The “only” option left for the Eurozone is to break up the euro currency, Michael Pettis, chief strategist at Guosen Securities HK, told Bloomberg TV.
Pettis pointed to history. He said no currency union without a corresponding fiscal union has ever survived a period of liquidity contraction.
The euro, introduced in 1999, rode the 2000s global liquidity boom. However, after the 2008 global financial crisis, its weaknesses have been exposed.
At center of Pettis’ thesis is that trade surplus and trade deficit countries cannot share the same currency.
In order to run a trade deficit, a country needs to borrow money. However, the market has clearly shown that it is becoming less and less willing to lend to countries like Greece, Portugal, and Spain.
In fact, the market may even be pulling money out, said Pettis.
In the case of capital flight, the natural response is for a country to devalue its currency and reverse the trade deficit.
However, that would not be an option for deficit countries in the euro zone. They could “grind down wages,” said Pettis, but that process is grueling and impractical.
The only solution is to leave the euro, said Pettis.
He pointed to Argentina, which in the early 2000s had some of the same problems as deficit European countries but recovered after it devalued its currency.
Pettis argued that the sooner countries like Greece leave the euro and switch to a revalued currency, the sooner their economies can begin to recovery.
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