Employing a seasonal metaphor for the basis of his CNNMoney column, PIMCO head Mohamed El-Erian compares the situation in Europe to that of an unstable hammock in an effort to explain what has, and most likely will, happen.
“I don't know about you but, the very few times I have tried, I have found it very hard to lie down properly on a hammock,” El-Erian wrote on Monday. “Moreover, my latest attempts to do so this summer became the source of endless laughs. Here is what I learned ... rather painfully.”
1. The starting point is critical. Unless you position yourself skillfully at the very outset, it is extremely difficult to secure a stable and sustainable outcome thereafter.
2. If you fail in the initial positioning—which I did, repeatedly—the construct of the hammock limits the prospects for adjustments on the fly.
3. Marginal adjustments—such as edging your body along the hammock—risk unfortunate outcomes: either an outright fall or rather peculiar ventriloquist-like positions that are hard to maintain for long.
4. With that, you will find that others will step away from the hammock, fearing that your spill could somehow harm them.
5. The right answer is to stand up and try again. But it is hard to elegantly get off a hammock if your initial positioning is wrong. It's not just a matter of pride. You may often end up falling to the ground.
Just in case the connection isn’t obvious, El-Erian noted, “Europe started out with an incomplete design. The monetary union, which introduced a much-appreciated common currency (the euro) and a powerful regional monetary institution (the European Central Bank or ECB), was insufficiently accompanied by other steps that are critical to longer-term stability. And these initial design flaws were amplified, loudly and visibly, by the impact of the 2008 global financial crisis.
“Realizing their design problems, European officials have been trying hard to adjust on the fly rather than attempt a fundamental revamp. And like someone placed awkwardly on a hammock, such marginal adjustments have proven of limited effectiveness given the extent of the initial design flaws.”
So yes, despite the appearance of significant policy activism (particularly by the ECB), Europe's crisis is likely to linger for a while, El-Erian concluded.
“There is a meaningful risk that the situation could well get worse before it gets better. And with Congress paralyzed by extreme political polarization, the United States is not yet doing enough to insulate itself against Europe's hammock dilemma.”