BL: Euro Area Headed for Break-Up, SocGen’s Edwards Says (Update2)
February 12, 2010, 11:10 AM EST
By Alexis Xydias
Feb. 12 (Bloomberg) -- Southern European countries are trapped in an overvalued currency and suffocated by low competitiveness, a situation that will lead to the break-up of the euro bloc, according to Societe Generale SA’s top-ranked strategist 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.”
The euro has slumped 9.9 percent against the dollar since November on concern countries including Greece will struggle to tame their budget deficits. The common currency and stocks in the region dropped yesterday as European leaders closed ranks to defend Greece in a plan that investors said lacked details.
The euro fell for a third day against the dollar to $1.3557 as of 12:50 p.m. in London. Europe’s recovery almost stalled in the fourth quarter, as gross domestic product in the 16-nation euro region rose a less-than-expected 0.1 percent from the third quarter, the European Union’s statistics office in Luxembourg said today.
Padoa-Schioppa
Tommaso Padoa-Schioppa, a former European Central Bank executive board member and Italian finance minister, said today there was no possibility of a partition of the euro-zone.
“I don’t think there is any prospect for such an event and I don’t think it makes much sense to talk about it,” he said in an interview on Bloomberg Television.
Edwards was voted second-best European strategist in the 2009 Thomson Extel survey after his then-colleague James Montier and is known for his bearish views on equities. In 1996 he angered south-east Asian governments by predicting the currency meltdown that struck the region a year later. The poll also named Societe Generale as the top economics and strategy research firm for a third straight year.
After a three-month long plunge in Greece’s bonds amid speculation it was facing the threat of default, the euro region’s leaders yesterday ordered the country to slash its budget deficit and warned investors they would be willing to defend the country from speculative attack if necessary.
Portuguese and Spanish bonds also declined earlier this month on concern those countries may also need to cut spending.
Strikes
Prime Minister George Papandreou’s drive to get Greece’s ballooning budget under control is being challenged in the streets by striking schools, hospitals and airline employees.
“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.”
The budget crisis in Greece may escalate in the way the Asian currency meltdown of 1997 paved the way for the Russian default and the collapse of Long-Term Capital Management LP in 1998, Edwards added.
This is “a different chapter in the same book,” he wrote, adding that the need to tighten deficits is a “particular issue for the U.S. and U.K.” “There will be more crises to follow Greece, both inside and outside of the euro-zone.”
--With assistance from Andrea Catherwood in London. Editor: Jason Carey.
To contact the reporter on this story: Alexis Xydias in London at +44-20-7073-3372 or axydias@bloomberg.net.
To contact the editor responsible for this story: David Merritt at +44-20-7673-2639 or dmerritt1@bloomberg.net.
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