10.10.2011
By Terry Flanagan

Euro Contrarianism

As macroeconomic factors wreak havoc on the Euro zone, some economists see long-term opportunity.

Market participants may have a negative view on Europe’s plight to reach fiscal harmony, but history shows that positive change and organic growth often rise from macroeconomic hardship.

Economists bullish on the long-term prospects of the Euro zone have faith in the region’s strong political will to harbor sound policies and rid the region some long-term practices.

“The euro crisis is conducive to in depth reforms that would not have been thinkable otherwise,” said Eric Chaney, chief economist at AXA Group, a France-based financial services company offering asset management services, with approximately 1.5 trillion under management.

Chaney noted “long term and sustainable solutions that will eventually be found,” such as Eurobonds and specifically cited Germany, as a policy-making stronghold, ultimately helping to keep the region’s unified currency intact.

“I do not think that the market and economic turmoil will lead to the break-up of the euro, because of the very strong political commitment of policy makers to political stability, in Germany in particular,” he said.

Part of the solution for Europe may be the shedding of some of its current problem states, or at least, a restructuring of some of their inherent “sacred cows,” noted Chaney.

“European economies will be in a much better shape in a few years because, under intense market pressure, they will have ditched significant parts of their costly and inefficient welfare states and sacrificed many sacred cows, such as excessively tight labor market regulation, as seen in Spain, Italy, and France or excessively loose financial regulation, as seen in, Ireland, and the U.K,” according to Chaney.

Still, the short term view on the Euro zone is bleak, even for those who feel positive change will galvanize as the region restructures. Chaney predicts that especially in non-corporate sectors of the Euro zone, recession is imminent.

“The region is entering into a recession caused by a wide spread credit crunch and a high preference for liquidity in the non financial corporate world,” Chaney told Markets Media. “In addition, Greece is likely to default on its internal liabilities, such as wages and pensions—which will add political instability to the picture and will raise further suspicions that the European banking system is itself unstable.”

Despite views on long-term growth, “reliable solutions for the management of the euro area have not yet been worked out by governments, and they won’t be before, perhaps late 2012,” Chaney said.

Today, AXA is currently negative on European stocks, high yield bonds, peripheral government debts and the Euro itself.

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