Seven lean years for Europe, says Citi chief economist – Fund Forum
There is “light at the end of the tunnel” to the Eurozone’s problems, but that tunnel is seven years long, according to Citi’s chief economist Willem Buiter, who said Europe’s investors risk “a lost decade” amid a crisis and grinding recovery.
Speaking at Fund Forum yesterday, he said advanced economies had “run out of policy elbow-room, and all that would be available would be the ‘helicopter money’ produced by central banks. For that the political will does not exist”.
The policy failures of Europe’s leaders – meeting today in Brussels at what Buiter calculated was the 19th summit since the crisis began – was “a mixture of impotence and procrastination”, he said.
With so many summits, he said: “You begin to think of the Alps more than the European Council.
“[The EC] only moves at gun point, and the only gun is the markets and they are not pointing very carefully. I expect little from the summit, although grand statements will be made: ‘We will do whatever it takes’ will be repeated with alarming regularity. If we knew what that was, it would be done.”
He predicted the summit would be “an exercise in kicking the can down the road and doing the minimum required to stop things falling apart.”
Even if they held together, the deleveraging required to do so would “at best produce a lost decade – that is what is at risk in Europe”.
He said “everyone can suffer” even if only two sectors delevered of government, households, non-financial corporates and banks.
He said central bankers should not be concentrating wholly on buying liquid sovereign debt, which they treat as risk-free, “but put on their balance sheet through purchases the stuff that is illiquid and problematic”.
Citi expects Greece ultimately to exit the euro, as the “twin miracle” that would save it will not occur. This would be Greece living under “austerity lite”, and delivering on promises of structural reform “whereas nothing much has been achieved for the last 18 months”.
“We anticipate by the end of this year Greece will again be found to be across the board non-compliant, and funding will be cut off.”.
Spain will end up on a full-fledged sovereign funding package from the troika and “Italy is likely to be on programs by the end of this year.”
Buiter said it would be important for authorities to show they were willing to allow Greece to exit. Not doing so “is as big a negative in credibility for those left behind as those remaining and there will be a cut-off of the next country remaining.”
At the point the larger countries are cut off by markets “will be when the ECB has to come in with all tools blazing. Their policy arsenal is infinite if they want it to be, and they should not lose ‘bragging rights’ about sitting it out.”
Buiter foresaw up to €3trn ultimately being required for the euro’s survival.
A break-up of the euro would usher in a great Depression, he said.
“We will have limited mutualisation of sovereign debt, and most of the solvency gap will be solved by austerity and sovereign debt restructuring.”
But Buiter was not wholly negative. “If it were not for emerging markets, the US and Japan keeping the global boat afloat it would be much tougher there will be light at the end of the tunnel – but the tunnel will be another seven years long.”