Photo: Goldman Sachs
The European crisis shows no signs of letting up and is still a drag on the global economy. Given this, Jim O’Neill, Chairman of Goldman Sachs Asset Management, in his latest issue of Viewpoints looks at 20 contradictions regarding the euro area issues.
Here are some the seven most important ones that he believes could come into play during the lead up to the June 28-29 European Council meeting:
- The absence of an external balance of payments deficit that seems to be a hallmark of financial crises – “The Euro Area has no external balance of payments deficit. Most, if not all, other major financial market crises I have been through have involved current account deficits: the Plaza Accord in 1985 through to the 1987 Wall Street crash, the ERM crisis from 1989 through 1992, the Mexican tequila crisis in 1994, the Asian crisis in 1997-98, the Russia crisis in 1998. This is a crisis about the European Monetary Union itself and whether it can persist.”
- The euro area fiscal and debt position is better than other developed countries – “The Euro Area GDP-weighted fiscal and debt position is better than that of the US and UK, and certainly Japan. So, while its external balance and its fiscal position are better than most other parts of the developed world, it is the epicentre of this crisis today. Odd. It could be solved with Euro leadership.”
- Only six countries would originally have qualified for the euro in 1999, so it’s surprising it took this long for major issues to arise – “Probably only six countries originally would qualify on the strictest criteria for sharing the Euro back in 1999: Germany, France, the Benelux and Austria. All the other joiners had some significant question mark; whether it be their fiscal position (Italy, Greece, Portugal, Spain), competitiveness (Greece, Portugal, Spain) or degree of trade interlinkage (Ireland, Finland). In many ways, it is more surprising that it took over 10 years of Euro existence for major issues to arise.”
- The problem with European banks is that they aren’t in control of their currency, which makes markets look at their bond purchases as foreign currency liabilities of their government – “Is there really a problem with the connection between European banks buying their own sovereign bonds? Isn’t this what banks do? This week’s Japanese Nikkei has a feature article on its mega banks having 20 pct of their assets in JGBs. UK and US banks hold huge amounts of bonds, it is part of the monetary mechanism. The problem surely is that they aren’t in control of the monetary base or currency, and the markets are now assuming these holdings are foreign currency liabilities of their government.”
- Even though Switzerland isn’t experiencing a recession, it has a currency floor against the euro – “Switzerland sits surrounded by three big EMU members France, Germany and Italy. Like Poland, it currently is not experiencing a recession despite this adjacency. Can there be a life outside the Euro for very open economies in Europe? The Swiss now have a currency target against the Euro suggesting their policymakers don’t think so.”
- The most popular figure in Italian politics is a comedian – “The most popular figure in Italian politics currently is a comedian called Grillo, who has no experience in politics. In recent polls, he scored 22 pct, way above anyone else. Could he become Italy’s next elected leader?”
- No one’s happy with the Greek coalition that would have made them happy a weekend ago: “Greece has elected a coalition that the rest of Europe’s leaders would have been relieved about last weekend. But they appear to want significant re-negotiations of their current programme.”
See the full report and all 20 contradictions at GoldmanSachs.com.