About Andrew Smithers
Andrew Smithers founded Smithers & Co in 1989. Before that he ran S G Warburg's asset management business for many years (now part of Merrill Lynch Investment Managers/BlackRock). A regular financial commentator and columnist, and author of several academic publications, he co-authored Valuing Wall Street with Stephen Wright (published March 2000).
(The Virtual Appendix can be accessed through this link)
He wrote Wall Street Revalued: Imperfect Markets and Inept Central Bankers (published July 2009), and is also the author of Chapter 6, “Can We Identify Bubbles and Stabilize the System?” in The Future of Finance: The LSE Report, published by The London School of Economics and Political Science in September, 2010.
Those who discuss the Euro’s future are usually divided into two groups. There are the proponents, who see problems in bond markets and in banking, but ignore those of output and the opponents, who concentrate on output and see the zone collapsing. The fiscal issues and other issues that relate to “optimal currency areas” are to some extent common ground to both proponents and opponents, the latter seeing them as soluble given time and the emergence of a Eurozone fiscal union and the former seeing them as another bridge that is too difficult to cross.
As a change from this sad dialogue of the deaf it is a welcome relief to read this exceptionally well considered and highly readable paper which looks at the issues which the zone’s proponents are unwilling to discuss and, unlike the majority of opponents, proposes solutions. In putting forward an agenda of the steps needed, the authors remark that “This is not because we think the common currency ought to fail, but because we think the current situation can and should be rescued. However time is short.”
The key recommendation is the reset option, which would enable EMU member states with severe payment problems to temporarily leave the monetary union while remaining a member of the EU. Unless members have this ability and there are suitable arrangements to smooth the impact, the authors see little hope for the zone’s future. Worryingly they see that without a well organised procedure the shock of disorganised break up will be extremely severe. “Estimates of a disorderly Greek exit from the Eurozone range from 5 to 10 times that of …the Lehman’s collapse, to a total freeze-up and collapse of global financial markets.”
The difficulty of implementing the authors’ recommendations will reinforce the pessimism of many, including those who wish the Eurozone well for political reasons or who are scared about the economic consequences of failure. I fear that the authors’ view of the steps needed to avoid the zone’s break up are correct and their implementation unlikely, though this would improve if the politicians of the Eurozone can be persuaded to read the paper. I also hope that the consequences of break up will prove less damaging than is widely and reasonably feared.
For more on Chadha, Dempster and Pickford's new book, click here.