Pimco managing directors Andrew Bosomworth and Mike Amey aren't particularly bullish for the long-term of the eurozone and its single currency the euro.
"The lesson from history is that the status quo we have now is not a tenable structure," says Bosomworth, according to The Telegraph
"There's no historical precedent that this sort of structure, which is centralized monetary policy, decentralized fiscal policy, can last over multiple decades," Bosomworth adds.
While the European Central Bank is in charge of monetary policy, each country conducts its own fiscal policy.
There's a political dynamic working against the eurozone, Bosomworth says. "[Persistently low growth] manifests itself in a lack of support in the common currency, so then it leads to the rise to power of political parties that want to end it. That's what we seen in the last few years."
"You need to reach some sort of political agreement about how to share fiscal resources around the zone. We're a long, long, long way from designing that and getting the political backing for it," he notes.
"Will we get the United States of Europe? It's not impossible, but Europe could also spend many decades in a hybrid form of a political and fiscal federation. While there might not be one government, one passport and one army, we could be moving closer toward that — but not yet."
Economic growth totaled only 0.9 percent last year in the eurozone, and the euro dropped to a 12-year low against the dollar earlier this month.
"We're pretty comfortable that the euro could trade at parity with the dollar and potentially trade through because of the relative points of the business cycle and the stance of monetary policy in both regions," Amey states.
That currency move has soured central banks on the common European currency, adding yet another twist to the raging global currency war.
The euro has dropped 21 percent in the last year, and many experts think it is headed lower still, with central banks helping to spark the move.
"It is quite likely that central banks will continue to divest from the euro," Stephen Jen, managing partner at money manager SLJ Macro Partners, tells The Wall Street Journal
. "The main reason is that negative yields are a turnoff for central banks."
Central banks generally hold their currency reserves in bonds. The German government 2-year bond yield stands at negative 0.25 percent, compared with a positive 0.58 percent for 2-year U.S. Treasurys.
That interest-rate differential makes dollars much more attractive than euros for central banks (and other investors).
"The euro no longer looks to be an attractive alternative to the persistent reserve currency, which is the dollar," Robert Sinche, global strategist at Amherst Pierpont Securities, tells The Journal.
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