Bootle: why euro break-up still part of the solution, not the problem

The cards are still stacked against the eurozone, according to Capital Economics’ Roger Bootle, who maintains a break-up remains the best solution for the monetary union.

Although sentiment has improved and markets have bounced since Mario Draghi’s outright monetary transactions (OMT) scheme was formulated in September last year, Bootle argues the fundamental issues facing the eurozone are yet to be addressed.

Although its survival is still possible given the political will behind it, the eurozone perma-bear believes much will depend on Germany’s capacity for subsidising the weaker nations alongside the timeframe behind it.

‘Eurobonds, bank union, OMT, targeting countries – it is all the same issue and is about the Germans paying for the bill. Are they able to do this at the end of the day without limit?’ he asked.

He is concerned that subsidies from Germany to the weaker nations may end up being more perpetual in nature than is currently being factored in. ‘This is the type of thing the Germans have to be worried about,’ he added.

Although the headline data may suggest unit labour costs are starting to look more competitive among some of the peripheral economies, Bootle argues this may be quite misleading and could be more reflective of underlying trends, such as the mass redundancies at many firms.

‘The problem of competitiveness is still a serious one. I don’t think it has been addressed properly, with the exception of Ireland,’ he added.

One of his biggest concerns for the region is the longer-term trend of stalling growth and what he sees as over-optimistic expectations for the future.

‘There has not been a history of growth in the eurozone ever since it was formed, so how can we expect the eurozone to generate growth over the next few years to dig itself out of the problems it is in?’ he asked.

Likewise, even though sentiment has improved on the back of Draghi’s OMT plan, Bootle expects the scale of any intervention in bond markets to prove tricky in practice, and views the growth targets underpinning bailouts as over-optimistic.

As a result, he said: ‘Will the euro hold together? Is it going to? I don’t think it is. I think the crisis has entered a new stage. I think in the long term, the break-up of the euro is part of the solution, not the problem. Or, if you like, a solution that holds the euro together is the very opposite of the solution to the European economy.’