Investors shouldn’t think Europe’s crisis is finished, warns UBS. There’s still a realistic chance of a Eurozone break-up, and don’t expect a real conclusion of the crisis unless nations in the Eurozone centralize fiscal policy:
“Euro area-wide policy measures announced and enacted in the last few months have already created fiscal transfer mechanisms,” UBS analysts Justin Knight and Andrew Rowan in London said in a report today. Proposals for a European Monetary Fund and more formal sanctions for budget-rule breaches “suggest Europe is already at least looking, if not moving, the way of fiscal union.”
UBS examined scenarios where investor confidence in European bonds returns and where the 16-nation euro region breaks up. The analysts said the return of confidence is the outcome “in which we have the least confidence.” While the region is unlikely to fracture, the possibility is “not tiny,” they said.
“Fiscal union is the most likely scenario and, in the longer run, the only sustainable endgame,” they said.
Given the massive political hurdles for any centralization of fiscal policy, given that it takes sovereignty away from individual nations, perhaps we thus shouldn’t expect a true resolution to Europe’s euro problem any time soon.
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