The euro’s 16 member states need to surrender some control of tax and spending to avoid a breakup of the currency, according to Credit Suisse Group AG.
The consequences of the euro’s 14 percent decline against the dollar this year will accentuate differences across the region, according to Bob Parker, a senior adviser at the company in London. Germany’s economy may grow at an annualized pace of faster than 4 percent later this year as the depreciating currency makes its exports cheaper, while Greece and Spain will contract, he said.
“You have this two-track euro zone,” Parker said in an interview in Santiago. “It’s all very well having a free-trade zone and it’s all very well having monetary union, but you can’t have a successful currency union unless you have economic coordination and fiscal integration.”
European governments have struggled to contain concern that the region’s most indebted nations will default, leading to a collapse of the single currency. The European Union announced an aid package of almost $1 trillion on May 10 and regional central banks began buying government bonds.
While the yield premium investors demand to hold Greek 10- year bonds rather than German bunds has narrowed to 490 basis points from 965 basis points on May 7, it’s still more than seven times the 10-year mean of 65 basis points.
Credit Suisse has been betting on the advancing dollar and paring investments in equities and commodities, said Parker, a member of the bank’s 10-person investment committee, which sets asset allocation recommendations for clients and internal trades.
“We reduced our risk exposure quite significantly about a month ago,” Parker said. “That meant we reduced our equity exposure, we reduced our commodity exposure and we went seriously long the dollar.”
The euro may now start to recover following the EU rescue plan, Parker said.
“I’m assuming that markets very slowly and nervously go from a period of panic over the past two or three weeks to calming down, so the flight to quality starts to slowly unwind,” he said.