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A woman covers her mouth with a fake Euro note during a protest against Spain's bailout at La Constitucion square in Malaga, southern Spain, June 10, 2012. Euro zone finance ministers agreed on Saturday to lend Spain up to 100 billion euros ($125 billion) to shore up its teetering banks and Madrid said it would specify precisely how much it needs once independent audits report in just over a week. (JON NAZCA/REUTERS)
A woman covers her mouth with a fake Euro note during a protest against Spain's bailout at La Constitucion square in Malaga, southern Spain, June 10, 2012. Euro zone finance ministers agreed on Saturday to lend Spain up to 100 billion euros ($125 billion) to shore up its teetering banks and Madrid said it would specify precisely how much it needs once independent audits report in just over a week. (JON NAZCA/REUTERS)

Taking stock

Unlikely euro bull expects compromise will save the day Add to ...

Anyone following the long-running European tragicomedy is bound to get a tad frustrated with the lack of visible progress. Lots of jawing and marvellous emergency dinners with only the best regional wines – and whines – but not a whole lot of action on a festering debt crisis that poses a growing threat to an increasingly fragile global economy.

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So it should come as no surprise that people running other economies now being affected by the euro ditherers are showing their exasperation. Such was the case Friday when U.S. President Barack Obama, who needs all the economic help he can get, declared: “The sooner they act, the more decisive and concrete their action, the sooner people and markets will regain some confidence.” He also repeated his advice to promote economic growth and jobs, alongside the necessary fiscal and banking cleanup, in what would amount to a repudiation of the German austerity diet that has landed Spain and other battered economies in the intensive-care ward.

The Obama broadside followed earlier comments last week by Prime Minister Stephen Harper in London. “I don’t want to sound too alarmist, but we are kind of running out of runway here,” our chief air-traffic controller told the CBC’s Peter Mansbridge. And prominent Harvard economist Larry Summers, a former U.S. Treasury secretary, opined to the BBC: “I think there has been a deep and profound and continuing failure of realism, and that that persists to this day.”

Like many other economists both outside and inside the euro zone, Mr. Summers was an early critic of the currency union as unworkable. Another celebrated economic voice, the late Nobel laureate Milton Friedman, flatly called it a recipe for disaster. But years of currency calm, low, stable borrowing rates and steady economic progress quieted all but diehard skeptics. Even after the global financial meltdown in 2008-09 exposed deep fissures in Europe, the optimists still held the stage. The monetary union and the currency itself were flexible and sturdy enough to weather the storms, the euro boosters insisted.

But that was before Greece and other fiscally challenged members of the club found themselves on a slippery financial tightrope and then choked on the German-imposed austerity they were forced to swallow in exchange for a safety net. Today, the glass-is-half-full crowd is becoming as scarce as an Angela Merkel smile. So it’s refreshing to find that some market pros on the other side of the Atlantic are not ready to don their black funeral garb just yet. “A lot of people have been writing the same thing for 20 years,” French economist Philippe Ithurbide says, referring to the European Monetary Union’s predicted demise. “Never, never underestimate the commitment to EMU.”

What makes Mr. Ithurbide an unusual euro bull is that the former professor casts himself as one of the original skeptics who voted against the Maastricht Treaty, which set the euro zone in motion. “So I am not a fan. But I am realistic. I have no emotion [about the euro]. I look at the figures.”

That analysis tells him that a breakup would have disastrous consequences for all member states. Even small Greece is likely to remain in the fold, regardless of whether anti-austerity forces prevail in Sunday’s election. Why? Because exiting the union would be enormously complicated and cost about four times as much as staying put.

“It’s a poker game, and part of the cards are in the hands of the Greeks,” says Mr. Ithurbide, global head of research with Amundi Asset Management in Paris and a former executive with the Caisse de dépôt et Placement du Québec. “They do have cards to play.”

The most likely outcome, he says, is a compromise that reaffirms a commitment to austerity while offering up some growth initiatives and giving Greece and other bailout recipients more time to meet debt and deficit targets.

In any case, it is much larger Spain, which diligently imposed a string of tough austerity measures, that has become the most critical worry facing the eurocrats. “In Spain, the business model was consumption, credit and the housing sector. What’s left today? Nothing.” But here, too, Mr. Ithurbide expects compromise. Spain, which has only grudgingly

conceded it needs outside help for its beleaguered banking sector, will take it; and Berlin will avoid attaching any onerous conditions. Time and again, he points out, the Germans have said no to various bailouts and efforts to recapitalize banks, only to soften their stand when the floodwaters rose up to their necks. “I’m not among the ones systematically criticizing Germany for XYZ. They did a lot at the beginning of the crisis.” But at the same time, the rest of the euro zone has to persuade the Germans that easing up on the brakes and promoting growth through euro-wide infrastructure project bonds and other mechanisms will not mean an end to austerity or greater self-discipline.

For a longer-term fix, the region desperately needs major structural reforms, including what Mr. Ithurbide calls “official federalism” – euro-wide institutions or mechanisms alongside the European Central Bank to enforce fiscal rules, govern banks and safeguard depositors.

“The solution exists. Of course, they have to adopt it. That’s another story.”

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