Q&A: EWI's Take on Europe's Debt Crisis, Part II

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Q&A: EWI's Take on Europe's Debt Crisis, Part II
Will the symptoms of Europe's debt crisis continue to spread?

By Nathaniel Williams
Thu, 12 Jul 2012 13:30:00 ET

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In this second excerpt of the interview that EWI's Brian Whitmer gave to the German financial blog, Wirtschaftsfacts.de, he speaks about whether the United States would feel any consequences should the eurozone fall apart. As editor of The European Financial Forecast, Whitmer also contributes to our monthly Global Market Perspective -- a comprehensive, 50-page publication that covers more than 40 key markets for global investors.

(Editor's Note: You can read the first excerpt of the interview here: "EWI's Take on Europe's Debt Crisis, Part I.")

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Q: Do European banking customers have to be worried about their savings?

Whitmer: In a word, yes. Today's fractional reserve system relies exclusively on the confidence of depositors. But confidence is fickle. In [the June] issue of The European Financial Forecast, I showed charts of demand deposits (think of your typical checking account) critically declining at banks across Southern Europe. As depositors continue to take their money out of the banks, bank runs have become commonplace in Greece, and panicky withdrawals are now popping up in Spain. These symptoms will spread as credit conditions deteriorate alongside stocks.

Q: What about banks in the northern member states of the eurozone? What will happen to German, French and Dutch banks in case Greece should leave the eurozone?

Whitmer: When Northern European bourses look like those in the south, the financial turmoil will be similar, too. Some analysts say that German and French banks are different: that they're more conservative, better insulated, etc. A few may be, but most are not. With the exception of Swiss banks, depositors' money is mostly backed by precarious IOUs that will lose value or become worthless as stocks decline.

Q: Should the eurozone fall apart, what kind of consequences would such an outcome have for the U.S. economy?

Whitmer: None, frankly. Again, our models show that outside events (i.e., currency breakups, government defaults) have zero ability to predict the trends in the economy or stocks. In fact, it's the other way around: The position of the stock market has an uncanny ability to predict outside events. This field of study, called socionomics, observes that stock markets provide a leading indicator of what we call "social mood." By knowing where mood is headed, socionomists can make some interesting predictions on a wide array of societal trends.

To your question on the U.S. economy: [EWI's] forecast ... does not rely on what happens to the eurozone.

Q: Is there a chance that the euro could rally after an announcement of Greece leaving the eurozone?

Whitmer: Sure, the euro could rally -- or it could decline. Markets move according to an internal rhythm, sometimes in line with fundamentals and other times against them. Look at all the uncertainty leading up to last month's election in Greece. Who would have guessed that Greek stocks could rally during this cliffhanger? Yet stocks did rally -- by more than 20%, in fact....

Q: Do you see other important developments in the world -- besides fears over the eurozone -- that would make you place a bet on a further rise of the greenback?

Whitmer: I'll let others handle the fundamental analysis. In terms of Elliott waves, the dollar registered a major low back in 2011 and is now rallying....

Q: Should the world slide into a full-blown economic depression, what kind of asset classes should investors hold ... ?

Whitmer: Broadly speaking, investors should move into safe assets now, meaning greenback cash and short-term, government-backed bills and notes. Hold them at the world's safest banks. In addition to the dollar, we like Swiss francs, Singaporean dollars and New Zealand dollars, because these four currencies represent the safest way to hold cash in the four corners of the globe....

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The new July issue gives you our latest insights into Europe's debt crisis -- along with independent, comprehensive forecasts and analysis for global stocks, currencies, interest rates, gold, silver, crude, natural gas, social trends and more.

BONUS: Get instant access to Brian Whitmer’s NEW 35-minute subscriber-exclusive video, "Is Europe as Bad as it Looks? Or is it Worse?" In it, Whitmer brings you up to speed with EWI's analysis of Europe's debt crisis and then prepares you for what's next.

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Tags: banks, brian whitmer, euro, europe, European debt crisis, european markets, European Union (EU), eurozone

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