Jim O'Neill: eurozone crisis unnecessary; Bundesbank now just a pressure group
Jim O’Neill, chairman of Goldman Sachs Asset Management, has delivered an upbeat assessment of the eurozone crisis, arguing the market has failed to fully appreciate the significance of the European Central Bank’s (ECB) pledge to do whatever it takes to save the euro.
O’Neill, Goldman’s former FX strategy chief and the man who coined the term Bric a decade ago, says ECB president Mario Draghi would never had made the pledge earlier in the summer if he did not have the full backing of German chancellor Angela Merkel.
O’Neill, speaking at the Bloomberg FX Summit in London on Tuesday, says he is surprised more was not made of the announcement.
“The fact that the German chancellor has backed the ECB and effectively, so far, reduced the Bundesbank to a protest group is a big thing,” he says.
“Nobody has ignored the Bundesbank like that since the Berlin Wall fell.”
Jim O'Neill, chairman of
O’Neill says while the ECB’s more activist role is causing uproar among conservative factions in Germany, those dissenters are being sidelined in much the same way they were overruled on the reunification of the east and west deutschemark at the end of the cold war.
“They are being told: we know what you think, but this is what we are going to do,” says O’Neill.
On the eurozone debt crisis, O’Neill notes that most of the debt crises he has witnessed in more than 30 years in the financial markets have involved balance of payments problems, and that does not apply to the eurozone, which enjoys a positive balance at an aggregate level.
He says if policymakers in the region want to act like true Europeans, the issue surrounding Greek debt is non-existent.
“On one level, it is the most unnecessary crisis I’ve seen,” says O’Neill.
“It’s an issue because Greece is being treated as a country, but if they behave as the United States of Europe, the crisis is finished.
O’Neill argues that given the negative sentiment surrounding the euro, it is not hard for it to appreciate.
“All you need is a period of no bad news and against the background of QE ‘infinity’ from the Fed, it’s easy for the euro to go up.”
New dynamic for AUD
O’Neill backed a bullish EURAUD recommendation from Thomas Stolper, Goldman’s head of FX strategy.
Stolper has said that long EURAUD could prove to be a “trade of the century”, given that much of the bad news from Europe is in the price, while the AUD is yet to feel the impact on its commodity exports from a slowdown in Chinese growth, Australian interest-rate cuts and tighter fiscal policy.
Indeed, Stolper believes that AUDUSD has peaked, and a substantial fall in commodity prices could send it as low as $0.65 in the medium term.
For his part, O’Neill believes that China is going to move from “quantity to quality” in terms of its economic output, meaning there are going to be new winners and losers compared with the last decade.
He believes, therefore, the AUD’s days above parity against the USD are numbered.
“The last decade, amid China’s rise as a huge producer – as many people correctly thought – the cleanest bet on that was the AUD,” he says. “Going forward, it is not in my opinion.”
As China raises wages to help a move towards more consumption, O’Neill believes southeast Asian countries, such as the Philippines, and countries such as Mexico will be net winners, as they get back the chance to produce some of the lower value-added goods they have not been able to make for a long time because of China.