Pimco’s El-Erian: Europe’s Economic War of Attrition

Monday, 03 Dec 2012 11:11 AM

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Europe is facing a war of attrition similar to the one that pitted Egypt versus Israel in the late 1960s, a tense standoff marked neither by heavy fighting but by no peace either, said Mohamed El-Erian, CEO of fund giant Pimco.

Tensions among indebted European countries are on the rise as austerity measures imposed on them by lending countries and multilateral lending institutions exacerbate already painful recessions.

Eventually, Egypt and Israel did go to war before peace restored relations.

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

Europe can avoid an economic version of that war by pushing through meaningful fiscal reforms that lead to growth, employment and financial stability and give greater emphasis to the notion that the continent’s economies are interconnected and that measures that slow growth in places like Greece will reverberate in wealthier swathes of the continent.

So far, the European Central Bank (ECB) has propped up the eurozone’s economy via rate cuts and monetary stimulus measures, which cannot, by design, bring lasting reform and growth alone.

“Like Egypt’s war of attrition, the eurozone’s underlying economic, financial and social ferment continues. If governments continue to stumble from one patchwork remedy to another — a probability that remains uncomfortably high — the delay in implementing a comprehensive solution will eventually overwhelm the defenses that the ECB has so courageously put in place,” El-Erian wrote in a Project Syndicate column.

”Some say that, just as Egypt’s war of attrition eventually gave way to a full-scale war and then a peace treaty, Europe needs a major crisis to move forward. But this is a dangerous notion, one that entails not just massive risks, but also unacceptably high interim human costs.”

In the meantime, overreliance on ECB measures that include sovereign bond purchases from troubled countries could make a tense situation even worse if not backed with underlying structural economic reforms.

“European governments are well-advised to use the financial cease-fire that the ECB is willing to buy for them,” El-Erian wrote.

“Allowing it to expire without progress toward permanent stability would expose Europe to disruptions that would diminish significantly its prospects for long-term economic stability, growth and job creation.”

EU and International Monetary Fund policymakers agreed on austerity and debt-reduction measures to free up aid for crisis-weary Greece recently, which calmed nerves worldwide by allaying fears the country will default and exit the eurozone, which could roil the global economy.

European paymaster Germany, however, appears to be willing to help Greece even more these days and on a structural level.

German Chancellor Angela Merkel told the Bild am Sonntag newspaper that Berlin may be willing to write off Greek debt if Athens gets its fiscal affairs in order.

When the newspaper inquired about Germany’s willingness to take a haircut on Greek debt, Merkel said “when Greece one day again manages with its revenue, without taking on new debt, then we have to look anew at the situation and re-evaluate,” The Associated Press reported.

“That won’t be before 2014-2015 if all goes as planned.”

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

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