Tags: euro | Economy | crisis | oneill

Goldman’s Jim O’Neill: Global Economy Could Be 'Taken Down' by Euro Crisis

Tuesday, 26 June 2012 08:19 AM

The European debt crisis could derail the entire global economy if left unchecked even though solving the predicament is relatively easy, says Jim O'Neill, chairman at Goldman Sachs Asset Management.

"I think if this euro crisis gets worse, everyone is eventually going to get taken down," O'Neill tells the Freeland File, a Reuters news venue.

Despite the debt burdens plaguing Greece, Italy and Spain, fundamentals of the broader European economy remain comparatively healthy.

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Creating a banking union and having all member nations underwriting and financing a single bond issue would make notable improvements to the economy.

Germany, Europe's paymaster, opposes such measures on the grounds they ask German taxpayers to shoulder more debt while allowing Greece and others to sidestep tough political decisions to narrow deficits and pay down debts.

"The euro crisis, in some ways, is mind-bogglingly simple to solve," O'Neill says.

"The euro area actually has no current deficit, it doesn't need anybody else's financing, it has a lower debt-to-GDP ratio than the U.S. or Japan, and yet we have this almighty mess," O'Neill says.

"And yet you can solve it this weekend if Angela Merkel and her colleagues stood there together with the rest of the euro area, and if they behaved as a true union, the crisis would be finished this weekend."

Markets, meanwhile, remain skeptical over Europe's progress to date.

European Union finance ministers recently arranged $125 billion in financing for Spain to recapitalize its banks, while Greeks voted in pro-bailout, pro-eurozone politicians in recent parliamentary elections.

"The market rallies lasted five and ten seconds — not a good sign. That to me is further confirmation that the markets basically believe the whole thing is falling apart," he said.

"If you want the E.U. to exist you've got to have a full-blown banking union across the euro area, and you probably have to move to some genuine, true euro bond," O'Neill says.

"It's tough to implement but the choices are pretty straightforward. The Germans in particular are so busy lecturing everybody about the right ways to behave, they were guilty for allowing all of these countries to join them in the first place. They do have quite a bit of responsibility on many levels, including human and social ones."

Other experts have noted that the European debt crisis, the focus of which centers largely on Greece, reflects a lack of true policy tools.

The Greek economy is not that large, but the Spanish, Portuguese and Italian economies are, and fears continue to build that a Greek exit from the eurozone could pressure other countries to follow suit despite the measures taken so far to prevent such a scenario from occurring.

"In economic and financial terms, Greece is tiny, and it's not the core question," says Roger Altman, chairman at Evercore Partners and former Deputy Treasury Secretary, according to CNBC.

"Yes the markets are fixed with it and yes, there is contagion risk if Greece should exit but fundamentally, the eurozone does not have the rescue tools and the protection tools, which are necessary in a situation like this, and I think the market is fundamentally focused on that."

Aside from greater banking integration, the continent's sovereign rescue fund, the European Stability Mechanism, might not be large enough to bail out big European economies once.

The continent also lacks a fund similar to the U.S. Troubled Asset Relief Program that purchased assets and equity stakes from troubled financial institutions in the U.S. during the downturn, Altman says.

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Tuesday, 26 June 2012 08:19 AM
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