Eurozone needs reforms, not devaluation of euro: UniCredit

The PMI data from the eurozone, particularly from countries like Germany, France and Spain fell to their lowest levels since mid-2009. A sharp fall in output and decline of new orders led to job losses and a steep downturn of the manufacturing sector.

In an interview with CNBC-TV18, Marco Valli, UniCredit said, "There is a clear contraction in manufacturing activity and most likely also negative gross domestic product (GDP) growth. This means that after a temporary stabilization in activity in the first quarter of the year, probably the eurozone will again see negative growth in the second quarter."
The European markets lately have been under pressure due to various issues. The weak euro is also one of the key issues affecting the market. Valli believes the euro has been an anchor of stability for various European countries including Spain and Italy. Therefore, it is extremely important to keep these anchors stable. According to him, countries within the eurozone must look for structural reforms instead of relying on competitive devaluation of the currency. Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video. Q: What are you making of the PMI data that is coming out form the euro zone? Does it emphasize the macro and the fundamental problems that the euro economy is currently facing?
A: Certainly, this is the case. The manufacturing Purchasing Managers' Index (PMI) weakened further and now we are down to level consistent. There is a clear contraction in manufacturing activity and most likely also negative gross domestic product (GDP) growth. This means that after a temporary stabilization in activity in the first quarter of the year, probably the euro zone will again see negative growth in the second quarter. Q: We had a lot of noises yesterday from the European Central Bank (ECB), the EU commission chief and the Bank of Italy pressing Germany and the other countries to act and take urgent measures before the problems snowball into a bigger one. Do you expect the central bankers and the governments to act more aggressively on euro bonds or be it banking, financing in Spain, are you expecting any urgent movement?
A: I think this is certainly becoming a crucial topic. They do believe that it is extremely necessary for European governments to find a way to move towards the banking union. It means, in the very near-term the top priorities are a pan-European deposit guarantee scheme and allowing the European Stability Mechanism (ESM) to directly recapitalize banks.
These are the two very important steps that need to be undertaken in the very short-term. Euro bonds are not an issue at this stage. This is not the right way to solve the euro-zone crisis. Q: It seems like the euro, the currency itself is basically the bane of the issue at this point in time and there is some editorial opinion doing the rounds that maybe we should just get rid of the euro in order to solve the problem. Each country has its own currency, would that be something which you would concur with?
A: No, absolutely not. This is not the right solution. The euro has been an anchor of stability for several countries in the periphery and also to countries like Spain and Italy. It is very important to keep these anchors of stability. What countries need to do within the currency unit is to understand that they cannot rely on competitive devaluation. They have to force and rely entirely on the need of structural reforms. This is the way to go in the eurozone.
European banking union also requires a clear commitment to structural reforms and to put every country's house in order. These are the constraints that they have to face when you have a single currency. But, I think that these are good constraints, not bad constraints. In trying to solve the problem, just going back to national currencies is just trying to bypass the problem, not to solve them. Q: There has been this talk about how Germany is steadfast on not easing further. Do you see Germany easing its stance? Do you see Merkel relenting and giving way if the pressures begin to aggravate or do you expect Germany to remain on its stand and not budge whatever the implication maybe?
A: I think that Germany is right in standing against the euro bonds. Euro bonds are not the right solution. I think Germany is wrong when they oppose the moves that would lead to the beginning of a process towards the banking union.
Currently, two very hot topics are needed and are urgent, European deposit guarantee scheme and ESM direct recapitalization of banks. The Germans should make some concession on these two topics, not on the euro bonds. But it is important that they move towards the beginning of our banking union because now the stress in the financial system is starting to rise again and there is no time to wait. Q: I was asking you about the whole situation with Spain and Greece. While Greece was a big issue and was grabbing a lot of headlines earlier, we didn't see the euro crack below those important levels of 1.26-1.27 then. But after the Spanish refinancing and banking concerns, we have seen the euro below 1.235. Do you think Spain is a bigger issue at this point or the June 17 elections in Greece are the one that you should be focusing on in the near-term at least?
A: I think that the current euro weakness is justified by both the approaching of the Greek election and the huge uncertainty that surrounds the final outcome of the banking crisis in Spain. Obviously, Spain is the novelty over the last few days' trading session.
It's clear that Spain is currently lagging behind in optimal solution to its banking problems. I think that the market is getting worried about the systemic implication of not tackling the banking problem in Spain efficiently on the eurozone as a whole. This explains most of the recent weakness in the euro-dollar. We expect the euro to continue drifting lower and probably break 1.20 and head towards 1.80 in the second half of this year. Q: The Italian yields for the 10 year was at around 6% and we had that frightening data with regards to the auction which wasn't successfully completed. Post Spain, is Italy also now becoming more of a threat for the eurozone?
A: No. There is a rising Greece contagion, in a sense that Italian fundamentals certainly has not changed over the last couple of months. But the yields are consistently going up. I think this has to do with fright of contagion and with the possibility of problems spreading from Greece to Spain and potentially to Italy, in case we see no convincing government action in the near-term.
This is mostly a contagion problem. Governments have to really step up their efforts because the ECB certainly can intervene but cannot be the final solution to the problem. The final solution to the eurozone debt crisis will have to come from the government.

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