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London isn't crying about the Euro
By Abdul Turay
Published Postimees 21 October 2011

It's not going to work, not now, not ever. The European Financial Stability Fund (EFSF), the plan to save the Euro, is doomed. The Euro - at least in it's present form- will fail, that is the view from London.

It is a view held across the board, by left-wingers and right-wingers by Eurosceptics and Europhiles, by economist, politicians and traders and it is really only in the last month or so that this view has crystallised and become a majority view.

The only question is not “if” the Euro will fail but “ how” it will fail.

Can Europe's political elite work something out so that the Euro will continue on in another form may be even come back stronger at a later date or will the whole thing disintegrate into a unholy mess that will destroy Europe and the rest of the World.

Some traders who know the region are painting a very black picture for Estonia indeed.

“One day Estonia will be in the same position as Greece is now, but probably worse,” Michael Wood-Wilson a trader with one of Britain major banks told Postimees.

Why does London have this view and does it matter? After all Britain is outside the Eurozone and does not contribute to the fund.

The answer to the first question is fairly simple. London has this view precisely because it is not in the Eurozone. The financial community in London unlike policy makers in Brussels, Frankfurt, or Tallinn don't have a vested interest in saying that something is going to work when clearly it isn't.

In Britain analysts aren't swayed by sentiment or political rhetoric. It's true that Britain has traditionally been more Euro-sceptic than Estonia but there are also a lot of powerful Europhiles, they have all but given up hope. They look at Europe and they see, confusion, a culture of blame, lack of leadership, lack of will and most importantly lack of money.

Jose Manuel Barusso, President of the European Commission, wants the continent to recapitalise its banks. The view from London is European countries can't afford it.

Simon Tillford, chief economist, at the pro-European think tank, the centre for Europe reform, told the BBC.

“Some of the weaker countries do not have the money to recapitalise the banks. If they try to stomp up the money themselves there is a risk of making the sovereign debt crisis worse. France will struggle. There is very really risk that they will lose their triple A rating. ”

Indeed it cost Belgium, France and Luxembourg 90 billion Euro to bail out just one bank, Dexia. Belgium have may it's credit rating downgraded as a result.

In London nobody thinks the EFSF is big enough. George Osborne the British chancellor of the exchequer has called for a massive increase in its size.

But the problem is deeper, London thinks the fund won't work because, once you get past the rhetoric, it is structured like a Ponzi scheme. It involves hugely indebted countries lending money to themselves.

Derivatives trader, Satyajit Das told the BBC

“The European Financial Stability Fund is guaranteed by a whole bunch of countries including, Spain and Italy. Spain and Italy between them make up 30% of the guarantee of the European Financial Stability Fund.

“The European Financial Stability Fund is going to borrow from the European Central Bank, which has also obviously got support from Spain and Italy, and then lend the money to Spain and Italy.”

Das went on to say that say that nobody could serious think this will work.

“The politicians in Brussels and a few policy-makers.... to be very honest don't have any solutions, and they are now playing almost confidence games to try to actually convince people that this will work. Ultimately it won't work because it all boils down to a simple fact,” he said.

The British assessment of what has caused this disaster is radical different from how the average Estonian sees it.

Far from blaming the Greeks for their free spending ways, analysts in London blame the Germans for setting up a system that suited them.

“The rules weren't obeyed. France and Germany broke the rules,” Sir Richard Lambert ex-editor of The Financial Times said on British Television.

Under Lambert's editorship The Financial Times once supported Britain's membership of the Euro. Now he says the Eurozone will shrink.

“I think it is likely that Greece (will fall out of the Euro) the numbers are now impossible.

“I think the extreme position of the collapse of the Euro is very unlikely. I think a fiscal union is very unlikely the question is it possible to get an orderly way to get Germany to support an orderly way for Greece to withdraw,” he said.

In America even right-wing economist are enraged with Germany behaviour. Dr Peter Morici of the University of Maryland said the Eurozone is mis-structured because it allows the Germans to be quite wealthy without sharing any of its revenues with the others. He roundly cursed them in the British press.

“This crisis is as much a product of Germany's destructive and economic imperialist behaviour.”

“ Germany profits greatly from the Eurozone. Germany has an undervalued currency. Germany seems to think they can drink from the well but never put anything in. Germans get to trade, keep huge surpluses keep most of the manufacturing to themselves.

“The German finance minister is doing a heck of a lot more than Germany's armies could have ever accomplished in the 1940's it is literally destroying the state. Essentially the Germans are saying 'buck up and march through the great depression again.'”

City traders like Wood-Wilson who knows this region well, think unless Germany changes it's ways it could spell trouble for Estonia even if the Eurozone shrinks in an orderly manner.

“Germany will have a larger percentage of the value credited to the Euro by the markets. As more weak countries leave the Euro, the stronger it will get, as Germany is awesome. The stronger it gets the more those on the periphery will be sniffed out by the markets and pay more to service their debts.

“The stronger the Euro the less the rest of the world (Sweden and Norway), will want to buy their goods as they can't afford them.

“They (Estonia) can't devalue to boost their exports. Even with a strong economy (Estonia) will be out of synchronisation with Germany at some point. There must be a United States of Europe for the Euro to succeed,” he said.

To give readers some background. The Conservative party the equivalent of the IRL which is now in power fought the 2001 election on the issue of saving the pound. When the Swedes voted No to the Euro it killed the issue anyway. There has been some triumphalism from the die-hard Eurosceptics. Journalist, Peter Obourne an uncompromising Eurosceptic said his kind had “saved this country(Britain) from economic degradation” whereas the pro-Europeans “got the greatest economic issue of age utterly and completely wrong.”

But mostly the mood is one of fear, a fear that may turn to sheer panic if a way isn't found to fix the problem. British banks are also exposed to Europe debt. European banks are by far the biggest lenders to emerging economies so there is no salvation coming from that direction.

Mervyn King Governor of the Bank of England a man not known for hyperbole, is talking about the World facing the most serious financial crisis ever, worse than the 1930s.

And the view from London does matter, despite Britain not being in the Eurozone. London is Europe's main financial centre dwarfing Frankfurt and Paris. When people talk about what the market thinks, what they really means is what London, New York and Hong Kong thinks. And since London is a little closer to the Eurozone, is following developments just that little bit more, the view from London is the view of the market. The US economy and debt crisis is as bad if not worse than Europe's but Americans aren't thinking about that right now, they are just following sentiment in London. The Eurozone crisis is a crisis of confidence as much as it is crisis of credit. London and therefore the market has no confidence there is a way to fix it.

There is always hope. Many influential people think the collapse will happen in an orderly manner and the Euro can come back stronger. This is the view held by billionaire financier George Soros.

“We could have two or three of the small countries default or leave the Euro provided it done in an orderly way.”

He believes the seriousness of the crisis will eventually lead to a solution.

“I think the authorities whatever it takes to hold the system together because the alternative is too terrible to contemplate,” he said on American TV.

(Ed note; this is a paid for article. To read the original, subscribe to Postimees.)

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