Euro crisis could cause full EU break-up, warns ex-BoE official

John Gieve, former deputy governor for financial stability at the Bank of England, warns of an “explosion” waiting to happen in the EU

A break-up of the European Union – not just the single currency – is one of a number of possible outcomes that could emerge from the eurozone crisis over the course of this year, according to Sir John Gieve, who served as deputy governor for financial stability at the Bank of England (BoE) between 2006 and 2009.

“Greece is not on a sustainable path,” Gieve warned. “There is nothing certain in economics, but it is likely that before the summer or before the end of the year, Greece will have to come back to the European Parliament and to the International Monetary Fund, asking to borrow more money. This will increase the risk of an explosion, with the country deciding to leave the programme and exit the euro. This will be a true disaster, which might well lead to the break-up of Europe, not just the eurozone.”

Speaking at the close of the Risk Annual Summit in London this week, Gieve said the potential for such far-reaching outcomes is a consequence of the lack of credible commitment from other countries at a political level to give unequivocal guarantees to Greece, Spain and Portugal. But a euro collapse would drive global economic growth down and lead to stagnation of the recovery, he said.

“Following a period of economic crisis, at a global level the economy is now growing very fast, led by emerging markets. This is driving up prices, and this is the real driver of inflation, not quantitative easing. The magic relationship between money supply and inflation can be easily reversed by the Bank of England absorbing the cash. There is a risk that central banks, despite their mandate, will decide to accommodate inflation,” said Gieve.

 

This article first appeared in FX Week 

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