Germany should abandon euro for everyone’s benefit, says UK manager
Germany should make a clean break by leaving the euro, or accept fiscal union, according to Barry Norris, fund manager in UK-based boutique Argonaut Capital Partners.
He said yields on Spanish and Italian 10-year debt exceeding 6% this week represented “a moment of truth” for the shared currency.
Norris (pictured), who runs the Argonaut European Alpha fund, said: “Neither the Spanish nor the Italian economies can sustain these rates of interest, and their economies are too big to be ‘rescued’ by bail-out funds.”
Commentators have said today, if rates for these embattled nations’ debt reach 7% then further central support – most probably from Berlin – may become necessary.
Norris said: “The only way for the Spanish and Italian economies to cope with being shoehorned into Germany’s monetary policy would be if it were accompanied by fiscal stimulus. As their solvency is already being questioned, this stimulus must come from an external source, the most obvious being Germany.
“To survive in its current form the eurozone must evolve into a transfer union where the taxpayers of the booming economies subsidise those that are struggling. This will be a ‘tough sell’ for politicians, particularly in Germany where electorates have little sympathy for their profligate southern European neighbours.”
If German voters rebel, Norris said: “The German government should accept the logic that their continued membership of the single currency is destabilizing for many of its other members.”
If Germany abandoned the euro, its value would fall, providing a short-term boost to the remaining members. The value of the new German currency would appreciate, helping German consumers, Norris said.
On the other hand, he added, if Spain reverted to its peseta and Italy its lira, the nations would be able to devalue their currency, thus boosting short-term competitiveness and economic growth.
“Their central banks would also be able to erode the value of debt through printing more money via quantitative easing, in the same way as the Bank of England has done in the UK. Their membership of the single currency currently precludes this.”
As it is, the leaders of both Spain and Italy have cut short holiday plans this week to address the problem and, in the case of Italy’s prime minister Silvio Belusconi, also his people via television later today.
Norris said: “The folly of a currency union without large scale fiscal transfers has been known ever since the single currency was conceived. Events of the last few months suggest that financial markets are no longer prepared to tolerate this illogic indefinitely.
“For the periphery, leaving the euro is not an option. Their governments and their banks would still owe euros, but would own something less valuable. Germany leaving is the only way in which the single currency can be broken up without it causing a second banking crisis, or a sovereign default.
“Germany must show political leadership now or face responsibility for the consequences.”