Q Despite fears to the contrary, the Eurozone is still intact. What is the biggest threat now facing the single currency?
A A political rebellion is brewing, and many countries are close to breaking point. Beppe Grillo’s success in Italy was just the start – it could have been anyone standing with an anti-euro message. There’s a new anti-euro party in Germany gathering interest. And the anti-bailout True Finns in Finland are now the country’s third largest party. This will happen in every European country, and it’s all down to economic conditions. As long as you’re in the euro, you’ll be less and less competitive, and will get weaker and weaker against Germany.
Q Will the euro, therefore, inevitably fall apart?
A The future will inevitably see at least a partial dismantling of the euro. If you’re optimistic, politicians will listen to these protests and come up with a five, seven, ten years’ strategic plan to do this. If this does not happen, and you are pessimistic, markets will eventually take care of the euro and break it up. The current lull in debt interest rates in some Eurozone countries, for instance, is very temporary. It’s completely unsustainable. Hopefully the situation will be turned around by people rationally thinking about moving things in the right direction.
Q But where will this momentum come from?
A Germany is really the only country that benefits from the euro. Its exchange rate is significantly below what it would have been if the deutschmark still existed, and it’s the only remnant of a growth-driver in Europe. But it’s a double-edged situation – any German politician that wants to be re-elected has to remember that German money is being used to bail out people who want to retire at 53.
So Angela Merkel has to play hardball. Take Cyprus. That will teach other countries not to ask for bailout six months before a German election. As George Soros suggested a couple of weeks ago, one partial solution could be for Germany to leave the euro and adopt a more realistic exchange rate. The mark would immediately shoot through the roof.
Q Will the Cyprus bank resolution model be a template for future bailouts/bail-ins?
A There will be future bail-ins and other types of confiscation of wealth in the Eurozone, without a doubt. There’s no other realistic way forward if politicians continue to fail to deal with the basic indebtedness problem across Europe. They will either have to raise taxes and cut spending, or politicians will take the easier route and take money from the rich.
Q Are there any positives to take from the Cyprus bank resolution?
A Cyprus wasn’t all bad. There has to be a point in this crisis when customers take responsibility for the banks they choose. It’s been virtually cost-free to speculate in banks offering high interest rates. But there were no clear rules in Cyprus from the outset. Officials were making up solutions on the back of an envelope as they went along. It was clumsily executed, and people with connections got their money out.
Q We didn’t see much-anticipated bank runs in other countries after Cyprus. Why not?
A There has been a downward trend in deposits in weaker countries, and an upwards trend in Germany and other perceived safer areas. It’s gradual, but it’s not strange that a Spanish or Italian worker is unlikely to shift an account to Switzerland. But imagine that a weaker country had a bailout approaching this weekend. After Cyprus, we would see an instantaneous bank run. There are some dangerous time bombs built into smaller depositors if, suddenly, a similar situation to Cyprus occurs elsewhere.
Q Cyprus’s apparently temporary solution has been the imposition of capital controls. How long will they last?
A The fact that they’ve gone on longer than originally stated is the least surprising thing I can imagine. They may never really be fully removed, without some other restriction. But I expect many have completely lost confidence, and will take out their money no matter what the cost.
Q Is a Cypriot exit still on the cards?
A It’s unlikely the country will be allowed to leave – that may trigger similar desires elsewhere. Why? Because whoever leaves will be a success, showing that it’s possible to leave without a collapse. That’s the last things Brussels wants.
Q What dangers do you see in the approach taken by the European Central Bank to resolving the crisis?
A It’s like measures taken by central banks the world over. They are undermining confidence in central banks, in the quality of their assets, and in their respective currencies. The same thing is happening in US and Japan – trust in the fiat currency system will slowly begin to disintegerate. We’ve seen it in gold. The recent sell-off was driven by buy and sell pressures in a market that is not as big as many people think. Eventually gold will pick up and go higher. It’s all linked to evidence that the old principle of a prudent central bank has disappeared. We now have overt political influence on central banks, and that’s dangerous.
Q Will the European Central Bank cut interest rates this week?
A I doubt it. I don’t think it really matters. It’s not really what drives things right now. It’s all about politics, and it’s all about assumptions of what politicians will do next.
Lars Christensen will be joining a panel of experts for an evening of discussion on the Eurozone crisis at 5pm on 7 May at the Bloomberg Offices, 34-45 Finsbury Square, London EC2A 1PQ. For more information on this free event, visit www.fxdebates.co.uk