I have characterised my understanding of the euro zone investment climate as three no’s: No ECB backstop for sovereigns. No joint bond. No euro zone break-up. That implies a prolonged period of slow growth. It risks chronic political instability.
It also follows from this that I don’t expect Greece to leave or be ejected from monetary union. I think the market exaggerates those risks, perhaps at the encouragement of German officials who have tried to turn the election into a referendum on EMU. Ironically, some of them were the same ones critical previously when Greek prime minister tried doing something similar and then, well, changed his mind.
I keep talking about scope for compromises and because the middle ground seems so eroded, many investors and policy makers see no common ground. My model since the end of last year have been the NY Mets, even though I am a Cubs fan (yes, it is mostly scar tissue).
The essence of the argument is this: The Mets have in recent years hit the fewest home runs. They made a policy response. It was not to go spend lots of money on new talent. It was not to have steroid-infused diets. They simply brought in the fences, making it easier to hit home runs. And not to put the kibosh on them, but they are off to a respectable start.
Switch to Europe. What is the equivalent of moving the fences? Giving EMU members an extra year to reach fiscal targets. We have noted before that this can be done under existing agreements. EU’s Ollie Rehn has the discretion to grant the dispensation. Yesterday he suggested Spain could qualify if it would 1) get control of the excessive spending of the regions and 2) present a 2013-2014 budget plan.
Today, Eurogroup head Juncker suggested Greece should be granted a one -year extension, but he did not outline conditions he would attach to it. He also supports a year extension for Spain. I say both (unelected) officials are thinking on too small of a scale. Why not grant everyone a one year extension ?
The markets do not care whether the target is reached in 2013, 2014 or 2015. What is important is a credible and sustainable strategy. Granting it to every one would reduce the potential for a stigma. It would ease the social and political pressures.
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