Greek crisis reveals broader Euro zone flaws
The Greek debt crisis has revealed broader flaws in the European monetary union, according to respected academic and historian Niall Ferguson.
Ferguson, professor of history at Harvard University and widely considered the world's pre-eminent economic historian, is in Australia this week and presenting today at brillient's PortfolioConstruction Academy.
Ferguson believes the contagion effect of Greek’s debt woes highlights the need for the European monetary union (EMU) to embrace a centralised fiscal policy and essentially become a "fully fledged United States of Europe", or risk remaining “little more than a modern-day Holy Roman Empire” which will sooner or later fall apart.
Ferguson has long argued that the worst defect in the design of the EMU was that it united Europe’s currencies, but left its fiscal policies “completely uncoordinated”.
Ferguson points to the financial predicament currently facing the United States (which he describes as worse than that of the Euro zone), but highlights the benefits of the federal system.
“In America, Texas automatically bails out Michigan via the redistribution of income and corporation tax receipts,” Ferguson said.
“What the Greek crisis has belatedly revealed is that such fiscal centralisation is the necessary corollary of a monetary union," he said.
"Europe now faces a much bigger decision than whether to bail out Greece. The real choice is between becoming a fully fledged United States of Europe, or remaining little more than a modern-day Holy Roman Empire, a gimcrack hodgepodge of ‘variable geometry’ that will sooner or later fall apart.”
In Ferguson's view, further declines in the Euro “seem likely”.
“This Greek tragedy has several more acts to come,” he said.
“The first will be a Greek default. It’s simply not credible that the Government will be able to deliver such severe fiscal tightening at a time of deep recession.”
His prediction is that “the Government of George Papandreou will fall and its successor will inflict a 30 per cent ‘haircut’ on holders of Greek bonds”.
With Greek’s balance sheets now “stuffed full of dodgy Government bonds, the Greek banks are heading into Lehman Brothers territory,” Ferguson said.
Other EU banks are exposed to Greek debt to the tune of $193 billion, Ferguson said, pointing to figures from the Bank for International Settlements.
“Factor in the risk of copycat crises in Portugal and Spain, and you begin to see the outlines of a disastrous Europe-wide banking crisis,” Ferguson said.
“The only way out of that will be further compromises by the ECB about the paper it accepts as collateral.”
Niall Ferguson is a professor of history at Harvard University and professor at Harvard Business School. He is the author of The Ascent of Money: A Financial History of the World.
He presented yesterday at brillient’s inaugural PortfolioConstruction Academy in Sydney.
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