- Originally from our sister publication, Advisor.ca.
The eurozone’s days are numbered and it’s a matter of time before the common currency falls apart. The latest escalation in the eurozone debt crisis is seen by industry experts as the beginning of the end.
Governments in Europe can’t indefinitely fend off a eurozone break-up, says David Fingold, lead portfolio manager of the Dynamic Global Discovery Fund.
“The euro is unsustainable; it will not last forever,” he said. “You’re going to see Europe break apart into two zones—a Latin Europe with slower growth [needing] currency devaluation and a northern Europe which is much healthier [and] likely led by Germany.”
Tremendous growth in labour costs in southern Europe has forced leaders to face two unpalatable alternatives: have a different currency that falls 20% or 30%; or cut wages by the same margin.
“It would be safer to split off southern Europe than it would be to just cut everybody’s wages by 20% to 30%, because then no one will be able to repay their debts and the banks will be in further trouble,” said Fingold.
The split may not happen tomorrow, but might happen sooner than expected, added Fingold.
“I don’t know exactly how it’s going to manifest itself—whether it has to be done with two separate currencies—I just don’t see how you can deal with the need for a significant deflation in southern Europe without breaking into two different zones.”
Eurozone finance ministers met on Monday to discuss ways to deploy the European Financial Stability Facility (ESFS), in order to bail out larger economies like Italy and Spain.
More such meeting are in the cards. EU finance ministers are due to meet again on November 30 in Brussels, ahead of the December 9 summit of EU leaders.
In the meantime, financial markets are fast losing faith in the effectiveness of policymakers’ rescue plans and the ECB’s ability to act as the lender of last resort.
Fingold, like many money managers, is already sidestepping Europe for new investments. He said he sold all his European holdings, except the long-term core holdings, and moved the money into the U.S.
“To the extent in which we are involved in Europe, we’ve tried to avoid companies that could get hit with significant tax increases, regulatory initiatives or companies that depend on European consumers,” said Fingold, adding that ongoing austerity and deleveraging in Europe means all European financials are “a no-fly zone.”
As European leaders try to restructure their financial system, deleveraging is likely to continue, meaning Europe could well end up with a lost decade, Fingold says.
That’s expressing a bit more optimism than was shown by the International Monetary Fund chief Christine Lagarde, who recently warned the world could face a lost decade of low growth if European nations failed to act together to counter threats to growth.
“We’re not going to put any fresh money into continental Europe until it stabilizes,” said Fingold. The U.S. provides much more opportunity, as it continues to outperform Europe.
His message to investors is simple: “Stop focusing on where you’re not going to make any money.”