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What have we been up to


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Putting populism aside for a moment…

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A severe lack of flexibility and an innate tendency to passively manage external shocks make trees vulnerable to fires and human activity. With nouvelle populism spreading like wildfire across Europe, the chance of some large saw cutting down the good old European Union is a real one.

Before 2017 cuts those big branches down, it is worthwhile to note a few remarkable features of what was a very strange 2016 for the eurozone. Compared with the hard times post-2008, and (perhaps more importantly) the 2011 crisis, last year was a very good year. All indicators of economic output have been strengthening: GDP grew by 1.7%, retail sales by 1.1%, and industrial production by 2.0%. These figures may not reflect the huge variety among eurozone countries, but they cannot be ignored. CPI growth – inflation – ended up at 1.1%, a decent improvement from the negative and no growth during 2014 and 2015 respectively. Unemployment has dropped to 9.6% from 10.5% a year ago, and confidence indicators, albeit volatile, have all reached or breached levels not seen since pre-2008.

In a world increasingly affected by global warming, a tree needs to be flexible, and we have all debated how sudden moves towards flexibility within the Eurozone may be arriving too late to avoid wildfire. In Italy, we use the phrase: Il caldo gli ha dato alla testa to describe a person who has lost their composure and made a stupid mistake under the combined influences of heat, humidity and tiredness. In this way, global warming and the potential break-up of the eurozone are not so different. With reference to our previous European Commentary, all hail Schulz, and let’s hope that on 7 May the new French President is not Marine Le Pen, with all the destructive change she proclaims and wishes to bring forward.

In the meantime, the neglected European parliament has been voting on documents to set the scene for strengthening the eurozone by adding/widening the budget beyond the European Stability Mechanism. As one would expect, non-euro countries have shown substantial opposition, alongside portions of German, Dutch, Finnish, Irish and Maltese MEPs. However, the reality is that at this stage, any measure of this kind will have to wait until after the elections and so, another year is lost.

But what can be done to manage the risk of having once again to open French Franc bank accounts? If there were a simple way to hedge the break-up of the euro, we would be spending every minute of our day calling clients to explain our solution and how it would apply to their financial assets and liabilities and ultimately, solve the problem. If the subject does not concern you, please think twice. Lenders, mindful of their redenomination risk, are naturally worried about the legal and practical complexities of changing currency (or not) in some of their ‘investments’. Good bank relationship managers may be spending hours writing reports on their corporate clients to identify those who might suffer the most from a selective country debt default and/or a sudden new currency devaluation. The best advice so far is to avoid putting all one’s eggs in the same basket and diversify.

However aggressive politicians may have been about the idea during the election campaign, any depeg from the euro will demand long negotiations, careful treading and wisdom, at least for relatively healthy countries like France. Think of the Brexit timeline, which nobody really knows still, and apply a multiple. It will be exhausting! From a currency management perspective, it is very likely that a transition period will be imposed during which the new currency will be allowed to trade within a tight band, in a fashion similar to the exchange rate between euros and Danish Krone. The duration of the soft peg will depend on the country’s strength and will to maintain a healthy relationship with the remaining countries whose main interests will be economic and trade stability. Realistically, Greece leaving the euro would see the new currency devalued in the blink of an eye.

There is another, less obvious possibility to consider: many media channels name euro break-up, but imply that the euro will live on in Germany. This seems unlikely. If France and, say, the Netherlands were to leave the euro, then die Deutschen should leave it as well. In fact, it is very likely that a large majority of eurozone countries will quickly vote to move back to their old/new currency to avoid being left with the short straw, and likely without having their people sufficiently educated to understand the consequences.

There is an exception: Belgium should keep the euro. Here, no nationalistic party seems strong enough to pretend that going back to the neglected Belgian Franc (nicknamed the ‘Belgian Mark’ by the Flemish) will do anything but worsen relations between the north and the south. 

All views expressed here are the author's own and are based on information and data available at the time of writing. 




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