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Euro zone addicted to ‘financial heroin,’ BMO warns

RITA TRICHUR; Globe and Mail Blog; Posted on Wednesday, December 22, 2010 1:27PM EST

Europe’s bailout bonanza is tantamount to a gigantic dose of “financial heroin.”

That’s according to Don Coxe, a strategy adviser for Bank of Montreal, who worries about the long-term consequences of such costly economic pain relief.

Now that the euro zone has joined the United States and Japan in its efforts to reflate, he believes there is likely enough money being printed and enough bailouts being done to spur faster economic growth.

In the United States, economic growth could come in at 3 per cent next year, which would finally put to rest any lingering doubts of a double-dip recession.

That’s the good news.

“We’ve got heroin being injected right across the industrial world. As long as the heroin is flowing, you feel good. There is no doubt about that,” Mr. Coxe said in a telephone interview from his office in Chicago.

The bad news is those countries now risk becoming addicts. Preventing a long-term dependency involves weaning their economies off the drug while they are still in some pain.

That means the industrial world faces the monumental challenge of generating real economic growth.

“The heroin is flowing again in big amounts. Now the heroin addicts are more widely distributed,” Mr. Coxe observed.

“At some point, this strategy will fail. And we’ve just got to hope that the patients, who are now going to be measured in the hundreds and hundreds of millions, … will collectively be able to get off the heroin. Good luck.”

In a report, entitled The Eurodream Becomes a Nightmare, Mr. Coxe examines the euro crisis and the consequences of getting “pumped up.”

“The euro has achieved its greatest global impact since it was born: It has managed to displace the dollar as the centerpiece of global currency fears, and launch the second great global liquidity gush,” he wrote.

He notes that while countries like Greece and Ireland have succeeded in buying time, their strict austerity measures will likely fuel more social unrest.

Spain, meanwhile, is still grappling with an unemployment rate of almost 25 per cent and an ailing real-estate market. Neighbouring Portugal is also hardly out of the woods.

“We are assuredly not rejoicing in the euro’s miseries, although we are on record since 1997 in predicting its ultimate demise,” Mr. Coxe added.

In the United States, the “next shoes to drop” are likely state and local governments. He’s paying particular attention to Illinois and California.

His reasoning? Once the stimulus runs out, appetite for investments like municipal bonds will fade.

Mr. Coxe is also forecasting commodity prices to trek higher next year, an indirect result of the world’s money supply being awash with yens, dollars and euros.

Moreover, the industrialized world will also start to feel the effects of rising grain prices, which are already helping fuel inflation in China. North Americans can now expect the cost of bread and cereal to go up.