Tags: Pimco | El-Erian | Europe | greece

Pimco’s El-Erian: European Union is Set to Shrink

Wednesday, 16 May 2012 07:47 AM

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The European Union won't survive in its current form and will emerge healthier when the ailing Greece is shown the door, says Mohamed El-Erian, CEO of Pimco, manager of the world's largest bond fund.

Debt-ridden Greece is currently embroiled in a political stalemate, with political parties unable to agree on a coalition government.

Leftwing political parties remained opposed to austerity measures tied to bailout payments given to the country by the European Commission, the European Central Bank and the International Monetary Fund, known collectively as the Troika.

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Talk of a Greek exit from the currency block looms large, especially as the country's European neighbors demand Athens to stick with austerity.

Let Greece go, El-Erian says. Prolonging the turmoil hurts everyone.

"All this puts Greece’s eurozone partners in a very difficult position. Absent an urgent and imaginative response, they face a lose-lose situation: they lose by disbursing more good money after bad and see that too evaporate with no sustained benefits for Greek citizens and their European counterparts; or they lose by not disbursing and accelerating Greece’s slide into chaos, with unpredictable consequences for Europe and the world economy," El-Erian writes in a Financial Times commentary.

Now is the time for policymakers to forget about keeping all members in the currency zone but rather, focus on ways to ensure a smooth exit for Greece.

"Given conditions on the ground, the current 17-member eurozone needs to evolve into a smaller and less imperfect union if it is to avoid the growing risk of total fragmentation – namely a closer economic and political union among the big four (France, Germany, Italy and Spain) along with other members with similar initial conditions," El-Erian adds.

If Greece wants to keep tapping bailout funds, it must adhere to spending cuts and tax hikes agreed upon with its neighbors, say officials in Germany, Europe's economic motor.

"If Greece — and this is the will of the great majority — wants to stay in the euro then they have to accept the conditions," German Finance Minister Wolfgang Schaeuble told reporters at a meeting of European Union finance ministers in Brussels, according to Bloomberg.

"Otherwise it isn’t possible. No responsible candidate can hide that from the electorate."

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