United States of Europe will cure Continent

In the end, it all comes down to what’s become global markets’ and investor’s biggest bête noir in recent times, Europe. The eurozone, to be precise.

The world will continue to lurch from one crisis to another until policymakers in the eurozone start to put their heads together, rather than locking their horns, over its sovereign debt crisis, said UK-based Tony Cousins, chief investment officer, Pyrford International, speaking at a media conference titled ‘Europe at the Crossroads’ hosted by BMO.

“[It won’t stop] until the political will comes for a country to leave the euro,” he said. “The first one will be Greece; we hope that happens in conjunction with an orderly default rather than disorderly default because the key risk here is to the financial system.”

Talking about how “misguided” the policymakers in Europe are, Cousins said they are “concentrating on nothing other than fiscal austerity” which is stamping out what little economic growth peripheral Europe has been able to eke out.

The end game for the euro is that the countries will have to leave the monetary union to restore their own competitiveness and bring growth back to the economy, he added.

Investors can take some comfort from the fact that the worst-case scenario, a disorderly default, has been taken off the table, said Paul Taylor, chief investment officer, BMO Harris Private Banking.

But for an investor perspective, Taylor said “it was too late to sell and too early to buy.” He said he expects “a greater fiscal integration and debt neutralization” to finally emerge from euroland, but maintained “there can be no monetary union without a fiscal union, but there can also be no fiscal union without a political union.”

A political and fiscal union in Europe, virtually creating a United States of Europe, has been suggested by many experts as the alternative to the breakup of the euro. However, there simply is no appetite in the electorate for such a measure.

Chicago-based Andrew Busch, global currency and public policy strategist, BMO Capital Markets, said despite all the bad news coming out of Europe, policymakers will continue to act to alleviate funding pressures and reduce downside economic risks.

“My central thesis for 2012 is that the world will not come to an end, regardless of what the Mayans think,” he said. “We are concerned about the economic growth in Europe; it certainly has been decelerating. I’m still looking for a flat growth in the entire eurozone on average.”

The panellists’ outlook is consistent with that of the World Bank, which recently slashed its outlook for the global economy due to “significant headwinds” from the European debt crisis, and that of the bank of Canada that downgraded its 2012 and 2013 growth forecast for the world economy to 2.9% and 3.3% respectively.

The central bank also said Canada’s economy would grow better than 2% this year and 2.8% in 2013 if it were not for the issues in Europe and their “implications for financial conditions, confidence and global commodity prices.”