Renowned lecturer Robert Pozen has laid out a four-step solution to solve the eurozone crisis, but argues that Greece has to exit before structural reforms can take place.
The former chairman of America’s oldest mutual fund firm, MFS Investment Management, presented his views in an entertaining address at AsianInvestor’s seventh annual Asian Investment Summit this week.
“When it comes to the question whether we keep the euro or we keep Greece, I predict Greece will get kicked out of the eurozone,” he said. “The only reason that Greece is still in the eurozone is that people are afraid of contagion.”
In fact, he sees the country’s exit as an essential part of getting the bloc back on its feet. If opposition to core eurozone countries remains high during the forthcoming Greek election, Germany’s patience will only get thinner.
But Pozen suggests that beyond Greece, Spain is the real issue with a 23% unemployment rate, deficit targets revised upwards and weak banks. He describes it as a “difficult bail-out”.
He lists barriers to growth in Europe as rigid labour markets, uncompetitive exports of periphery nations and aging societies with low birth rates. To stimulate the economy, he argued that the euro should be further devalued to make exports more competitive.
“If Greece were alone and had its own currency, it would devalue its currency and build long term exports,” he says, while acknowledging that no other country in the zone other than Germany is willing to devalue its currency. And he doesn’t think the euro is low enough to build growth through exports.
In the end he puts forward a four-step solution to the eurozone problem. “The first is that Greece gets out; then to get Spain bolstered by recapitalising its banks; the third is to devalue the euro; followed by a series of structural reforms in the labour market.”
Nonetheless he doesn’t see prospects for the eurozone as entirely gloomy, and conversely he expects Italy and Ireland to weather the storm well.
“I believe Italy is in a pretty strong situation,” he added. “Yes, it has a big historical debt, but on a year-on-year basis it has a primary surplus and can actually pay down its debt.”
Italy’s deficit, currently less than 3% of GDP, is manageable and its unemployment rate of 9.3% is just slightly above the US, he notes. He also expresses his confidence in prime minister Mario Monti to reform the nation’s pension system.
Similarly, Pozen sees Ireland as having done a good job in reviving its economy since it has accepted austerity, met deficit-to-GDP targets and is producing exports.