November 28th, 2011
Econintersect: Mr. Davies has a commentary today (November 27) in the Financial Times, “Thinking the unthinkable on a euro break-up”. He points out that the formation of the euro currency as it has been existing for the past twelve years, was preceded by a lengthy period of several years where the ECU basket of national currencies was traded in foreign exchange markets. The entry into the euro was therefore a very orderly process, with no sudden changes or economic disruptions. Click on picture to see larger image attempting to answer the question: Will the euro fly?
Follow up:His point is that he finds it hard to imagine that the members of the EU could devise a process, probably a decade long, to have an orderly re-emergence of national currencies that enter any sort of controlled mutual re-evaluations until finally arriving at the endgame of freely floating co-existence.
Davies has diagrammed future scenarios for the euro:
Click on graphic for larger image:
He discusses the investment and currency trading implications of various scenarios. There are risks and opportunities in all scenarios, but by far the worst set of outcomes he foresees would come from the total dissolution of the euro (a disorderly process) which would create a nightmare of legal entanglements.
Davies concludes that early fiscal union (Route 3 in his diagram) with increasing consideration by the core to increase support for the peripheral bond markets is the preferred route.
From the Financial Times article:
To quote Neil Sedaka:
I beg of you don’t say goodbye
Can’t we give our love another try
Come on baby let’s start anew
‘Cause breaking up is hard to do
Note: Gavyn Davies is a macroeconomist who is now chairman of Fulcrum Asset Management and co-founder of Prisma Capital Partners. He was the head of the global economics department at Goldman Sachs from 1987-2001, and was chairman of the BBC from 2001-2004.
He has also served as an economic policy adviser in No 10 Downing Street, an external adviser to the British Treasury, and as a visiting professor at the London School of Economics.