Goldman Sachs Group Inc. (GS:US) President and Chief Operating Officer Gary D. Cohn sees a “small” probability that the euro area will stick together, saying it’s more likely that some countries will exit to pursue growth.
“In federalism, you create a unified Europe, where the countries that are thriving because of the currency subsidize the countries that are contracting because of the currency,” Cohn said in an interview in Tokyo today. “I would put a relatively small probability of that happening.”
The European Central Bank program pledging unlimited support to debt-burdened nations if they sign up for economic reforms deals with the “pre-existing condition” but hasn’t addressed the lack of growth, Cohn said. ECB President Mario Draghi pledged to “do whatever it takes” to defend the euro as officials seek to stem the debt crisis.
Europe still needs a “moment” similar to Lehman Brothers Holdings Inc.’s 2008 bankruptcy, Cohn said, reiterating comments made in June. The 17 countries that share the euro must find ways to support economic growth in the weaker members, he had said at that time, adding that austerity programs don’t support expansion.
“Southern Europe has no ability to grow the economy with the fixed exchange-rate environment they’re in,” he said today.
Policy makers from around the world who are in Tokyo for the annual meetings of the International Monetary Fund this week bemoaned the economic threat of strong exchange rates.
Such worries across both industrial and developing nations are being heightened by an IMF warning that global growth and trade are slowing, leaving countries at risk of losing an export edge if their exchange rates climb. The Federal Reserve drew fire from emerging markets for propelling their currencies higher.
Greece may be better off outside the euro, Cohn said.
“It would be hard for me to not think that if the Greeks dropped out of the euro, brought back the drachma, devalued it 10 to 1, that within three to five years they wouldn’t have a thriving, booming economy based on tourism,” Cohn said. In the meantime, further debt relief may be “helpful,” he said.
Greek government bond prices have doubled during the past three months as investors, including the $9 billion hedge fund Third Point LLC, bet the likelihood of the nation leaving the euro-region has diminished.
While flagging concern that not enough is being done to bolster global economic growth, Cohn also said that the U.S. Federal Reserve may struggle to end its quantitative easing program.
“I understand what they’re trying to do and I will tell you this, this is going to be difficult to stop or to exit,” Cohn told Bloomberg Television today in Tokyo. “At the end of this -- there will be an end to quantitative easing -- we will have to go through the pains of stopping quantitative easing.”
The Fed last month announced its third round of large-scale asset purchases since 2008, with no limit this time on the ultimate amount it would buy or the duration of the program. Fed Chairman Ben S. Bernanke says stimulus will be expanded until there’s a “sustained improvement” in the labor market.
Goldman Sachs sees opportunity in Europe to advise clients on purchases of banking assets, Cohn said. The New York-based lender doesn’t plan to be a buyer.
“It’s more of an opportunity for our clients,” he said.
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