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Multi- manager View

Dramatising the problems in the eurozone makes for good headlines -it helps to sell newspapers and gives weight to arguments over policy. But there is a more humdrum side to the story. Recent history shows that when the chips are down, European policymakers will do whatever it takes to save the euro. In fact, in the past three years when faced with a number of existential threats, the eurozone has always done just enough to muddle through.

Today, the most pressing threat comes from Greece. If it were to quit the euro, as some parties are threatening, the consequences would be profound but it might not come to that. Greek savers have a powerful incentive to avoid such an outcome. If their country were to ditch the euro, the buying power of their savings, redenominated in drachmas overnight, could fall by 50 per cent. Greeks may chafe against austerity but a recent survey showed 78 per cent favour staying in the euro and if the country’s two mainstream parties can position the upcoming election as a vote on keeping the euro as opposed to ditching austerity, they should be able to form a weak coalition committed to staying in the eurozone.

Events in Greece are not the only thing unsettling investors. Take the Spanish banking sector. Conservative estimates are that it needs a further €60bn of capital to provide against writedowns on ill-judged property loans. It seems unlikely the private sector will provide that.

However, the chaos that followed Lehman Brothers’ collapse was such that Spain’s banks are likely to be bailed out by the state, potentially pushing Spain’s debt-to-GDP ratio from 84 to 89 per cent. Given yields on Spanish borrowing costs are at worrying levels, bailing out the banks may be unpalatable but there appears to be little alternative.

Even once these questions surrounding Greece and Spain have been settled, broader challenges remain. Unemployment for young people in both countries is above 50 per cent. This is unsustainable and highlights the crisis of competitiveness at the heart of Europe. During the boom years, labour costs fell in Germany but rose on the periphery. This problem could take a decade to fix but the early signs are good. Labour costs in Ireland, which was one of the first countries to submit itself to austerity, are moving in the right direction.

The eurozone will likely stumble forward and muddle through its structural problems. Under the stewardship of Mario Draghi, the European Central Bank has shown its willingness to prop up the single currency. In the short term, it could cut rates to 0.75 per cent or so.

Meanwhile, a third instalment of bank-rejuvenating loans through its long-term refinancing operation cannot be ruled out. Any intervention from the ECB of this nature could trigger a powerful rally in European shares.

Mark Harries is head of multi-manager at Swip


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