What the Gurus Say About the Eurozone Crisis

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This article has been adapted from our sister site across the pond, Fool U.K.

We investors are living in torrid times, with many of us suffering substantial losses. I don't know about you, but what really gets me at the moment is the sheer uncertainty. We are all peering through a cloud of fog, trying to distinguish the faint shapes in the distance.

At this time, more than ever, we need guidance from the experts. So in this article, I have summarized the views of three of the world's leading financial gurus.

Joseph Stiglitz
Joseph Stiglitz is a Nobel Prize winner and a former World Bank chief economist. He argues that when the euro was created, the task was not completed. Too many adjustment mechanisms had been removed, and nothing had been put in their place.

Stiglitz believed what made a common currency in the U.S. work was a common fiscal authority and high migration, but the eurozone has neither. So the framework for allowing for an effective common currency was not there.

Instead, Stiglitz says: "What they did fiscally was tie themselves to the stability and growth pact, which was a pact for recession rather than for growth, because limiting deficits when you have a shock is a recipe for recession, which is what is happening in Greece."

Stiglitz adds: "The question was always: When a crisis occurred would they be able to finish the task? And I think the jury is still out."

He praises the eurozone meeting in July but feels things are moving too slowly. He thinks the European Financial Stability Facility (EFSF) needs to be larger, or leveraged. In the longer term, he thinks there should be Eurobonds, but he also thinks austerity is not the way to go.

So what's going to happen now? Stiglitz answers: "I suspect that we're going to see a lot of volatility ... I think there is a reasonably good chance that a year from now, you would find the eurozone smaller than what it is today."

Finally, he makes a worrying prediction: "The view is that some of the weaker countries will leave and that will lead to a very large trauma in the global financial markets, such as freezing the credit markets ... a repeat of 15 September 2008 (when Lehman Brothers collapsed)."

George Soros
Renowned speculator George Soros does not mince his words about the eurozone: "We need to take action now to avoid a second Great Depression." He lists three bold steps which need to be taken.

First, the governments of the eurozone must agree in principle on a new treaty creating a common treasury for the eurozone.

Second, while this is being put in place (which will take time) the major banks must be put under European Central Bank (ECB) direction in return for a temporary guarantee and permanent recapitalization.

He adds the ECB would then direct the banks to maintain their credit lines and outstanding loans while closely monitoring risks taken for their own accounts.

And third, the ECB would enable countries such as Italy and Spain to temporarily refinance their debts at a very low cost.

According to Soros, these steps are necessary to protect Europe against "contagion" from the increasingly likely possibility of a Greek default.

Taking these actions should stabilize the eurozone so that it can put together a longer-term plan for growth.

Nouriel Roubini
Nouriel Roubini is clear on his view: Greater European economic and political integration is needed to get us out of this mess. After muddling through and fire-fighting time and again, real action is required.

Roubini reckons the EFSF should be expanded so it can cope with a run on Italian and Spanish debt. The eurozone needs to ensure that the banks are adequately capitalized.

He also believes fiscal union needs to go alongside monetary union, and Eurobonds should be created. Preparation must be undertaken for an orderly Greek default, with orderly debt resolution for both public and private liabilities.

And, according to Roubini, we must also not undermine any fragile recovery in the short run. So there should be monetary easing by the ECB, a weaker euro to restore competitiveness, and fiscal stimulus in the core countries to counteract the 'fiscal drag' from austerity in the periphery.

Indeed, Roubini feels there should be a complete programme for growth and employment to boost competitiveness and long-term productivity.

A large part of the problem is political -- we need a greater commitment from the general public. As Roubini puts it: "The greatest task of European leadership today is to resell the European idea. They need to remind the public that the absence of war, the freedom of mobility and the rising prosperity they have taken for granted since the end of the cold war has been due to the path toward unity and away from the nationalist demons of the past."

Your guru advice is needed
So there we have it -- three gurus, three views. There seems to be a consensus that more integration, not less, is required, and that integration requires more commitment from the hard-pressed public in the eurozone nations. But there are substantial differences in the method of implementation.

So, do you agree with these three experts? And do you think enough will be done to avert calamity? Answers in the box below, please!

More from Prabhat Sakya:

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 05, 2011, at 4:13 PM, rfaramir wrote:

    Three statist peas in a pod. Not a lover of liberty in the bunch.

    They all think that more debt will cure a debt problem, that more spending will cure a spending problem. They're delusional!

    Austerity has not been tried. Private property is not respected. Losses by those who failed to handle responsibility well are being bailed out, causing moral hazard.

    The banks need to fail and be bought out by those who handle money well, not "permanently recapitalized." What does that even mean? "Here's some free money, do what you want with it, and if you lose it gambling, there's more where that was printed from!"

    Free the market and let it work!

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