Euro Will Have to Be Devalued to Save EU: Siegel
LAS VEGAS — Faced with a stubborn sovereign debt crisis that just won't go away, the European Central Bank will be forced into currency devaluation, Wharton finance professor Jeremy Siegel said.
Despite aggressive efforts to shore up problems in Greece, Spain, Portugal and elsewhere, the ECB has yet to find the formula that will assuage market concerns that not only could the countries default on their debts, but contagion also will spread to other nations.
One obvious solution to helping the troubled nations is a devaluation of the euro, something the ECB has resisted due primarily to pressure from Germany and nations that don't have the same debt issues. Devaluing a currency enables debtor nations to meet their obligations more easily, but European nations cannot act unilaterally in monetary policy.
"Europe is a big mess," Siegel said at the Skybridge Alternatives Conferencehere. "Greece leaving the euro zone — I think they would love to leave if they could figure out how. The ECB, in an attempt to save the union, will lower the euro."
Siegel sees the euro falling to 1.10 against the U.S. dollar, with a possibility that the two currencies even might reach parity.
Devaluing a currency enables debtor nations to meet their obligations more easily, but European nations cannot act unilaterally in monetary policy.
"Will that save the periphery?" Siegel said. "I give it a 50-50 chance."
Siegel has been in the news lately for a series of strongly bullish forecasts relative to the U.S. equity markets, including a recent predictionthat the Dow Jones Industrial Average could hit 17,000 in 2013, a 30 percent gain from current levels.
Asked during a SALT panel discussion to name the factor that could pre-empt that forecast, he named not the troubles in Europe but rather the so-called fiscal cliffthe U.S. faces if it fails to extend a number of tax breaks by the end of 2012.
Economists estimate that losing the payroll tax holiday, tax cuts enacted under former President George W. Bush and extended unemployment benefits, along with mandated tax increases and spending cuts, would sap about $500 billion or nearly 4 percent from the economy.
In his baseline forecast, Siegel sees Congress agreeing to extension for another six to 12 months.
"I do think we will get the extensions," he said. "But if we don't that's going to be hard."