Political Risks in Europe (w/ Mohamed El-Erian)


MOHAMED EL-ERIAN: If you look at
the challenges facing the ECB, they’re times 10
what the Fed faces. Europe, for me, is the
most vulnerable segment of the global economy,
this year and next. They are approaching
what I call stall speed. LARRY MCDONALD: OK,
so look at Europe. Mr. Draghi is
leaving in October. This is Mario Draghi, Mr.
Everything-it-takes Draghi. And we have, Ms. Merkel’s
potentially on the way out. So the glue of Europe, that
Angela Merkel, that foundation that’s held everything
together, is potentially leaving, whereas the Salvinis
of the world in Italy are strengthening. We have political
forces in Europe that are much more
evenly distributed than centralized strength
of political force. If you think about the
next head of the ECB, might we have a
ECB head that maybe is more supportive of
populism in the south and supportive of deficits. Or might we have a more
Austrian-looking Schauble type. Schauble would never
be in that role, but he’s the former
Finance Minister. But that thinking of austerity,
that’s isn’t that the key to this? Where, if you look at the
next head of the ECB, and that ECB balance sheet. What are your thoughts
on which way it might go? MOHAMED EL-ERIAN: We don’t know
which way it’s going to go. Because this is a
political process. Ultimately, it’s going to
be a political decision. We don’t know. But think. Think. Go back to the Patriots. LARRY MCDONALD: OK. What makes the Patriots
such a powerful team? And then compare it to Europe. They have a number of
very strong players that you can rely on. Their teamwork is great. And they’re very well-coached. Let’s look at Europe. The five major players in
Europe are all having problems. UK, with Brexit. France, with the yellow
vest protest against Macron. Germany, going through a major– as you mentioned–
leadership transition. Spain, going to an election
where it’s not clear where they’re going to have clarity. And Italy, a new
government that’s trying to find its way around. So the first thing we say about
this Patriots in Europe team is that the major
players are problematic. But you say, don’t
worry, I have teamwork. What teamwork? Europe is not functioning. Brexit has sucked
all the oxygen. There’s no progress
on banking union. There’s no progress
on fiscal integration. You say, that’s OK. The coaches are there. I have Belichick there. Well, you pointed out,
Draghi is leaving. And Merkel’s leaving. Which coach is there? We don’t even know
what the coaching staff is going to look like
at the end of this year. MOHAMED EL-ERIAN: And we know
markets hate uncertainty. LARRY MCDONALD: If you
look at, now, the ECB has been very lucky.
‘Cause with the Fed, you stayed off the radar screen. MOHAMED EL-ERIAN: Yeah, yeah. LARRY MCDONALD: But if you
look at the challenges facing the ECB, they’re times
10 what the Fed faces. And that’s before you
look at the transition. Their economy is
slowing rapidly. You’ve got dreadful PMI numbers
out of Germany, dreadful. MOHAMED EL-ERIAN:
And Germany’s beta is so high to emerging
markets and to China. In other words, because
they’re such a large exporter. So it’s fascinating
that you can have a man like Mr. Draghi and the
ECB, do so much balance sheet. But at the end of the day,
this trade war with China, a strong dollar
weakened EM, in China. LARRY MCDONALD: For me,
it’s not a surprise. Because balance sheet
operations are like painkillers. Europe is structurally impaired. We have real issues in terms of
competition, productivity, et cetera. They need surgery. They need the sort of surgery
that Germany went through, call it, 15 years ago. Before the labor
markets, et cetera. You go to the surgeons, and
the surgeons can’t agree. So you go to your doctor. Doctor says, fine, I’ll
give you some painkillers. Because I’m just got to help
you through a short-term period until the surgeons
are ready to deal with your structural impairment. And you know what? They can do it. They need the political
will to do it. You come back, and you
say, it hasn’t happened. I say, OK. So I gave you negative
interest rates. Let me now give you
more balance sheet. So I’m going to double the dose. And we go through this
repeated game a few times. And a couple of things happen. One is, the medicine
becomes less effective. Two is, you start worrying
about the side effects. What’s negative interest rate
doing to my banking system? What’s it doing to
my ability to provide long-term financial
protection products? Retirement, insurance? MOHAMED EL-ERIAN: So on
that, the recent comments, public comments by
central bankers in Europe, are starting to question
negative interest rates. LARRY MCDONALD: Correct. MOHAMED EL-ERIAN: Is
this a real shift? LARRY MCDONALD:
So I think it is. I think they’ve
gotten to realize what I call the Bernanke equation. Benefits, costs, risks. And you risk
undermining– and that’s why people say, ironically,
instead of encouraging people to spend more, you
encourage them to save more. Because they can no longer
rely on pooled vehicles for long-term savings. And I think that that’s
the realization, is the medicine is less effective. It has side effects. Now, the good news is
that the surgeons just need to get their act together. Because we know what
the surgery looks like. We just need them
to be able to be willing and able to intervene. And they’re able, but
not willing, as yet.

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