FX Week Europe: Disaster in the eurozone still plausible, warns Neil Record

The determination of eurozone member states to keep the currency union together in its current format could ultimately lead to a disorderly and potentially violent exit of one or more member countries, despite the market's perception that such risks have receded, a senior currency manager has warned.

Speaking at FX Week Europe in London earlier this week, Neil Record, founder and chairman of Record Currency Management, said current economic and monetary policies, particularly in southern European countries such as Greece, Spain and Portugal, make a disorderly exit an ongoing possibility.

"My current view is that Angela Merkel has decided that, should Greece leave the euro, it would be the end of the euro project, and by that she means the European Union. While Germany keeps that view, it is a real problem. I'm not saying that the euro can't end, but that if it does it will be in complete disorder. That's incredibly dangerous for everyone," said Record.

Continuing along the current path in southern Europe will lead to a decline in wages and house prices, while public and government debt will stay the same, so there needs to be a clear change in direction, he said.

"A country will turn into a Japan or worse because there will be a constant shortage of demand; the government will grind down the deficit while there is still a trade deficit – a problem Japan doesn't have because it operates a trade surplus. So you will have a horrible time; there will be high unemployment and everyone will leave. You could do that if you have enough political will, but I think it would be a moral and political disaster," said Record.

One solution to save the eurozone could be to create a European ‘super-state', with one president and one parliament. But recognising that scenario to be unlikely, Record believes banks should offer tailored hedging products as a type of insurance against a member state leaving the eurozone. One bank, he said, is already offering such a product.

"It is exactly like a forward contract except one of the currencies isn't called the euro – it's called the ‘legal tender of Germany from time-to-time'. Today it is the euro, but in the future it could be called the Deutsche mark or any other former eurozone currency. Those contracts now exist and I believe it will be a really interesting market because if there is one eurozone exit, the market will balloon," says Record.