Morgan Stanley's Joachim Fels Sees Possibility of Euro Nations Breakaway

Morgan Stanley co-chief global economist Joachim Fels said there’s a risk of some nations eventually breaking away from the 16-member euro region should the response to the debt crisis lead to “fiscal instability” and sustained pressure on the currency.

If there’s “further weakness and a rise in inflation pressures, then some of the more stability-minded European countries might decide to break away,” Fels told Bloomberg Television in an interview from London today. “Clearly that’s a long-term story, not a story for now.”

The euro remained close to a four-year low against the dollar today, partly on concern that the almost $1 trillion aid package European Union ministers agreed to last week won’t keep the fiscal crisis from spreading. The EU today transferred 14.5 billion euros ($18 billion) to Greece, the first installment to help restore investor confidence and prevent a sovereign default.

The euro fell as much as 0.7 percent today to $1.2315 and was little changed at $1.2420 at 12:16 p.m. in London.

Greece has pledged to implement austerity measures of almost 14 percent of gross domestic product in exchange for the rescue funds that EU officials hoped would stem declines in the euro and stop the crisis from spreading to other countries such as Spain and Portugal. Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said today that there are “good reasons to believe” Greece is on the right path.

Still, Fels said that the rescue package may “create more emergencies” over the medium term. If governments know that there’s a “fund to bail them out eventually,” they’ll “pursue a more expansionary fiscal policy,” he said.

Europe is on a “slippery slope now toward more fiscal instability,” he said.

Spain and Portugal this month announced additional budget cuts to tame the region’s third- and fourth-biggest deficits after their bonds plunged.

“What I am worried about is that those countries that are tightening fiscal policy account for less than 20 percent of euro-area GDP,” Fels said. “I think we have to look at the large countries in the core, especially France and Germany, where I see no signs whatsoever of fiscal tightening and these countries account for more than half of euro-area GDP.”

To contact the reporters on this story: Simone Meier in Dublin at smeier@bloomberg.net; David Tweed in London at dtweed@bloomberg.net

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