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Thread: Morgan Stanley: A Eurozone Collapse Is Now Far More Likely,

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    Default Morgan Stanley: A Eurozone Collapse Is Now Far More Likely,

    The latest Global Monetary Analyst raises the notion of stronger Eurozone nations ditching the euro in order to form a stronger, smaller currency union.

    Morgan Stanley’s Joachim Fels believes that the eurozone/IMF financial backstop for Greece, plus the European Central Bank’s recent backing-down on collateral rules for Greece have substantially, and ironically, increased the long-term risk of a eurozone break-up.

    Joachim Fels at Morgan Stanley:

    … which gives rise to moral hazard: The bail-out and the ECB’s softer collateral stance set a bad precedent for other euro area member states and make it more likely that the euro area degenerates into a zone of fiscal profligacy, currency weakness and higher inflationary pressures over time. If so, countries with a high preference for price stability, such as Germany, might conclude that they would be better off with a harder but smaller currency union. And because the Maastricht Treaty does not provide for the possibility of expelling euro area members, the only way how Germany could achieve this would be by leaving the euro to introduce a stronger currency.



    Obviously, we have not reached the end-game yet. However, with the recent developments, such a break-up scenario has clearly become more likely, for two reasons. First, the lesson for other euro area members from the Greek bail-out package that no matter how badly you violate the SGP guidelines, financial help will be forthcoming, if push comes to shove. This introduces a serious moral hazard problem into the European equation. Fiscal slippage in other countries has now become more rather than less likely.

    Moreover, the central bank’s credibility has been massively eroded.

    Second, the ECB’s climb-down on its collateral rules regarding lower-rated bonds, which ensures that Greek government bonds will still be eligible as collateral in ECB tenders beyond 2010, adds to this moral hazard problem and confirms that the ECB is not immune to political considerations and pressures.

    Most importantly, what to watch for that might signal the beginning of the end of the currency union as we know it:

    What are the signposts that would indicate our break-up scenario is in fact unfolding?

    First, watch fiscal developments in other euro area countries closely: Our suspicion is that the aid package for Greece lessens other governments’ resolve to tighten fiscal policy, especially in an environment of ongoing economic stagnation or recession.

    Second, watch ECB policy closely: If the ECB turns out to be slow in raising interest rates once inflation pressures return, this would be a sign of a politicisation of monetary policy.

    Third, watch the political debate in Germany: Support for Greece has been extremely unpopular and fears that the euro will turn into a soft currency abound. If the aid package for Greece, which so far is a backstop credit line, becomes activated, eurosceptic forces would receive a significant further boost. And, needless to say, if other countries also needed financial support, this would further strengthen euro opposition.

    Morgan Stanley is at strains to say that they don’t necessarily support a break-up of the union nor are they blind to the fact that a Greece crisis (without Eurozone/IMF support0 could lead to a crisis for Europe today. They just seem to be saying that the the most recent Greece-backstop solution only increases the long-term risks of the entire system simply ending, even though it papered over near-term problems. You’ll have to hunt down the full piece for details.
    Morgan Stanley: A Eurozone Collapse Is Now Far More Likely, Here Are The Canaries To Watch Out For
    "A government big enough to give you everything you want, is strong enough to take everything you have."

    Thomas Jefferson

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    Its ironic in a way. The bureaucrats in Brussels looking for increased integration; lisbon, now have to put up or shut up with regards to Greece or face their grand plan falling apart.

    A unified Europe is looking increasingly unlikely.

    If the Germans go it alone which imo is the best option, the project is finished.

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    I think the analysis is simplistic in some ways. Eg. I don't see any sign of a change of heart towards fiscal rectitude in this country, just because Greece seems to have struck some kind of deal. Also, there's no way that countries like Spain will be drawing much comfort from Greece's position either.

    But, the contradictions at the heart of the euro are gapingly obvious now, and
    a two speed Europe is looking ever more likely in my opinion - with a common currency (and fiscal policy) only in the core.

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    I said this a very long time ago on here on one of those "let's leave the euro" threads, I'll have to dig out the link.
    The only people who could leave the euro are the "rich", "central" countries. They could gang together and form a new "super euro", throwing the ordinary euro to the sharks.
    Presumably Ireland would not be invited to join the club.

    I'm no economist, but I'm thinking if this were to happen, it would happen overnight.
    If there is a future, it will be Green.

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    Quote Originally Posted by QuizMaster View Post
    I said this a very long time ago on here on one of those "let's leave the euro" threads, I'll have to dig out the link.
    The only people who could leave the euro are the "rich", "central" countries. They could gang together and form a new "super euro", throwing the ordinary euro to the sharks.
    Presumably Ireland would not be invited to join the club.

    I'm no economist, but I'm thinking if this were to happen, it would happen overnight.
    This is the best option imo, if germany and france leave, we can devalue "our" euro and its happy days! well......hopefully!

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    Quote Originally Posted by SKELLY View Post
    Its ironic in a way. The bureaucrats in Brussels looking for increased integration; lisbon, now have to put up or shut up with regards to Greece or face their grand plan falling apart.

    A unified Europe is looking increasingly unlikely.

    If the Germans go it alone which imo is the best option, the project is finished.
    Olli Rehn has an idea -


    "We should use the first months of the year, say January to July, to request draft national budgets," he said.

    "Not budget-line by budget-line ...but the overall budget, so that the commission would analyse and the eurogroup [of euro area finance ministers] would make a peer review and recommendations on national budgets, before they are presented to national parliaments," he added.

    The Finnish politician with a passion for football repeatedly referred to Article 136 of the EU's new Lisbon Treaty during his discourse, under which euro area members can vote by qualified majority on measures "to strengthen the co-ordination and surveillance of their budgetary discipline."
    EUobserver.com says:

    Greece's ongoing fiscal crisis has increased member state appetite for greater budgetary surveillance however, with the EU executive confident its proposals will find a favourable audience.
    Up tomorrow at the FinMins Council meeting.

    @skelly -
    'if germany and france leave, we can devalue "our" euro'

    Change euro to eiro?
    "It is difficult to get a man to understand something when his salary depends upon his not understanding it." - Upton Sinclair.

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    Quote Originally Posted by He3 View Post
    Olli Rehn has an idea -



    EUobserver.com says:



    Up tomorrow at the FinMins Council meeting.

    @skelly -
    'if germany and france leave, we can devalue "our" euro'

    Change euro to eiro?
    The "punto" ?

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    Quote Originally Posted by orbit View Post
    The "punto" ?
    The "Dingy".

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    The "eurine"!

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    Typical american "Morgan Stanley" wanting to dump all over poor lovely Europe... they have office is London too... filled to the brim with little englanders no doubt.
    Happiness is a dry martini and a good woman … or a bad woman.
    –George Burns

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