As German Chancellor Angela Merkel and French President Nicolas Sarkozy meet in the small German town of Freiburg to discuss their next move in the euro-zone debt crisis, the market is still questioning what International Monetary Fund boss Dominique Strauss-Khan calls the EU’s "piecemeal" response.
Bob Janjuah, the co-head of cross-asset allocation strategy at Nomura, said that whatever the two most powerful politicians in the euro zone decide Friday, the European Union faces two choices.
“In the near-term the risk is that post the upcoming general elections in Ireland, the Irish people say no thanks to austerity. Ireland’s GDP-to-debt ratio will be higher even with austerity and the people could simply reject the pain,” Janjuah told CNBC.
Next year will see the market go after Spain which is “too big to bail,” Janjuah said, adding that he remains very worried about the country's banking industry.
To avoid this situation will require serious burden sharing by the EU, or, as Janjuah said, Germany paying a huge price.
“We can create a soft and fluffy Europe in which we have cooperation and burden sharing, but then you have to accept to accept German inflation which is 3-to-5 percent higher and the German bund trading at 5 or 6 percent, not below 3 percent," he said.
“The big question is whether the German people are will to accept that price.”
No Risk-Free Assets
“Everything that has happened in the last two years has led to a higher cost of capital. In Europe we have some strong balance sheets and weak balance sheets,” Janjuah said.
Over the next 18 months, $4 trillion needs to be raised on the credit markets globally with half of that in Europe, Janjuah said.
And the idea of a Euro Bond is meant to allow this policy of debt to continue, he added.
“It is meant to be opaque”
“To make a Euro Bond work you have to damage the German balance sheet," he said. "If this where to happen it would destroy any hope of the euro becoming a reserve currency and would mean there are no risk-free assets in Europe with the exception of a few major companies.”
“Merkel and Sarkozy will have to make a decision on whether the euro zone is soft or hard.”
“In the US we are seeing internal opposition to the policy of debt. (Rep.) Ron Paul, the lunatic, is overseeing the Fed, on Capitol Hill there is disquiet, and the time is getting closer when some big decisions are going to be made,” he said.
Janjuah went on to say he likes Ron Paul, but did not retract his view that he is a lunatic.