An orderly withdrawal

Well it’s that time of year isn’t it? We all dust ourselves down from the new year frivolities and start making predictions for the year ahead. Flavour of the month is of course the European crisis and the great debate as to what is going to happen to the eurozone.

There are of course the pessimists who see a disorderly break up as inevitable and disastrous consequences for the European economy and there are those that are more sanguine who see EU leaders resolving to repair the root of the mess. Last week, Mark Mobius a fund manager from Franklin Templeton predicted salvation by July. ‘The European crisis is not as deep and terrible as people think’ he said. ‘Nations…are in a process of negotiations and that takes time’.

His scenario depends on many changes happening in France’s elections, successful negotiation of the stability pact and progess in financing the rescue funds. All big asks, I think.

For what it’s worth, I'm not sure I see the euro as viable over the medium term, largely because the big debtor states have no chance of repaying what they owe. Greece is of course first in line for departure. It has debt at 144 per cent of GDP and its economy in a downward spiral of contraction and austerity. Redemption therefore seems improbable and it is becoming increasingly clear to me that Greece is not going to last much longer in the single currency.

So what would happen? Well, I think when we get to this inevitable scenario, it all depends on how orderly the departure is. Undoubtedly the situation needs to be handled carefully. Whilst the Greek economy would undoubtedly take a massive hit, Greece accounts for only 2 per cent of eurozone GDP, so optimistically its departure could be manageable if the markets were convinced that no other countries would follow. It would need international officials to believe that they can put a firewall around Greece; it needs the market to believe that this is an exception. The last thing we need is for it to get spooked.

The success of this scenario is very much in the detail.