Speaking at a conference in Edinburgh, Russell Napier, strategist with brokers CLSA, as well as author and founder of Edinburgh Business School’s Practical History of the Financial Markets course, said: “At the moment the ECB is prizing price stability above all else. This has got to change.
“We need a euro that is built around growth and inflation, not one that is built around a hard currency.
“The key goal of monetary policy ought to be structural in nature – to hold the euro together. If that can only be done by permitting higher inflation in the next economic expansion, then that is a price which has to be paid.”
Mr Napier, also a non-executive director of Scottish Investment Trust and Mid Wynd Investment Trust, stressed he was speaking in a personal capacity.
The PIIGS countries – Portugal, Italy, Ireland Greece and Spain – remain severely economically challenged.
Their national accounts have been weakened following decades of fiscal irresponsibility and over-dependence on borrowing. Some, notably Greece, are struggling to service their debts and may need bailouts.
Their membership of the eurozone has placed them in a straightjacket where the former means of salvaging a broken economy, using inflation and the devaluation of their currencies to restore economic equilibrium, have become impossible. Although the euro has lost 10% of its value against the US dollar since the end of November 2009 – when the focus of fears about sovereign debt defaults shifted from Dubai to the eurozone – Mr Napier does not believe its value has fallen nearly enough.
He said: “The ECB governors don’t seem to recognise that it is politically impossible to impose nominal pay cuts of 20%. Wages are just one of the costs which have to adjust downwards to make Greece competitive.”
He said the ECB’s council of governors, led by president Jean-Claude Trichet, is dominated by academics and out of touch with political realities.
“The only way the euro can survive is as a weak currency,” Napier said. “I remain optimistic the ECB will recognise this before it’s too late.”
Napier said the people of Germany have already paid a high price to bail out the DDR and might prefer a weaker currency and higher inflation to having to bailout Greece and other countries.
A weaker euro would be negative for UK exporters and tourism. These sectors have been benefiting from the post-credit crisis weakness of sterling.
Mr Napier said the degree of economic pain inflicted by the ECB’s monetary policy may destroy democracy in a European nation. “It may take such a dramatic event to persuade the economists who run the ECB that European society cannot cope with the economic adjustments their current policies dictate.”
