Josef Ackermann, the former chief executive officer of Deutsche Bank AG who now chairs Zurich Insurance Group AG, said allowing the euro to fail would be more costly than deepening the region’s fiscal and political ties.
“The destruction of the euro system would be much more expensive than the further construction,” Ackermann said in an interview in Kuwait City on April 13. “We need a united Europe to negotiate at eye level with other major regions like the U.S., China, India and some other countries.”
While financial markets calmed after European Central Bank President Mario Draghi pledged in July to do whatever it takes to safeguard the euro, the currency-bloc is now in its second year of recession, battered by a debt crisis that’s forced five of its 17 members to take bailouts. Countries continue to spar over issues such as building a common fund for bank failures.
EU nations have injected 1.7 trillion euros ($2.2 trillion) of support to their banking systems since October 2008, according to European Commission data. Draghi’s pledge to save the euro -- and the later announcement of an unlimited bond-purchase program for countries committed to reforms -- helped drive stock indices such as the S&P 500 to record highs on speculation the bank is committed to propping up the union.
“We have, thanks to the actions of the European Central Bank, clearly entered more calmer water, and financial markets have responded positively to that,” Ackermann said. “Some of the fundamental challenges of the set-up of the euro system as well as questions of governance are still not adequately addressed.”
The European Central Bank and Michel Barnier, the EU’s financial services chief, have called for the creation of a European Resolution Authority, backed with a common fund, to intervene at crisis-hit banks in the euro area, saying the step is an essential part of efforts to build a so-called banking union that would untangle the fates of lenders and sovereigns.
German Finance Minister Wolfgang Schaeuble told his EU counterparts at a meeting in Dublin April 12-13 that there isn’t enough of a basis in the EU’s current rulebook for this, while others such as France and Denmark are urging swift progress on putting in place a resolution system to prevent delays.
Europe is still confronted with major issues of “growth, job creation, competitiveness of some countries and helping manage the European situation from a political point of view,” Ackermann said. “We need more integration and more coordination among policy makers, and more integration into some sort of a fiscal union.”
The investing mood is confused with two very different futures of Europe either pulling itself together and keeping the euro going or “things fall apart and the euro comes apart,” J. Christopher Flowers, chairman and chief executive officer of private equity firm JC Flowers & Co., said at the Bloomberg Link Doha Conference on April 9.
“We sort of liken it to Russian roulette, in the sense that on the one hand five of the chambers are empty, meaning that the euro hangs together,” Flowers said. “But the problem is, in chamber number six is the fatal bullet. So it’s not like if the euro falls apart we’ll have a bad weekend, its gonna be really quite a scene if that occurs.”
The euro fell 0.1 percent to $1.3095 at 1:26 p.m. London time. The 17-nation currency has dropped 0.8 percent against the dollar this year.
National Bank of Kuwait
Ackermann spoke from the Kuwaiti capital after joining National Bank of Kuwait SAK’s International Advisory Board in July, sitting with bankers such as Pacific Investment Management Co.’s Mohamed El-Erian and former Institute of International Finance managing director Charles Dallara.
“The problem in Europe, the problem in the United States, is that these countries are trying to pivot from an old model of growth that depended on debt and leverage, to a new model of growth,” El-Erian told a symposium organised by the bank.
“In order to help this pivot, the central banks are buying time for the system to adjust,” he said. “In the case of the United States, there is hope over the long-term that this new model of growth will in fact emerge. In the case of Europe, unfortunately, there’s reason to be less optimistic.”