Felix Zulauf, a market expert with a worldwide reputation, spoke in an OÖN interview about the euro crisis on the 10th of December which was later posted on http://www.nachrichten.at. Here is the full interview with Felix Zulauf:
The Swiss Felix Zulauf is one of the world's most prestigious asset managers and market experts. He has built one of the largest hedge funds in Europe. Meanwhile, the 62-year-old businessman sold his company, works as a consultant and manages its own assets. On Monday evening he was a guest of the Financial Market Forum of Upper Bank and OÖNachrichten. In OÖN exclusive interview, he did not mince his words and calls for a "back to national currencies" in Europe.
OÖNachrichten: Half an year ago you said that the euro would die and the entire financial architecture would disintegrate. Now the euro is strong and trades at around $1.30, the financial markets have calmed down. So, is the worst not over yet?
Felix Zulauf: No. There are EURO-contract rules and statutes of the European Central Bank. The policy and the ECB break all the rules and lie to the people of Europe. Central banks are still disciplining factors as the gold standard. Today more and more euros are printed. Everything just because politicians want to keep together a building called the euro area, where people have started to build the roof instead of starting it up from the ground.
OÖNachrichten: But is the euro is not worth saving?
Felix Zulauf: The conditions for a European currency area were and still are not given today. If this project is far from subordinates, then the euro will fall as a structural weak currency. An Italianisation of the euro is under way. In addition, the debt will be communitized. What do you want for European citizens?
OÖNachrichten: One could follow the retiring Premier Mario Monti again or even Silvio Berlusconi.
Felix Zulauf: Getting the euro with forcing the governments to Brussels austerity programs that lead to the periphery to the economic depression. The population is no longer willing to support that. Monti was thrown in the towel due to lack of support. Last month, the retail sector in Italy has dropped by 13 percent, which says it all.
OÖNachrichten: What alternatives do you suggest?
Felix Zulauf: The best course would be a return to national currencies. The outcome would be that the accession criteria would be clearly defined and there would be agreed penalties for failure. Over a period of at least one cycle of these criteria of each candidate would have to be met to qualify for the European currency. Thus, the first structural adjustment of economies would be achieved at the end of joining a monetary union. We have not bridled the horse from the tail.
The politicians want to admit it now; the error is in the construction of the euro. They fear the high costs of a breakup. You do not know what it will cost, if they continue forever. From my perspective, those costs will be much higher.
OÖNachrichten: You push the responsibility only on politics. And yet the actors such as hedge funds exacerbate the financial markets.
Felix Zulauf: It is exaggerated that hedge funds attack and deny. Ultimately matters are the economic fundamentals. With cheap money from banks in the creditor countries such as Spain and an unbelievable real estate bubble in 2008. Since then there everything has collapsed, and the money would naturally arise capital flows. This has nothing to do with hedge funds.
OÖNachrichten: ECB chief Mario Draghi, an Italian, has said that he would do everything he could to defend the euro. Does that sound dangerous to you?
Felix Zulauf: Why have the German central banker Axel Weber and Juergen Stark retired from the ECB? They didn’t want to support this development anymore, because they know exactly where it will lead in the long term. Only Italians can make such a policy. If we continue to fund ailing financial Insitute and States on the printing presses, it will have a high price in the long term. The ECB will certainly decrease even as the U.S. central bank interest rates to zero. I expect that the euro zone economy will shrink in 2013 by over two percent. The recession will last well into the year 2014 and more.
OÖNachrichten: Given your gloomy forecasts: how can people earn more money, what do you recommend to people’s shares, with which one is performing well this year?
Felix Zulauf: Over the past two years, government bonds of strong countries like Germany have been outperforming equities. This bull market has missed almost all. I see much more potential for gold because the pursued monetary policy weakens the value of paper money.
OÖNachrichten: How do you suggest they invest their assets?
Felix Zulauf: I have invested much in Swiss francs and partly in U.S. dollars. I have accumulated gold at 300 to 350 dollars an ounce and I keep it. I have shortened my investment in government bonds due to the interest rates of this summer.
OÖNachrichten: How can financial markets, banks and investment advisers regain confidence after all the turmoil and scandals of recent years?
Felix Zulauf: Sound economic policies, including monetary policy which is a precondition for a correct behavior of all in our society. If they fell apart, as it has been the case for fiscal and monetary policy for decades, then everything else will fall apart. Well, and the company then drifts further and further apart
OÖNachrichten: The debt is high but also because of the bailouts of recent years for the private sector.
Felix Zulauf: Well, yes. We had all ailing banks nationalized in the last financial crisis, then reorganized and after a few years returned to the market. Instead, we commit a sin after another.
OÖNachrichten: How long the Swiss National Bank (SNB) will be able to maintain the minimum rate of 1.20 francs to the euro? You have already speculated that this brand of currency market intervention cannot be maintained?
Felix Zulauf: It was right to fix the exchange rate of the National Bank, otherwise the country's economy would have slumped significantly. The Swiss franc is overvalued about 15 per cent even today. But the defense, through intervention cannot be sustained forever. At the next weakness of the euro, which I expect from the summer of 2013, it is likely that the inflow of interventionist measures will be restricted.
NB: The interview with Felix Zulauf has been translated from German and there could be some inaccuracies.