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Eurozone ?at risk? unless ECB softens currency line

Cover of  by Russell Napier

The entire eurozone is at risk unless the European Central Bank softens its stance towards the value of the euro and indulges Greece and other troubled member states, a leading Edinburgh-based financial expert has warned.

Speaking at a conference in Edinburgh, Russell Napier, strategist with brokers CLSA, as well as author and founder of Edinburgh Business School?s Practical History of the Financial Markets course, said: ?At the moment the ECB is prizing price stability above all else. This has got to change.

?We need a euro that is built around growth and inflation, not one that is built around a hard currency.

?The key goal of monetary policy ought to be structural in nature ? to hold the euro together. If that can only be done by permitting higher inflation in the next economic expansion, then that is a price which has to be paid.?

Mr Napier, also a non-executive director of Scottish Investment Trust and Mid Wynd Investment Trust, stressed he was speaking in a personal capacity.

The PIIGS countries ? Portugal, Italy, Ireland Greece and Spain ? remain severely economically challenged.

Their national accounts have been weakened following decades of fiscal irresponsibility and over-dependence on borrowing. Some, notably Greece, are struggling to service their debts and may need bailouts.

Their membership of the eurozone has placed them in a straightjacket where the former means of salvaging a broken economy, using inflation and the devaluation of their currencies to restore economic equilibrium, have become impossible. Although the euro has lost 10% of its value against the US dollar since the end of November 2009 ? when the focus of fears about sovereign debt defaults shifted from Dubai to the eurozone ? Mr Napier does not believe its value has fallen nearly enough.

He said: ?The ECB governors don?t seem to recognise that it is politically impossible to impose nominal pay cuts of 20%. Wages are just one of the costs which have to adjust downwards to make Greece competitive.?

He said the ECB?s council of governors, led by president Jean-Claude Trichet, is dominated by academics and out of touch with political realities.

?The only way the euro can survive is as a weak currency,? Napier said. ?I remain optimistic the ECB will recognise this before it?s too late.?

Napier said the people of Germany have already paid a high price to bail out the DDR and might prefer a weaker currency and higher inflation to having to bailout Greece and other countries.

A weaker euro would be negative for UK exporters and tourism. These sectors have been benefiting from the post-credit crisis weakness of sterling.

Mr Napier said the degree of economic pain inflicted by the ECB?s monetary policy may destroy democracy in a European nation. ?It may take such a dramatic event to persuade the economists who run the ECB that European society cannot cope with the economic adjustments their current policies dictate.?

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