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Breaking up is hard to do

Managers agree the eurozone is unlikely to split up in the short term but the speculation is hitting investors. Joanne Ellul reports

Managers are confident the eurozone will remain intact in the short to medium term as member states face far greater costs as a result of a break-up.

The European sovereign debt crisis has caused turmoil in the markets, prompting many to speculate about the future of the euro and whether countries swamped with debt should leave.

Skandia head of asset allocation Rupert Watson says: “The eurozone is unlikely to split up because the cost of doing so would be enormous for the countries leaving and those that remain.”

But he says people with money in a European bank account outside the “safe haven” countries such as Germany and possibly the Netherlands and Finland, should transfer it to a German bank.

Watson says these countries are least likely to leave the euro and even if they did, the currency would not be devalued if redenominated into the pre-euro currency.
He says this is not true of other countries in the eurozone, such as Spain, France and Italy.

He says: “People with bank accounts outside of the safe-haven countries fear further euro breakup, which could lead to their euro deposits being redenominated back into the peseta, franc, lira and so on, which would have less value.

“If that happened, it would make the turmoil after the collapse of Lehmans look like a children’s tea party.”

Schroders head of UK equities Richard Buxton says he thinks a breakup of the single currency will be avoided in the short term.

He says: “I do think it will eventually break apart but not now. It will be several years down the road after they have tried to get closer fiscal union.”

Buxton says the scale of cross-border banking exposure is so great that if any country were to leave, the whole European banking system would have to be nationalised.

He says: “It is too late for Greece or any other countries to exit the euro. The necessary solution to the crisis will involve fiscal union and probably fiscal transfers from the Germans to the fringe.

“We are looking at 9 per cent of German GDP if it is to shore up the eurozone. It is a price worth paying and Germany will move in that direction because the pace of change that is now depressing the market is forcing that outcome, rather than an exit.

“Several years down the road, after the move to fiscal union, the Germans will still be putting a lot of austerity on peripheral countries and there will be voter discontent. People will question if the union is really working for them.”

Neptune Investment Management head of client investment strategies Douglas McDowell says: “I cannot conceive a situation where the eurozone would be allowed to disintegrate. It is going to cost a huge amount of money to get stability in Europe but the cheapest way to do that is through fiscal union.

“Europe, when considered as a single country, is solvent. A fiscal union, where all countries guarantee the debts of each other, can work to calm the crisis. It would take a long time to implement but the market needs to hear there is a firm intention to get there. With the right commitments from the countries at risk, Germany should be willing to accept a move in this direction.”

Skandia senior portfolio manager John Ventre says: “It looks as if Germany is at least considering the option of making the eurozone smaller by creating a so-called ’core’ or ’Northern euro bloc’. Many have suggested this sort of eurozone breakup would be an ideal solution, allowing peripheral countries to devalue to address their debt burdens and saving core Europe from the costs associated with bailouts.”

But Ventre says bailouts remain “the lesser evil” and he is confident German policymakers will reach this conclusion. He says Germany, which exports about $1.3trn of goods and services each year, punches above its weight and competes heavily with China, not just in terms of volume of exports but also directly in a number of industries.

He says: “Chinese currency is significantly undervalued, with controls in place that do not allow it to reach its fair market value. Moving to a smaller, core Europe or breaking up the eurozone entirely would lead to a stronger currency for Germany and would hurt it economically, much more than the cost of bailouts for weaker European states.”

Hargreaves Lansdown head of research Mark Dampier says a resolution, even if it is a breakup of the eurozone, would at least put an end to the uncertainty that is hampering markets

He says: “The eurozone is on the news every day and it is affecting investors. They are scared to invest and if the eurozone breaks up, the market might go down but we also might see a good resolution. Markets cannot cope with the uncertainty.”



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