Thursday, June 7, 2012

Niels Jensen - "a eurozone exit is not the Armageddon"

From a game theory perspective, the moment one of the 17 eurozone member countries realises it would be better off outside the eurozone, it has everything to gain from being the first mover. We have all been led to believe that a break-up will be devastating for everyone. That is not entirely the case. It could certainly prove disastrous for those left inside a dysfunctional currency union but for the first mover the advantages are numerous and it is only a question of time before someone in Greece, Spain, Portugal or Italy reaches that conclusion.
An exit from the eurozone would create another set of challenges but it wouldn’t necessarily spell the financial Armageddon widely predicted. The media – in particular the British – clearly enjoy the prospects of a bit of drama and do not even attempt to restrain themselves. Neither do politicians when spelling out the consequences of a break-up. Only the other day did Joschka Fisher, Foreign Minister and Vice Chancellor of Germany in Gerhard Schröder’s government between 1998 and 2005, utter the following warning:
“Let’s not delude ourselves. If the euro falls apart, so will the European Union, triggering a global economic crisis on a scale that most people alive today have never experienced.”[1]
The armies of financial analysts and economists employed by banks worldwide (who really should know better) do not exactly paint a rosy picture either. Cascade after cascade of dire predictions about the “end of Europe as we know it” do little for overall confidence. The problem with all these doomsday prophecies is that the history books of currency union break-ups offer little support for all that negativity. In fact, most currency union break-ups have confounded the so-called experts and led not to a collapse of society but to renewed prosperity. The hard facts suggest that this is a hurdle that can indeed be overcome and that those countries that break with the euro would most likely benefit in the long term.
Read it at Credit Writedowns
First Mover Advantage
By Niels Jensen

Jensen’s monthly commentary is another beauty, looking at the actual historical record of currency break-ups. The game theory perspective, which Tyler Cowen also alluded to yesterday, is precisely why I continue to expect at least a partial break-up of the euro. The Greek vote, in two weeks, represents yet another opportunity for a country to express its first mover advantage or, at the very least, threaten to leave in order to gain concessions from Germany. That the politicians and bankers in peripheral nations have been able to prevent this realization for so long is frankly a bit surprising.

As Jensen points out, Germany relies heavily on the rest of the EU to provide an export market. Therefore, as an exit becomes increasingly likely, maintaining free trade and labor mobility within the EU remains critical for supporting economic growth (and peace). Several others have recently backed this view, which you can read here, here and here. Jensen closes on a very positive note:
If structured correctly, a eurozone exit is not the Armageddon it is so often portrayed to be. When the perma bears realise that, and as they begin to see the benefits bestowed upon the first mover, the mother of all equity bull markets will be unleashed in Europe. As I have frequently pointed out in recent months (see for example here), European equities are extraordinarily attractively priced at levels not experienced since the dark days of the early 1980s. We are just waiting for the catalyst, but remember one thing – banks will not be the place to be.

Related posts:
Is Non-Existent Austerity Priced in to Euro Stoxx?
Bring Back the Deutsche Mark!!

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