Europe Risks 'Sleepwalking Into Oblivion'

Hannelore Foerster | Getty Images

At the risk of boring you I'm slightly repeating myself this week, but it's justified because (a) the two topics are connected in an oblique sort of way and (b) the business media isn't making enough of a fuss about these issues!

First up: the euro. A few weeks ago The Economist's over illustration showed euro zone members walking over a cliff.

Then this week we had some horrendous unemployment statistics from the euro zone, which shouldn't have surprised anyone, and a pronouncement from Mario Draghi – he of the "pay any price, bear any burden" school of supporting the single currency – that just because the euro's problems seemed to have stabilized was no reason for governments not to undertake structural reforms of the economy.

Of course governments are never going to do that are they? Hence The Economist's cover picture. They can only be forced to make painful changes that enrage voters. But the markets won't force anything as long as they have Mr Draghi's blanket underwriting of euro zone sovereign debt to contend with.

But as we saw with the unemployment statistics, insuring sovereign debt doesn't produce economic growth. Or jobs. The southern euro zone continues to stagnate (or should that be stagflate?). The European Central Bank has simply provided the sticking plaster, but underneath it's still a gaping wound.

In a post from December 2012 I wrote:

What is the point of the euro? Indeed, what is the point of the European Union? Wasn't the overarching principal objective of both to bring member economies together? To trade as one, irrespective of national borders?

Thanks to the euro, that process is actually being reversed. Banks have pulled back from cross-border lending. They are minimising their exposure to euro assets in the southern eurozone. European Union (EU) economies themselves are diverging, not converging, to the point where northern eurozone countries are growing their gross domestic product output while southern members are contracting and indeed imploding on themselves under the burden of their unsustainable debt.

In terms of competitiveness and productivity, EU members are also diverging. Trade flows across the EU have turned into a virtuous circle of ever-increasing surplus for some countries and a vicious circle deficit for others.

The paradox of the euro is that it has moved member economies further apart, not closer together. Its existence is creating the opposite effect to what its proponents wanted, and always stated would happen. EU taxpayers are suffering because of the unintended consequences of a completely artificial construct with no basis in sustainability.

Let's stop debating how to make the euro viable and instead ask ourselves: what's the point of the euro?

My second repeat topic this week: equity markets rising on a house of cards foundation.

A few weeks ago I wrote about central banks repeating the mistakes of the U.S. Federal Reserve during the Alan Greenspan era, but don't take my word for it: now the Bank for International Settlements (BIS) has said the same.

Last week it raised concerns about a "new asset price bubble that could plunge the world economy back into recession."

Central bank action had "left equity valuations vulnerable to changes in sentiment" and loose monetary policy being practised by a number of central banks was now creating a worrying situation.

So there you have it: the BIS has spoken and I'm glad to be in its company.

And the connection between my two topics this week? Governments and investors sleepwalking into future oblivion, with eyes closed to the structural problems of the euro or the artificial base to this year's equity bull market.

It's enough to leave one quite dismayed.


Professor Moorad Choudhry is at the Department of Mathematical Sciences, Brunel University and author of The Principles of Banking (John Wiley & Sons 2012)