While still of the belief that a wholesale disintegration of the European Monetary Union remains a distinct tail-risk event, Citigroup's chief economist Willem Buiter succinctly summarizes his core view as "the euro-area will stumble and bumble towards an eventual resolution." However, that 'final' solution does not look like your grandma's European Union as he expects nothing more than a "continued Monetary Union, probably without Greece, having undergone both major sovereign debt restructurings in the periphery and financial debt restructurings for banks in the periphery and core." Transcribed from a three-minute clip, Buiter eloquently answers three key questions: How is the Euro crisis (and its consequent solution) shaping up? Does Germany have the upper-hand? and What sort of moral hazard issues might we see in the near future? He concludes "we won't have a smooth solution to this crisis."
Q. How is the Euro crisis and the consequent solution shaping up?
Buiter: The euro area is continuing to bumble and stumble to its eventual resolution. There still is the risk of disaster - of wholesale disintegration of the monetray union - but that is still pretty much a tail risk.
The most likely outcome will be a continued European Monetary Union - probably without Greece - and having undrgone a significant sovereign debt restructring and financial debt restructuring both in the periphery and for banks in the core also.
Q. Does Germany have the upper hand here?
Buiter: Nobody has the upper hand. Germany, perhaps, has the most to lose from the collapse of the monetary union and that of course weakens its negotiating power. Like every other EMU member nation, it can veto future aid programs, it can veto enlargement of rescue facilities but that's about it. After that, they only have the nuclear option of 'exit' which is very unlikely to be exercised.
This is why nobody has the upper-hand and decision-making remains a long drawn-out clumsy and often frustrating process
Q. What sort of moral hazard issues might we see in the near future?
Buiter: There isn't really significant risk of moral hazard. Moral hazard could occur if there was large-scale mutualization of sovereign debt and/or a large-scale transfer union but for political reasons that is NOT going to happen.
The ECB, which has announced that it is willing to intervene in markets to keep yields under control BUT only after countries (including Italy and Spain) go on programs, is not going to be the agent of moral hazard and neither is a large-scale increase in the size of the facilities.
It means of course that, while we won't have moral hazard, we also won't have a smooth solution towards the crisis
Source: Citigroup Velocity