“The current policy of lending plus austerity will lead to social unrest,” Mr. Connolly told investors and policy makers at a conference held this spring in Los Angeles by the Milken Institute, arguing the case that Greece, Italy, Portugal and Spain could not simply cut their way to recovery.

“And one should not forget that of the four countries we are talking about, all have had civil wars, fascist dictatorships and revolutions. That is history,” he concluded, his voice rising above the chortles and gasps coming from the audience and the Europeans on his panel. “And that is the future if this malignant lunacy of monetary union is pursued and crushes these countries into the ground.”

Mr. Connolly has been warning for years that Europe was heading for disaster. As a European Union economist in the early 1990s, he helped design the common currency’s framework, but then he was dismissed after he expressed turncoat views. In 1998, just months before the euro’s introduction, he predicted that at least one of Europe’s weakest countries would face a rising budget deficit, a shrinking economy and a “downward spiral from which there is no escape unaided. When that happens, the country concerned will be faced with a risk of sovereign default.”

Now, as the European debt crisis that began in Greece threatens to engulf even France along with Italy and Spain, Mr. Connolly’s longstanding proposition that the foisting of a common currency upon so many disparate nations would end in ruin is getting a much wider hearing. Hedge funds looking to bet on a euro zone breakup scour his research reports for insights.

Longer-term investors who listened to his decade-long recommendations to steer clear of the bonds of Greece, Italy, Portugal and Spain are congratulating themselves for not falling into the trap that bankrupted MF Global, the investment firm run until recently by Jon S. Corzine, the former Goldman Sachs executive and New Jersey governor.

And central bankers outside the euro zone are among his most faithful readers.

In 2008, Mark Carney, the governor of the Canadian central bank, cited the British-born Mr. Connolly, along with the far more prominent Nouriel Roubini of New York University and the Harvard economist Kenneth S. Rogoff, as having been among the few who foresaw the global financial crisis. Mervyn A. King, the governor of the Bank of England, has become more vocal about the euro zone’s problems and is also a longtime follower.

Nicolas Carn, an independent research analyst and money manager who worked previously as chief investment strategist for the London-based hedge fund Odey Asset Management, is one of Mr. Connolly’s biggest fans. “Bernard has influenced me a great deal,” Mr. Carn said. “He has shaped my views on Europe and contributed significantly to my investment performance.”

To be sure, Mr. Connolly was not the only analyst who raised early warning flags about the euro project. Economists like Martin Feldstein of Harvard and Paul Krugman, a Princeton economist who writes an Op-Ed page column for The New York Times, have been longtime critics, as were many experts in Britain, which has long been skeptical of the euro. But few have gone on to devote more or less their entire professional career to exposing Europe’s monetary fault lines.

Unlike many critics of the euro, Mr. Connolly, 61, plies his trade mostly in private, eschewing cable television programs, opinion pages and policy journals.

He represents a new breed of independent analyst that has come increasingly to the fore since the financial crisis broke in 2008.

As investment banks have cut down on staff and remain constrained by their banking and government relationships, independent analysts like Mr. Connolly, who are mostly pessimistic in outlook, have become highly popular for hedge fund investors who wager large sums of money betting against the currencies, bonds and banks of countries headed for trouble.

Article source: http://www.nytimes.com/2011/11/18/business/global/the-rise-of-a-euro-doomsayer.html?partner=rss&emc=rss