The fiscal situation of the so-called PIIGS is not the only issue prying the Euro apart, says SocGen’s famous uber-bear Albert Edwards.
The problem for countries including Portugal, Spain and Greece “is that years of inappropriately low interest rates resulted in overheating and rapid inflation,” London-based Edwards wrote in a report today. Even if governments “could slash their fiscal deficits, the lack of competitiveness within the euro zone needs years of relative (and probably given the outlook elsewhere, absolute) deflation. Any help given to Greece merely delays the inevitable break-up of the euro zone.”
“Unlike Japan or the U.S., Europe has an unfortunate tendency towards civil unrest when subjected to extreme economic pain,” Edwards wrote. Consigning the countries in southern Europe with the weakest finances “to a prolonged period of deflation is most likely to impose too severe a test on these nations.”