Could Europe's Crisis Be Over by End 2013?
Assistant News Editor, CNBC.com
The political risks to the euro zone and its currency have receded and if the area stays on the "right track," the region's crisis could be largely over by the end of the year, Holger Schmieding, chief economist at Berenberg Bank, told CNBC.
"We are now only at a very small risk of the break up of the currency. A year ago going into the Greek elections, the risk was more severe. Now, [the euro zone crisis] looks fairly contained unless Italy throws a very funny surprise," Schmieding told CNBC.
"Except in Italy,where we have to ask in a post-Monti [environment] what happens next, the political risks to the euro have receded," he told CNBC Europe's "Squawk Box"on Tuesday.
In a note to clients, the bank stated that the euro zone is continuing its path toward a "much more balanced and potentially more dynamic economy."
"The fiscal position of the euro zone as a whole is significantly better than that of the U.S., the U.K., or Japan," Schmieding and Christian Schulz, the note's authors, said.
"External balance, fiscal progress and the return to growth which we project for all peripheral countries by the end of 2013 could herald the end of the euro crisis – as long as policymakers stay the course."
(Read More: Will the Divergence in US-Europe Growth Persist?)
All of the four euro zone countries that have been granted external financial assistance – Greece, Ireland, Portugal and Spain – have strengthened their fiscal adjustment effort over the course of 2012 and this was continuing into spring 2013, the note said.
"The joint current account deficit of the five major peripheral countries – Greece, Ireland, Italy, Portugal and Spain – has narrowed to 0.6 percent of gross domestic product at the end of 2012, down from a deficit of almost 7 percent in 2008.
"On current trends, the euro periphery as a group will balance its collective current account by mid-2013. The five countries as a group would no longer need to import capital thereafter," Berenberg stated.
Not So Sanguine
Paul Day, chief strategist at brokerage Market Securities, disagreed with an optimistic prognosis for the euro zone, telling CNBC on Tuesday that he was a "little skeptical" about Schmieding's views.
"Countries like Spain, for example, aren't in a wonderful place right now, particularly looking at the banking sector. We're not through the worst of it yet," Day said.
"Equity markets are still being driven by liquidity rather than the growth picture. I think we'll get soggy gross domestic product (GDP) numbers going through the rest of the year," he added.
Gina Sanchez, founder of Chantico Global, an asset advisor spun off from Roubini Global Economics, told CNBC that the rally in European equities did not reflect political risks presented by countries such as Italy.
"I think there's an enormous faith that everything is going to turn out ok, the OMT (the Outright Monetary Transactions bond-buying program from the European Central Bank) is in place and therefore there is a backstop…but if Italy reverses austerity measures they will never call on the OMT, "Sanchez said.
"There is a disconnect. The last earning season was a disappointment and I'm expecting a continued recession…We're still mired in very high unemployment in Europe and it's really hard to paint a good picture there. I think forward earnings estimates versus actual estimates are still way off track," Sanchez added.
Tail Risks From Italy
European bond markets have not reacted overtly to the political deadlock in Italy.
Schmieding said that the political stalemate in Italy is not different to that seen in Germany and the U.S. However, he added that Italy was the "big political tail risk for the euro zone."
(Read More: Could Italy Be the Next 'Bad Boy' of Europe?)
"So far the Italian political situation, weird as it is, is not different from that of the U.S. and Germany," Schmieding told CNBC. "Namely, it's a stalemate between the two houses of parliament. At the moment, if it's a stalemate we don't have to worry very much (about) as Italy's fiscal position is relatively stable. "
Italian elections in late February were inconclusive after no one party gained enough votes to gain a majority in both the upper and lower house.
Despite the leader of the center-left, Pier Luigi Bersani, courting Beppe Grillo, the comedian and political leader of the protest "5 Star Movement," to form a coalition government, Grillo has refused, reiterating on Monday that he will not form an alliance with any mainstream party.
Schmieding said that there was a "tail risk" of an "anti-everything" party, such as Beppe Grillo's leading the vote in further elections.
"In the absence of catastrophic tail risks, such as someone funny taking over the country - who isn't ready to take over the country - or tail risks of Italy going back big-time on the Monti achievements so far we are fairly safe right now. But with opinion polls showing Grillo would be ahead [in the polls], that could be a catalysts for markets [to fall]."