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Borsen Article, 10th August 2011

This is a translation from the original Danish text which is contained in the attachment below.

Lack of management set to send the euro into the grave

EU government leaders have been criticised from several quarters for failing to act in the debt crisis furore. Without new interventions, analysts believe there is the threat of a euro collapse within a few weeks.

Playoffs for the eurozone are now running. Without far-reaching political decisions on further integration and massive purchases of distressed bonds, the common currency of 17 countries will be history before the autumn is over. This is the common conclusion of several long-standing observers of European integration, who have sharply criticised the complete lack of visibility and leadership among European politicians at a time when the world is threatened by a new recession.

And the arrow is directed particularly at Germany's Chancellor, Angela Merkel, as the main culprit as she has been hesitant and, since the beginning of the crisis, has not been prepared to pay the full bill. "Too little, too late" has been the constant German reaction.

"She'll have to explain to the German people the consequences of a euro collapse - namely, that millions of German jobs will be disappearing because 60 per cent of German exports are sold within the EU", said Graham Bishop, who for years has been the advisor to, i.a., US investment banks, the EU Parliament and the British Parliament.

More at risk

Simon Tilford, chief economist at the Centre for European Reform think tank, says that not only Portugal, Greece and Ireland may have to leave the euro, if far-reaching decisions are not taken over the coming weeks and months, but that also Italy and Spain, then perhaps Belgium and France will be in danger.

He sees only one option to avoid a collapse: "Introduce eurobonds, i.e. mutualisation of debt issuance to be accompanied by common financial legislation and supervision. This will bring borrowing costs down", says Tilford, stressing that in view of market reactions especially this week "there is not much time to act".

At the same time, the ECB will need to buy at least €100 billion of Spanish and Italian bonds to calm markets, a Reuters poll of 10 fund managers with collective investments of  $1.1 trillion has found. The ECB has only spent an estimated €2 billion so far, but the study shows it needs to be much more. Eight of the 10 fund managers say it should be at least €100 billion, two believe that it must be at least €250 billion to scare off short-sellers.

With the exception of an interview on French radio with ECB chief Jean-Claude Trichet, where he urged European leaders to implement the decisions of the EU summit in late July, the crisis weeks so far have been remarkable for their absolute absence of political leaders on the scene.

Jim Cielinski, head of fixed income at the British company Threadneedle, says regarding the crisis that: "The key missing ingredient to date has been a genuine united common stance from eurozone countries", which would have supported the ECB's rescue attempt with the acquisition of Italian and Spanish government bonds that may otherwise have a "short lifetime".

In practice, only Germany can spearhead such an initiative. "The leadership must come from Merkel, but until now she has rejected the otherwise sensible proposal that has come from the EU Commission", said Graham Bishop, referring particularly to last autumn's attempt to create a European Competition Pact with binding rules for individual countries' fiscal policies.

40 years of continually-rising public debt in the EU have made Graham Bishop deeply sceptical of the EU's ability to respond actively. "It is clear that the Heads of Government simply do not understand the natural, logical consequences of their actions", he says, recalling the repeated summit declarations on tackling the problems as being - increasingly - 'airy and grandiose' and saying that it would be 'ridiculous to attribute any significance to them'.

"It might actually be interesting to investigate whether an investment advisor who invested his clients' money on the basis of the Heads of Government statements could be held responsible legally", said Graham Bishop.

New package

The recent eurozone summit on 21st July agreed a new emergency package of €120 billion for Greece, and an increase in the size of the EFSF (European Financial Stability Facility) special fund to €440 billion to save other euro countries from national bankruptcy. However, the effect on the markets was only brief, and so far nothing suggests that there are any new EU initiatives. "But the size of the EFSF must be increased drastically to prevent the crisis from spreading", says Simon Tilford, Centre for European Reform.

Merkel's spokesman denied that Germany will help, but Simon Tilford stresses that the crisis in the EU is pan-European, and that it is not just about southern European countries having been living beyond their means and now being punished by a fiscal tightening .

"Germany has used the fact that these countries have had too low interest rates and therefore an unsustainable boom, which has also benefited German exports and economy. The biggest problem in the EU is now Germany seeking to reduce its risks", says Simon Tilford. He thinks that German growth will be stimulated with higher wages, because German growth has been translated into very large cash holdings of firms, but because of the low-paying jobs that were introduced during the crisis, and moderation - not for general consumption growth.

Documents associated with this article

Borsen Article .pdf