Axel Weber Warns "Euro Will Come Down To Earth.. Markets Are Disregarding Risks"
It's not all ponies and unicorns in Davos today. Paul Singer's dismal views on financial fragility were followed up by a panel, as The Telegraph's Ambrose Evans-Pritchard reports, that poured cold water on the claims that the European crisis is over. Harvard professor Kenneth Rogoff said the launch of the euro had been a "giant historic mistake, done to soon" but EMU leaders are still refusing to take the necessary steps, and is squandering the "scarce resource" of its youth, badly needed to fortify an aging society as the demographic crunch sets in. But it is ex-Buba head Axel Weber that unleashed the ugly truth: "Markets are currently disregarding risks, particularly in the periphery...Europe is under threat. I am still really concerned."
A top panel of experts in Davos has poured cold water on claims that the European crisis is over, warning that the eurozone remains stuck in a low-growth debt trap and risks being left on the margins of the global economy by US and China.
Axel Weber, the former head of the German Bundesbank, said the underlying disorder continues to fester and region is likely to face a fresh market attack this year.
"Europe is under threat. I am still really concerned. Markets have improved but the economic situation for most countries has not improved," he said that the World Economic Forum in Davos.
"Markets are currently disregarding risks, particularly in the periphery. I expect some banks not to pass the test despite political pressure. As that becomes clear, there will be a financial reaction in markets," he said.
Harvard professor Kenneth Rogoff said the launch of the euro had been a "giant historic mistake, done to soon" that now requires a degree of fiscal union and a common bank resolution fund to make it work, but EMU leaders are still refusing to take these steps.
"People are no longer talking about the euro falling apart but youth unemployment is really horrific. They can't leave this twisting in wind for another five years," he said.
Mr Rogoff said Europe is squandering the "scarce resource" of its youth, badly needed to fortify an ageing society as the demographic crunch sets in.
Mr Rogoff said debt write-downs across the EMU periphery "will eventually happen" but the longer leaders let the crisis fester with half-measures, the worse damage this will do to European society in the end.
Mr Weber, who resigned from the Bundesbank and the ECB in a dispute over euro debt crisis strategy, said new "bail-in" rules for bond-holders of eurozone banks will cause investors to act pre-emptively, aiming to avoid large losses before the ECB issues its test verdicts.
"We may see that speculators do not wait until November, but bet on winners and losers before that," he said.
The danger is that bank strains will turn the spotlight back on those sovereign states that cannot easily afford to shore up their banking systems. While he did not name any country, Spain, Italy, and Portugal are viewed as vulnerable. Even Ireland may be at risk again with a debt ratio of 125pc of GDP. "This is the key issue this year," he said
Mr Weber warned EU leaders not to have "dangerous delusions" or become complacent about recovery. "Things feel better than they are. The recovery too weak to generate jobs. It's not about whether things are improving: the levels of growth, jobs, and GDP are way worse than before the crisis," he said.
Pierre Nanterme, chief executive of the French group Accenture, said Europe is losing the great battle for competitiveness, and risks a perma-slump... "A lot is at stake. If in 12 to 24 months no radical steps are taken to break the curse, we might have not just five, ten, but twenty years of a low-growth sluggish situation in Europe," he said.
Mr Weber retorted that the euro will come down to earth as the tightening by the US Federal Reserve and other central banks leave Europe as the odd man out. "The ECB has an easing bias. Fast forward another year or two, and relative monetary policy will become obvious to everybody," he said.
We suspect these messages will not reach Samaras or Barroso... Meanwhile Spanish, Irish, and Italian yields will cross US Treasuries any day now at this pace of complacency...
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