they realise the only way out is through radical change, says Saxo Capital Markets.

http://photos.prnewswire.com/prnh/20121115/574147 Steen Jakobsen, Chief Analyst at Saxo, comments:

"We are now nearing the point of no return forEurope. Time is running out for Europe as 2012 became an issue of letting the central banks do the dirty job of keeping the tail-risk away though Draghi's put and general easy monetary policy."

"A Greek exit may sound like a frightening scenario, but profoundly restructuring the Eurozone may be less painful than a slow Japanese style death, with deflation, m assive fiscal deficits, negative real-rates, housing prices lower than 30 years ago and a stock market valuation at less than 50% of its peak."

In "The Euro in crisis", the third chapter of the e-book in Saxo Capital Markets' FX Debates Series, Saxo analyses the unfolding of the Eurozone crisis as a three-stage process, following its evolution through phases of denial, protest and, ultimately, change.

Steen Jakobsen explains:

"First, in the denial phase we have fiscal stimulus. Then in the protest phase we have changes of political figureheads where there is no real change, but with some milder fiscal stimulus underneath. Then, ultimately, we move to a serious mandate for change. The Eurozone will bounce back only once its leaders and citizens, prompted by social unrest, realise and accept that the only way out is through radical change."

About social unrest Steen Jakobsen comments:

"It's very likely that someone who is getting their salary pummeled, their disposable income pummeled, and their purchasing power pummeled gets upset because, with the high stock market, the richest 1% and the corporations are making all the money. History shows that when the source of tension becomes too big, things can blow up. That's where we are at today."

Saxo Capital Markets sees three potential outcomes to the Eurozone debt crisis:

• Meeting of the Cardinals - 20%probability

• Extend-and-pretend Squared - 60% probability

• Doom-and-Gloom - 20% probability

Meeting of the Cardinals

The Meeting of the Cardinals (MoC) will be the only orderly solution dictated by rational and practical solutions, where some countries need to leave the Euro, whether permanently or for a tempory period.

Comments Jakobsen:

"Here, the guinea pig will most likely be Greece. This will force Club Med to the table and make them accept further loss of sovereignty on fiscal and monetary policy, most likely in a German model where the European Court of Justice becomes the highest-ranking authority.

"The MoC scenario will likely lead to a short-term negative market reaction and a deep one-to-three year recession. However, this could also trigger the final phase of the three-phase crisis model: Mandate for Change. Inside the mandate for change there is a V-shaped recovery when reforms are initiated from the low point. For investors, the MoC is the best solution as it will lead to several years of prosperity amid better debt-to-equity, more realistic future expectations, and a public sector under control."

Extend-and-Pretend Squared

According to Jakobsen, the more likely scenario, however, is that Eurozone policy markets will continue to use delay tactics.

"The extend-and-pretend forever solution is about buying time - more of the same patch work solutions, slowly forcing Europe towards fiscal consolidation, not changing the Maastricht Treaty but the European Central Bank (ECB) charter to allow it to be lender-of-last-resort. This is the final phase of 'Maximum Intervention' - bigger and bigger direct support on liquidity and no impact on the solvency. This outcome is a vicious circle as every time the major central banks start the printing press, people's purchasing power diminishes." explains Jakobsen.

Doom-and-gloom

Under this scenario there are no good solutions to this crisis. Markets would re-test their 2009 lows and there will be a deep rooted discontentment with politics and the banking system, which could lead to social unrest and worse.

Steen Jakobsen concludes:

"The magnitude of this debt crisis is far larger than the market realises. The idea that it's merely a question of Germany paying is not only naïve, but also impossible. They cannot and they should not pay - and nor is the ECB the only solution to this debt crisis. There is only one solution: the system must fail and both the Euro and the Eurozone need to be redefined."

"The Euro in crisis" is the third part of Saxo's e-book,#FXdebates-Trading Insights from our Top Analysts,which focuses on trends in currency movements and pairings, the challenges affecting FX traders and advice on key trading strategies. The other articles in the#FXdebatesseries will focus on:

The US Dollar (published) Yuan Diplomacy (published) Gold - Just another currency? Currency Wars: Battle Of The Weakest

The #FXdebates series of articles will be published over the next three months, leading the way to an event in February 2012in collaboration with Bloomberg LINK.

For more information please see:http://uk.saxomarkets.com/fxdebates

Follow the debates via twitter:https://twitter.com/SaxoMarketsUK

Hashtag: #FXdebates

About Saxo Capital Markets

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