Our friends at Fasanara Capital have released a new report, which in
keeping with the Mayfair fund's recent trend of gloomy predictions, has
looked beyond the current set of adverse socioeconomic development
jarring Europe, and looks forward to the "last act of the Euro",
explaining why "whatever it takes" is now over, and why the time to
panic about the future of the common currency is once again nigh.
Here is their latest analysis:
The last act begins for the EUR peg
Why the EUR-peg is likely to breakWhy new QE is deflationary and counterproductive, so it may soon be up for review
We have long been negative on the prospects for the EUR peg to
survive the test of global structural deflation and local ineffective
policymaking. Back in 2013,
we wrote of the instability and unsustainability of a currency
construct set for failure. At the time, we highlighted three big
problems with it:
Why does deflation matter that much? Because durable deflation in a
period of economic stagnation is like a death penalty for debt-laden
countries burdened with high unemployment: no matter how much virtuous
they get fiscally their debt-GDP ratio is set to rise over time, i.e.
their debt go up in real terms and make a recovery progressively less
likely. So they remain trapped in a long period of debt deflation /
balance sheet recession. Take the case of Italy, for example, at 132.5%
gross public debt-GDP, where at zero inflation even a primary surplus of
~8% would just about manage to prevent debt ratios from rising further.
And such surplus would be heavily contractionary, thus a self-defeating
strategy. Such is the evil of deflation. No wonders the ECB embarked on
unprecedented expansion of the monetary base. But it failed at stopping
deflation. Here are our thoughts in 2014 on that.