In his latest Sunday Start note, Morgan Stanley strategist Joachim Fels describes the mood and opinions of big investors at a recent event in Florence.
The gist: Most investors still aren’t betting on anyone quitting the Euro.
However, the beautiful historic setting didn’t fail to make an impression on most participants: while many worried about the potentially catastrophic consequences of a Greek exit from the euro (rightly so in my view), very few actually believed that a divorce would actually materialise over the next several years. In a poll on the four scenarios for the future of Europe that Elga Bartsch and I described in the recent Global Macro Analyst , only 5% thought ‘European Divorce’ would be the likely outcome.
True, despite the setting, the rosy ‘European Renaissance’ scenario also only got few votes (10%). However, 40% thought a ‘Matrimonio all’Italiana’ scenario of fiscal union with continuing economic divergences as between Italy’s north and south would materialise. In fact, in the discussion, some participants warned against underestimating the ‘power of politics’, i.e. the possibility that there would be a big leap towards fiscal federalism at some stage. Many others, however, felt that it would probably require a much bigger crisis first to get there. Unsurprisingly, our ‘Staggering on’ scenario – basically, muddling through with a lot of help from the ECB – received 45% and thus the most votes.
We’re a little surprised that the “European Divorce” scenario is so low.
To some extent, it seems like a lot of the optism (if it oculd be called that) is just based on the idea that the alternate scenario (divorce) would be do disastrous. This sounds like a lot of the thinking regarding the fiscal cliff in the US, as well… a crisis will be averted because to not avert it would be such a disaster. We’ll see if that actually holds up.