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Whole of Southern Europe set for euro-zone exit, Invesco warns

EUROPE - The whole of Southern Europe will eventually leave the euro-zone due to a general lack of competitiveness, with Greece and Portugal first in line for the exit, according to John Greenwood, chief economist at Invesco.

In a presentation at the asset manager’s annual investment seminar in Austria, Greenwood predicted Portugal would be the next to leave the common currency, with state, company and household debt pushing the country into default.

The economist also pointed out that Greece was technically already in default - “a 50% haircut is, in effect, a default” - and unit labour costs in “uncompetitive” Italy and Spain were 25% more than in Germany.

“If those countries had their own currencies, they would devalue them by that factor,” he added. “But they would also have to reduce wages and prices by 25% in the coming years.”

The economist - who helped to reform Hong Kong’s currency after its collapse in the 1980s - said painful cuts had worked then only because there had been lots of growth and little democracy in the Asian economy.

Greenwood also argued that the euro-zone had only itself to blame for the current crisis, as the Southern European states, since the inception of the common currency, had effectively been able to borrow at German rates.

He said he was dubious about the introduction of Eurobonds anytime soon, as some countries would continue to “ride on Germany’s coattails”.

Greenwood also rejected the notion that countries breaking away from the euro-zone would be able to establish a “secondary euro”, as the markets would have “too little trust in them”.

However, Invesco’s economist did say the European Central Bank’s three-year lending programme for banks had created “a lot of interest” and was a “ray of sunshine”.

But other measures aimed simply at keeping the euro-zone as it was, or shifting to a full fiscal union, would not work, he said, as they “do not solve the problems of competitiveness, growth or debt repayment”.

This year, Greenwood expects a second recession in Europe with “sub-par” GDP growth, as the “Keynesian” economic stimulus of government debt reached “the end of the road”.

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