BL: SocGen’s Edwards Sees Euro Breakup as Feldstein Predicts Change
By Alexis Xydias
Feb. 12 (Bloomberg) -- The Greek budget crisis is a symptom of imbalances that will lead to the breakup of the euro region, according to Societe Generale SA strategist Albert Edwards, and Harvard University Professor Martin Feldstein said monetary union “isn’t working” in its current form.
Southern European countries are trapped in an overvalued currency and suffocated by low competitiveness, top-ranked Edwards wrote in a report today. Feldstein, speaking on Bloomberg Radio, said a one-size-fits-all monetary policy has fueled big deficits as countries’ fiscal records differ.
The problem for countries including Portugal, Spain and Greece “is that years of inappropriately low interest rates resulted in overheating and rapid inflation,” Edwards wrote. 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 breakup 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.
Euro Falls
The euro fell for a third day against the dollar, to $1.3626 as of 5:01 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.
While the European Central Bank sets interest rates for the region’s 16 economies, the practice until now has been that each country has to steer its economy and can set its own tax and spending plans.
“They have a single monetary policy and yet every country can set its own fiscal and tax policy,” Feldstein, 70, said. “There’s too much incentive for countries to run up big deficits as there’s no feedback until a crisis,” he said.
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 area.
Padoa-Schioppa
“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 southeast 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.
In a 1997 article, Feldstein wrote that while it is impossible to predict whether political clashes will lead to war, “it is too real a possibility to ignore in weighing the potential effects” of monetary and political union.
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, Spanish Bonds
Portuguese and Spanish bonds also declined earlier this month on concern those countries may also need to cut spending.
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.”
To contact the reporter on this story: Alexis Xydias in London at axydias@bloomberg.net.
Last Updated: February 12, 2010 13:04 EST
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