Want to Save the Euro? Don't Start from Where You are Now

July 16th, 2012
in Op Ed

by Clive Corcoran

Paul Krugman, who must be on a promotion tour for his book as he has been showing up for lots of TV interviews recently, was recently interviewed by Joe impossible-fractalsWiesenthal (Business Insider) and a clip entitled How the Euro crisis will end can be found on You Tube (video can be viewed after Read more... break.)

In a nutshell Krugman's verdict on the fate of the single currency is that it hangs in the balance - he puts it at 50/50 - between a series of bank runs in the peripheral nations of the Eurozone which would lead to a complete disintegration, and a very hard to contemplate climbdown by the Bundesbank and the German government which would open the way for the ECB to backstop all of the sovereign debt of the troubled Eurozone states.

Follow up:


My point with this brief piece is not to opine on which is the more likely scenario, but rather to dwell on the closing comment from the interview in which Krugman makes the point that neither option is acceptable to Germany. In other words the German government and financial establishment are faced with an impossible dilemma.

Increasingly policy makers, not just in Europe, are being faced with a series of options all of which are "unacceptable". When confronted with such a policy bind there is a natural tendency for those who have to make policy announcements to do their utmost to avoid disambiguating the choices, and continue to prevaricate and play for time.

As long as messages from central bankers and policy makers can remain ambiguous, providing asymmetric information, then the prevailing paradigm of bipolar risk on/risk off asset allocations should enable systemic liquidity to be preserved. Unfortunately, today’s global financial system has become so interconnected, and the returns from most asset classes are so highly-correlated, that investors and asset managers, to a much larger degree than previously, are essentially undiversified and subject to systemic risk. Should market developments and signals become symmetrically disadvantageous then a more substantial systemic crisis than that seen in 2008 is a real possibility.

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Editor's note: Clive Corcoran is the author of a new book scheduled to be published in December 2012, "Systemic Liquidity Risk and Bipolar Markets"


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About the Author

clive corcoranClive Corcoran
is an FSA registered investment adviser providing private client wealth management services, as well as being an author, financial educator/mentor and an independent trader.   He has written “Long/Short Market Dynamics: Trading Strategies for Today’s Markets” (Wiley, 2007) and two textbooks, “Financial Markets, and Portfolio Construction Theory” and “Wealth Management”.  He currently is a director of Morphology Management Inc. which has developed a systematic trading platform. Clive has been a regular analyst/contributor to CNBC Europe and other broadcast outlets.  Previously he was the founder and CEO of a personal and business management company for entertainment professionals that operated in Los Angeles, London, Munich and Toronto.  Clive’s Blog: Morph366.

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