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Don Coxe
Don Coxe

Don't hold your breath over euro summit: Don Coxe Add to ...

The only thing euro zone leaders will be able to agree on after this latest summit is to come to a more definitive agreement at a later date.

That was the gut feeling of Don Coxe, a Chicago-based strategy adviser for Bank of Montreal, when we sat down for an interview on Wednesday morning in Toronto.

Mr. Coxe even offered up his hunch about what the final communiqué was likely say. In a nutshell: we concur that a final agreement should be reached in time for the next G20 summit in early November.

“Hope springs eternal in the human breast: Man never is, but always to be blest,” said Mr. Coxe, quoting celebrated poet Alexander Pope.

With global expectations already so low for Wednesday’s summit, Mr. Coxe isn’t holding his breath over the euro’s long-term viability. He, for one, predicted back in 1995 that the then-proposed common currency would eventually fail.

And as a noted history buff, it’s not surprising the logic for his prediction was rooted in a key lesson of history. Essentially, European leaders have had lots of trouble reaching consensus even on seemingly routine issues in the not-so-distant past.

For example, when the Europeans struck a committee during the 1990s to design the euro’s future bank notes, they ended up capitulating after two years of work. The reason? They could not agree on which notable Europeans should be featured on the notes.

“So I said, ‘If they can’t agree on any one European on the principle of unanimity, then when finally a great crisis comes they will not be able to agree on the sacrifices that may be needed. So the only question is when that crisis comes,’” said Mr. Coxe.

He likens the creation of the common currency to an attempt by European elites to defy history by closing the book on centuries of wars and rivalries. It may have been a nice dream but “as soon as they built into it the roach motel structure, which is that you can get in, but you can’t get out, they created the problem for themselves.”

Now selling crisis-weary European voters on the need for yet another costly bailout plan is proving to be a massive challenge, he added.

German Chancellor Angela Merkel is no doubt feeling the brunt of that pressure. Her Christian Democrats have already suffered a slew of embarrassing defeats in state elections this year. “She’s obviously terrified that her career is going to come to an end with this,” said Mr. Coxe.

French President Nicolas Sarkozy, meanwhile, is suffering from dismal approval ratings ahead of the 2012 presidential election. “These post-modern tours de force are not a substitute for real policy and being able to do something that is going to have a chance of working with the voters,” said Mr. Coxe.

European voters, he argues, have good reason to be worried. Ordinary citizens, particularly those in Germany, have socked away their life savings in European banks.

Now the stability of the entire European banking system is in jeopardy due a widely accepted capital asset pricing model that originally deemed Italian, Greek and Portuguese bonds “risk free” assets.

“Along with the implosion of the euro is the implosion of the capital asset pricing model,” said Mr. Coxe. “And now the fun begins because nearly all of the pension funds of any importance are constructed according to the capital asset pricing model. So what do you replace it with? Nobody knows.”

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