Email of the day (2)
Comment of the Day

May 11 2012

Commentary by David Fuller

Email of the day (2)

On the "euro crisis":
"You and everyone else have discussed this problem so many times, yet I felt, as a private person in Europe seeking to protect his savings, that the long-range implications haven't really become clear.

"Let's suppose, as has seemed very likely for a long time, that Greece leaves the euro zone. What does this do for the euro against say the dollar? Does it shoot up or down? What does it do for the markets generally? Surely much more than would be warranted by the small size of the Greek economy. I would imagine some sort of panic reaction, but what? What about contagion?

"Does the example of Argentina not help in this analysis in some way?

"As someone who listens not only to the financial news but also to the BBC World Service it has seemed clear to me for a long time that we are heading for very serious social unrest in many countries, starting with Greece, which will probably end up putting rightwing governments in power - with increasing economic paralysis just compounding the problem. But what this means for the markets is just too hard for an amateur to work out.

"Put at its most simple - how does one batten down the hatches? Leave all one's money in euro, or get it all out?"

David Fuller's view Thanks for a very topical email certain to be of interest to many subscribers, whether or not they live in the Eurozone. Also, your ability as a self-described "amateur" to ask so many relevant questions is half the battle, in my opinion. Many so-called "experts", as you may have observed, can thank creative marketing for their reputation, and there has been plenty of 'shooting from the hip' in terms of Eurozone forecasts.

Inevitably, every individual Eurozone state is quite different and the lack of fiscal union compounds these differences, as we have known from the beginning. The author of this email lives in Denmark which has its own currency - the Danish krone, albeit pegged to the euro. Consequently, his situation is quite different from that of a subscriber living in Greece, although even subscribers living far away from Europe have found that their investments are not entirely free from the buffeting winds of contagion.

Let's try to narrow down the questions above, so that Eurozone subscribers in particular are better able to plan investment strategies for possible developments in the single currency.

I agree that Greece is likely to leave the euro at some point and that would be very costly for people with deposits in Greek banks. They could suddenly find that their euros had been swapped on a 1-for-1 basis with a reconstituted drachma which immediately plunges in value. There is a degree of capital flight as people anticipate this so a far greater risk would apply to Greek firms and individuals who have financial liabilities in other countries.

People in other southern European countries face similar risks if / when euro exit contagion spreads. However, I do not think that this risk applies to Denmark or any other northern European country. A Greek exit from the euro would probably be a case of 'sell the rumour, buy the news'. The euro is a fundamentally soft currency due to weak economic performance within the region. However, the single currency has powerful advocates with a vested interest in its long-term survival, not least the Chinese government. Also, the departure of some weaker Eurozone countries would tend to strengthen the single currency once the dust settled.

The main case for a dramatically weaker euro, in my opinion, would be if Germany decided to pull out. Although this might please the Bundesbank and a not insignificant number of Germans, I regard it as very unlikely because the euro is a political construct, fashioned by the governing elites of France and Germany. Germany is the real power here and to date its politicians have shown little interest in referendums on euro membership or any other important EU decisions.

I do not think that Argentina's example sheds any additional light on the Eurozone situation.

I do share concern over serious social unrest in Europe, which could just as easily produce leftwing as rightwing governments, or more likely, dysfunctional multiparty coalitions. These are inherently weak and a hostage to special interest groups.

If I were among those of you who dine in euros, I would only try to get most of my money out if I lived in one of the more vulnerable southern European states. Meanwhile, wealthy French citizens have an additional incentive to export capital, at least while additional wealth taxes appear likely. In northern European countries I would weight my portfolio with a number of high-yielding, multinational Autonomies, plus some gold, and also some Asian equity exposure for that dynamic region's next upturn.

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