Tyndall Monthly Commentary

As markets and even the Eurozone's population becomes increasingly exasperated with the region's policymakers and their apparent inability to solve the current, deep-seated crisis in the Euro system, many are beginning to wonder if maybe a few countries, such as Greece, should simply opt out of the single currency experiment for a while.  Indeed, the generally well-respected former UK Finance Minister Nigel Lawson recently suggested that this should be allowed to happen and he used as his template for this the dissolution of the Latin American Currency Union in 1920.  Unfortunately, we would disagree with Lord Lawson's proffered template - the world today is a very different one to that which prevailed during 1920 and for one country, or even a group, attempting to leave the Euro would be akin to attempting to be "a bit pregnant".

It is estimated that at present there are just over USD450 trillion of notional Over-The-Counter (OTC) interest rate derivatives within the global financial system (these are just the plain vanilla ones - the more complex ones are simply not measured...) and nearly half of these contracts are thought to be denominated in Euro.  If one or some of the countries were to unexpectedly leave the Euro, then it is highly likely that many of these bilateral trades would not be able to be settled, a situation that would likely pave the way for a banking crisis that would make the Lehman Crisis appear mild by comparison.  The stakes with regard to the Euro are impossibly high and the rational expectation is to believe that, given this potentially calamitous downside, the politicians and policymakers will one day "get their collective acts together".

For many of the world's bankers, though, a simple rational expectation of common sense is not enough - they know that if the Euro fails so will many of their business counterparties in the world's now amazingly complex situation and this fear of the unknown has effectively paralyzed them.  The world's commercial and investment banks are simply hoarding their capital, reducing their risk levels and waiting even as US Federal Reserve Chairman Bernanke promises zero interest rates seemingly ad infinitum.  Unfortunately, this inactivity by the banks has neutered the US and many other authorities' attempts at easing monetary policy.  It therefore seems that the world is truly waiting for a resolution of the Euro Crisis and that none of us in either the real or financial market sectors can move forward towards some form of response to what is fast becoming a new global recession.

When the Euro Project was first announced, we drew extensively on the writings of Ricardo and Keynes to suggest that the project was deeply flawed and liable to fail in the longer term.  There is, though, no satisfaction in these forecasts at the present time and we would rather be "wrong" about the breakup concept, at least in the short and medium terms.  Indeed, we continue to believe that, at the heart of the Euro's problems, lays the mismatch between electoral/national boundaries and the boundaries of the currency area itself.