Abolish the euro, stop losses!
Next week, once again there will be endless debates about success or failure of the latest “solution” European leaders agree on in order to overcome the eurozone crisis. Will the additional levers given to the EFSF suffice to calm down markets and prevent contagion? Will the recapitalization of banks strengthen their ability to digest further losses? Will the increase of private sector involvement in the “rescue” of Greece suffice to save the country from bankruptcy and, at the same time, quieten the critics in national parliaments and elsewhere?
The current agreement again, above all, will serve to buy time. Nobody is really expecting it to end the European drama. There is widespread agreement that this could be achieved only by far-reaching further integration including the creation of eurobonds and the transition to a full-fledged fiscal union.
However, as I argued elsewhere, even eurobonds would be no panacea. As long as financial markets find a way to discriminate between countries – and the poor integration of most financial market segments in Europe offer ample opportunities in this respect – and as long as derivative constructs provide for unlimited liquidity, the differences between national economies will be incentive enough to test the system again and again (and neither Charles Goodhart’s 2% minimalist federal fiscal union nor the recent proposal of the Bruegel Institute would hinder them). One lesson from the EMS crisis of the 1990s is that, in the long run, if markets do not believe in a system it has no chance to survive.
In the eurozone, big economic differences will continue to exist and cannot be expected to be eliminated in the foreseeable future. On the other hand, the prospects for deeper integration in the sense, for example, of a one and only eurobond market are nil. Under these circumstances, the only way out of the crisis is to admit the failure of the euro experiment and to abandon the project as fast as possible. Every new round of rescue action and austerity program, shift in market sentiment and renewed policy initiative will only lead to more friction and increase the cost to maintain a system which is doomed to die. No ban of financial strategies or rating activities, and no increase of public funds for intervention, can change that. Had the decision to abolish the common currency been made months ago at the first indications of the system’s inconsistencies the cost for all members as well as other trading and financial partners in the world would have been considerably lower.
People currently debate the pros and cons of the various components of the latest policy agreement as if they were an alternative to quitting the euro. They are wrong. There is no way to stem the floods of financial speculation except policy credibility, and the euro has long lost this opportunity.
In financial markets there is one rule which is crucial for survival and which applies to this case, too: Stop losses. If a position or activity is losing you money again and again, and you have no indication for change, quit it. If you expect the situation to improve, consider the risk. But if your expectation is grounded on hope instead of information, quit. Is expectation in the eurozone these days grounded on information or on hope? Is it a calculable risk policy is taking deliberately or is it uncertainty and high non-quantifiable ambiguity? In the first case, every effort may be justified to save the system, in the second there is a danger to lose much more than a common currency.
Stop losses. It is high time for European leaders to follow this rule.