The euro crisis has turned into a fatal disaster

Tradingfloor.com Lars Seier Christensen , co-founder & CEO, Saxo Bank A/S Filed in Lars Seier Christensen Denmark, 09 May 2013 at 13:09    In his keynote speech at this week’s #FXDebates event in London, Lars Seier Christensen, the co-founder and co-chief executive of Saxo Bank, said the euro crisis had turned into a fatal disaster with huge consequences for the members involved.

“I have rarely, in my 25 years career in foreign exchange, witnessed an equally turbulent and fascinating time,” he told the audience.

Here is the speech in full:

Talking points

Thank you for inviting me to open the second FXDebates event.

I am quite excited by the FXDebates initiative, so let me start by telling you a little bit about the initiative.

Last year, Saxo Bank joined forces with Bloomberg and published a series of articles for an e-book covering the latest trends in the Foreign Exchange market. In March, this turned into the first FXDebates event and I am delighted to open the second FXDebates on a rather daunting subject, the euro crisis.

I’m particular proud of our co-operation with Bloomberg as they have been champions in pushing ‘thought leadership’ to a new level with their editorial strategy. I would also like to extend our thanks to CityAM for their support of todays event.

Thought leadership is not just another buzz word. Thought leadership is rather an honest and rational approach to outperform in a rapidly changing digital economy.

It’s about business leaders recognizing the opportunities enabled by new megatrends in the market. Those in my view center around technology, of course, but also a significant shift in investor perception. Investors are looking for transparency, independent information and to enable their self empowerment and independence of thinking, where before they would rely more on traditional sources in the banks.

That is bad news for old, outdated private banking models relying heavily on client trust, but it is good news for financial institutions deploying technology, information sources and communication channels intelligently and innovatively, involving and engaging investors much more actively in the decision making process.

With the FXDebates, Saxo Bank, a specialist in online trading and investment, and our esteemed guests get an opportunity to highlight our and their intent to better educate traders and prepare them in the best possible way for the dynamic world of foreign exchange. The understanding of the importance of foreign exchange and the use of the market, both as an asset class in itself, and as a crucial overlay to other assets classes remains surprisingly limited, even among many professional participants.

Understanding fully the impact of currencies on our world and our investments is more necessary and relevant than ever. Used extensively as centrals tool in defining international trade policies and growth initiatives, investors need to fully grasp the implications on their portfolios. And of course, most importantly, the euro crisis has turned into a fatal disaster with huge consequences for the members involved. I have rarely, in my 25 years career in foreign exchange, witnessed an equally turbulent and fascinating time.

And as this is the main subject of our debate today, let us turn to the situation in the Eurozone.

Frankly, it is a complete mess. And it is a mess that gets worse and worse every day. Only not in Brussels. There we hear an endless litany of promises of recovery in six months time, always in six months time, we hear the Euro is safe, and that if just we all hand over more responsibility to our Masters in Brussels, everything will be just fine.

Nothing could be further from the truth. We have just been through the bailout of the fifth Euro zone country, and both Slovenia and Malta are queuing up to be next. When, not IF, the Troika arrive in these two countries, it will create to an absurd situation where nearly half of the Eurozone countries have been broken by their adoption of the common currency, the same EURO they joined with such high hopes for the future.

Now these are small countries, and can be treated as such… just look what happened to Cyprus. I would suggest to Malta, Slovenia and other bailout candidates that they hang on for dear life until after the German election. After Cyprus, we now know what happens if you get in the way of a German leader seeking reelection.

What is it that is going so wrong in the Eurozone? I think we all know very well by now. The Euro is a political construct, and it simply has no sound economic or fiscal foundation. Unless that is put in place, the Euro will be doomed eventually.

The political capital invested in Euro is gigantic, so the will to keep it alive for absolutely as long as humanly possible, should never be underestimated. Every tool in the box – and I seriously mean EVERY single tool in the box- will be tried, before the unelected, unaccountable people in Bruxelles capitulate to reality. But doomed it is, the Euro, be in no doubt about it.

Actually, a lot of people knew this already when the Euro was introduced. Saxo Bank’s chief economist, Steen Jakobsen, that did work related to the Delors commission back in the nineties, has often told me that the dangers playing out now, were openly discussed at the time. But the political pressure to move forward back then was relentless, and the momentum in the EU seemed so strong, that it was expected by many that the foundation could be put in place after the house was built.

Not so. Because during the first decade of the Euro, it became clear that the suggested benefits from the Euro never materialised. There was no strengthening of Europes clout in the world, there was no discipline among the members, there were serious issues beginning to show for the weaker countries that could not keep up with Germany when it came to competitiveness and productivity. There was no way to manage the economy without controlling your own short term interest rates. There was no way to devaluate your currency to create renewed equilibrium and ability to compete. There was no long term beneficial impact on long term interest rates, as the big winners from the Eurozone, Germany could and would not sell to their citizens that they should underwrite a common Eurobond, or make large transfer payments to the weaker countries forever.

And now, there is no way that the European populations are willing to move forward with the necessary further integration. Not that they get asked directly a lot,as almost all decisions are made by their parliaments or in Bruxelles behind closed doors, because no one dares to ask their populations via a referendum – they know the answer would be a resounding NO! And a NO it should rightly be, because Europe is not, and will never be, the United States. Our cultures, our economies, our populations are far too diverse to ever integrate efficiently and happily in a forced union.
Instead, integration is brought in via the back door, via contributions to the bailout mechanism, by corruption of the ECBs balance sheet, by the banking union that would destroy the credibility of even sound banks if fully implemented, by passing treaty changes quickly and uninformed via the parliaments, claiming that representational democracy justifies that. Well, it doesn’t. A parliament that gives up national sovereignty knowing full well that their population would reject it, are committing treason, in my view.

But one thing is politics, another is economics, although it gets harder and harder to tell the two apart.

Anyone with a rational view of the world now sees the currency collaboration as a historic failure that can lead to even further fatal consequences for Europe and the continent’s competitiveness vis-à-vis the rest of the world.

In my view, there are a number of things that are very clear. The Eurozone will eventually break up. It could happen in a multitude of different ways.

The weaker countries could leave. If this process was managed in an orderly fashion, it could be done at lower costs than the current and future bailouts, and it would quickly set the exiting countries back on a recovery course.

Germany could leave. As the sole beneficiary of the Eurozone until now, this is not likely to happen anytime soon, but as the bills begin to pile up even higher, that may all of a sudden seems an attractive solution to the German citizens. Of course, this would mean a much higher German exchange rate, but with the pressure off for a while, it would reduce the urgency of the crisis for the remaining 16 countries, that would experience a growth boost from a significantly, but not catastrophically lower Euro rate.

A multi-currency zone could evolve, with countries with more similar economic conditions and objective could group together and achieve more appropriate currency levels.

But all of these scenarios would require rationality returning to Bruxelles. It could be certainly be achieved with less chaos and less economic mayhem than what otherwise awaits the Eurozone.

This could even secure attractive outcome of an EU returning to focus on a common market, reducing trade friction between the economies, and benefit from the big diversity of different competences across Europe – we have the benefit of both highly educated workforces and low cost industrial workers, more than 500m consumers, and the benefit of competing tax and social welfare systems.

Again, I repeat, all of this requires rationality to return to the Eurozone. And frankly, this does not seem to be on the cards, unfortunately.

If rationality does not return, what can we expect…

In my view, recession will continue for years, and even turn into depression. Forget about recovery in six months, it will always be six months from now.

Euro denominated assets will remain unattractive, and downright dangerous, to hold for years to come.

Bond yields will rise substantially, in all the 17 countries as the unsustainability of the situation becomes ever clearer.

Bruxelles will claim ever more power, and use it ever more poorly. The financial sector will be drowned in self defeating regulation, taxes and cross border responsibility for failing banks, that will eventually destroy also the healthy banks.

Cyprus WAS a template. Expect not only bail ins, which if defined clearly ahead of time could be part of the solution, but also outright confiscatory wealth taxes, disguised as solidarity payments. The governments of Europe need money, and the private sector has it. It is as simple as that. Be very paranoid.

Expect latent surprises in the Eurozone minefield. The Cyprus chaos has ensured this. A normal private depositor that has worked hard to save up for his family, will not move his account to Switzerland or Singapore. But what will he do when his country is having a bailout over the weekend? I would say the mattress will look a safer place than his bank over that weekend. So bank runs could start instantaneously.

Of course, the answer to bank runs is capital restrictions. Expect a lot more of that, always introduces as short term and temporary, but very hard to remove once in place. Iceland is in its 5th year of “temporary” capital restriction – just for your reference.

There are a lot of things to worry and think about if you are a citizen or investor in the Eurozone.

So all the more reason to welcome the the second FXDebates event about the euro crisis. I for one look forward to hearing what our panel has to say.

This crisis will not pass. This is reality for investors and traders around the world and that’s why this is an important forum.

A crisis is also an opportunity as it creates conditions for change. Hopefully a change towards more transparency, reform but also intellectual honesty. This forum should be a stepping stone towards better understanding based on openness, intellectual capacity and two organizations with a firm belief in that voicing and exposing opinions is key, particularly in time of crisis.

FX and the debate of currencies is very much both part of the solution and the problem of Europe today.

An Irish challenge to the European Stability Mechanism

Legal proceedings have been initiated by Thomas Pringle T.D., Independent Irish Member of Parliament for Donegal South-West, challenging the Irish Government on fundamental aspects of the European Stability Mechanism (ESM)
Treaty and the Stability, Coordination and Governance in the Economic and Monetary Union (Fiscal Compact) Treaty

Pringle stated that he is “of the opinion that both treaties raise serious legal difficulties both at the level of EU treaty law and Irish Constitutional law.”

Stating “my primary democratic concern as both a citizen and as an elected public representative is the integrity of the Irish Constitution and the EU treaties which now form such an important part of our constitutional framework. I believe that the matters that I seek the clarification and assistance of the Court on are of crucial importance not only for the citizens of this country but for the future of the EU.”

Of special concern to him are the implications under the terms of the ESM Treaty of a new permanent €700 billion bailout fund called the European Stability Mechanism to be set up with power to call on Ireland (at a time of that institution’s choosing) to make capital contributions of up to €11,145,400,00 in various forms of capital.

“In this country’s case, this is the equivalent to approximately one-third of Government Tax Revenue for 2011. This figure can be increased at the sole behest of the ESM at any time in the future and with no limit set in the treaty as to what may be sought from Member States in the future.

“In effect this Stability Mechanism can direct the State to raise sovereign debt, give the money so raised to it and can then decide, where, when, whether and how it is to be spent. Therefore Ireland will not have power to control decisions regarding the use of funds raised by it.”

Implications – What if a majority of voters in the May referendum on the Fiscal Compact Treaty vote in favour of imposing permanent austerity rules on the country in order to get access to a proposed permanent Eurozone loan fund only to discover that the treaty to establish that fund is illegal under EU law and unconstitutional in Ireland and may never in fact come into force?

Pringle said “On the 9th March last I wrote to Irish Taoiseach Mr Enda Kenny, the Minister for Finance and the Minister for Foreign Affairs detailing some of these very serious concerns. To date I have received no reply to this correspondence beyond the usual standard acknowledgement of receipt of the communication. I have now been left with no other option but to take this course of action.”

Summary of the Case

“I am asking the Court to examine the legality of the amendment of Article 136 of the Treaty on the Functioning of the European Union (TFEU) before any further action is taken by Government to approve that amendment. That amendment is being adopted under a so-called ‘simplified revision procedure’ of the EU treaties which I believe is legally wrong. The changes being proposed are so fundamental that they should go through the ‘ordinary treaty revision procedure’ to ensure proper democratic scrutiny. They also require the approval of the Irish people.

“I am also asking the Court to consider whether the ESM Treaty is in breach of existing EU treaty principles which have been approved by the Irish people in previous referendums and which are now therefore part of our law.

“In addition I am asking the Court to decide whether the State can ratify the Treaty Establishing the European Stability Mechanism without first having the approval of the people in a referendum.

“The Treaty on Stability, Coordination and Governance in the Economic and
Monetary Union signed on 2nd March 2012 is intertwined with the ESM Treaty. They each depend on the other.

“If I am right in my belief that the ESM Treaty is unlawful, then there is in my opinion a question over the validity of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union.”

Timing & Positioning Q & A

Pringle states that he “appreciates and welcomes the Irish Government’s
decision to submit the issue of the Fiscal Treaty to the people by way of
referendum”, but he “has concerns that due to the intense pressures on
Government at this time, the need to put the amendment to the EU treaties and the ESM Treaty to a referendum may not yet have been fully scrutinised. In order to assist in that scrutiny, he is seeking particular judicial review in these proceedings.”

How much longer can the Euro survive? And, if the Euro collapses, what will happen to the European Union?

By Andy Smith

While America and much of the English-speaking world struggling to climb out of recession, the EU is still in the depths of economic gloom. The crisis is deepest in Eurozone countries such as Greece and Ireland which, due to the failures of the Single Currency, have had to turn to their EU neighbours for a financial rescue package.

In fact it was cash-strapped Britain that had to bail out the Republic of Ireland and prevent the Irish economy from crashing completely. With virtually all European governments having to make draconian cuts in public services, and with unemployment rising dramatically across the Eurozone, protests have often turned into full-blown riots.

One size fits all

None of this should be a surprise to anyone. The problem with the Euro is that it is a “one size fits all” solution that puts economic control in the hands of the EU. There is no scope for flexibility to suit the circumstances of different countries. Single currencies only work in single states. The political leadership of the EU has already taken us a long way down the road to a “United States of Europe” with its Maastricht and Lisbon treaties – but the Eurofederalists’ dream of a single, totalitarian EU State, is just out of their reach. And will continue to be while the Eurozone – the ultimate expression of European “unity” – flounders.

In the meantime, the economic problems grow. And the crisis is not confined to the poorest Eurozone countries. The more efficient economies, such as Germany, are being dragged into it. And even Britain, in the EU but still outside the Eurozone, is affected. Having spent millions of pounds on a rescue package for Ireland, we will soon be asked to help shore up the near-bankrupt economies of Portugal and Spain too. What’s more, around half of our exports currently go to countries in the Eurozone, and if the economies of the Eurozone decline further, so too will Britain.

Not immune

So, despite making the right decision to keep out of the Single Currency, we are not immune to the Eurozone’s developing economic crisis. This is totally unsustainable. But the political leadership of the EU – including our supposedly Eurosceptic Prime Minister David Cameron – will do everything they can to keep the Eurozone afloat and keep the EU together. Their answer is to try to increase Brussels’ powers and accelerate the process of “convergence” and unification. This is in spite of Prime Minister Cameron’s pledge to block any power-grabs by the EU without a referendum.

So much for politicians’ promises!

What then are the inevitable consequences for the Eurozone – and the EU? Soaring unemployment, widespread business failures, and unavoidable political crisis throughout Europe…

There is, however, an alternative for Britain. Withdrawal from the EU would enable us to escape the crisis, save billions of pounds of taxpayers’ money that is currently poured into the bottomless pit of the EU, and regain the trading opportunities in the Commonwealth and the English-speaking world that have been largely closed to us since we joined the “Common Market” in 1973. Britain has been an outwardlooking trading nation for hundreds of years. But this began to change in the 1970s when we entered the Common Market – and turned out backs on the Commonwealth. Today, it is the straitjacket of the EU that prevents us from taking advantage of our longstanding relationship with countries such as Canada, Australia and New Zealand. The Eurofederalists dismiss groups like the Campaign for an Independent Britain – opponents of the EU – as “Little Englanders”, implying that we have no interest in the world outside the British Isles. In reality, the federalists are the insular ones – Little Europeans – whose worldview is narrow and whose minds are closed.

What CIB wants is for Britain to opt out of the failing EU and instead become a major independent trading nation once more, in charge of our laws, government and trade. The choice facing Britain is simple: stay in the EU and go down with the sinking ship of the Eurozone, or sail away to a brighter, more prosperous future