Anyone familiar with Bernard Connolly won’t be surprised that he is bullish on the Euro. He has recently sent out a note through Hamiltonian Associates arguing that not only is the issue of European sovereign debt not improving, but that delaying what he considers to be an inevitable crisis will only make matters worse.
Connolly’s pessimistic bent
“Things usually get worse, and the EMMA is no exception,” writes Connolly, reminding readers of his pessimistic bent. Comparing the current economic situation in Europe to the political situation just before World War I, Connolly thinks that this is the calm before the storm, and he is worried that people aren’t adequately preparing for coming problems. He points to an interview with Bank of England governor Mervyn King last summer, where he laid out four possible resolutions to the Euro crisis: long-term mass unemployment, German inflation, a perpetual transfer union, or some countries exiting the Euro.
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But Connolly argues that Eurozone policymakers are counting on “underlying adjustment in the cads through ‘structural reform’, rather than through deflation; and the re-creation of a credit bubble.” While he doesn’t spell it out explicitly, ‘cads’ seems to refer to countries facing a sovereign debt crisis, such as Italy and Greece, and he doesn’t think they have the wherewithal to actually effect change. “’Structural reform’ is, in the mouths of the Europols, just a noise,” he writes.
German constituents don’t want a transfer or debt union
As for the second possibility, he argues that many analysts have been assuming German politicians would be more accommodating once national elections had come and gone, but polling shows that German constituents don’t want a transfer union or debt union, forcing politicians to make assurances that would be difficult to back away from.
Of course it could be argued that allowing the Euro periphery to take on debt now will give them more time to increase productivity and growth so that the debt levels become more manageable over time, but Connolly clearly thinks this is foolish.
Connolly on ponzi games
“Ponzi games are sometimes excused, or even lauded, on the grounds that a crisis deferred is a crisis resolved. Sadly, history suggests that crisis deferred is a crisis magnified,” writes Connolly.
Connolly’s quick to point out that a crisis does not lead to a catastrophe; it is a challenge that must be confronted, and he would rather Europe confront it now than years down the road. And how should it be confronted?
“There is no way out; exits, preferably a German exit, would be the least-bad option – but even the least-bad option would be horrible.”