EMU by zhangyun

VIEWS: 3 PAGES: 18

									IS THE EURO GOING TO
      COLLAPSE?

                Iain Begg
European Institute, London School of Economics
           NO

But please don‟t leave yet…
PRINCIPAL SHORTCOMINGS
ECB as sole, EU level economic actor
Aggregation of national policies: policy mix
    Fiscal, but also supply-side
Wrong focus of surveillance
    Especially, neglect of imbalances and their causes
No explicit crisis resolution mechanism
– Tricky wording of „no bail-out‟ clause in Treaty
Political economy of implementation
– The „why comply?‟ Catch-22s – legitimacy
LONG-TERM INTEREST RATES SINCE
   START OF FINANCIAL „CRISIS‟
 Interest rate, %
 12


 10


  8


  6


  4


  2


  0
        7




        8




        9
      08




      09




      10
      07




      08




      09




      10
       8




       9




       0
      08




      09




      10
      07




      08




      09
     -0




     -0




     -0
   r-0




   r-0




   r-1
   b-




   b-




   b-
   g-




   g-




   g-




   g-
   c-




   c-




   c-
  n-




  n-




  n-
  ct




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Ap




Ap




Ap
Fe




Fe




Fe
Au




Au




Au




Au
De




De




De
Ju




Ju




Ju
O




O




O
                    Germany   Ireland   Greece   Spain   France   Italy   Portugal
   GROWING DIVERGENCE IN
  CURRENT ACCOUNT OF BoP
% of GDP
  10




   5




   0




  -5




 -10




 -15
       2000   2001      2002    2003     2004      2005   2006     2007   2008    2009       2010        2011
              Germany      Netherlands    Greece      Spain      France   Italy   Portugal     Ireland
TRENDS IN CONSUMER PRICES OF
EURO AREA COUNTRIES, 1999-2010
 Change in price level
   over period, %
      70.0



      60.0



      50.0



      40.0



      30.0



      20.0



      10.0



         0.0
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                                                                1999-2003              2003-2007               2007-2010
EXTENT OF ULC SHIFTS
     ….pre-crisis!
 Member State   Change 2000-08, %

 Spain              29.3

 Italy              26.1

 Greece             25.0

 Portugal           21.8

 Belgium            17.2

 France             17.1

 Germany            -0.2

 Euro area          14.8

 UK                 22.8

 Poland             6.8
“THINGS THAT CAN‟T GO ON
    FOREVER… DON‟T”

   Herb Stein [Nixon‟s economic adviser]
 …..THEN CAME MAY 2010



            Greece
            Ireland



AND NOVEMBER 2010…AND?
DISTINCT „PATHOLOGIES‟
 PUBLIC SECTOR                             BANKING CRISIS
•Weak & profligate                        •Systemic risk
•Too costly                               •Bail-out

     Greece                                   Ireland
     Portugal?                               Spain next?
                     SOVEREIGN
                       DEBT
                       CRISIS


                     COMPETITIVENESS
                     •Unit labour costs

                         Greece
                         Portugal
                          Spain
    STRUCTURE OF DEBT,
EXCLUDING FINANCIAL SECTOR




Source: Laurence Boone, Barclays Capital
RESPONSE TO 2010 CRISIS
Slow recognition of scope of threats
– Extent of banking „connectedness‟
Yet opportunity for reform
Led by EU institutions
– Van Rompuy Task Force to the fore
– European semester
– Six Commission legislative proposals
Grudging acceptance of crisis resolution
– Inter-governmental emphasis
STILL SICK OR RECOVERING?
 MANY ANSWERS BUT …
 …FEW FULL SOLUTIONS
Better surveillance to prevent trouble
– Stricter rules
– Automatic sanctions
Risk from overly onerous rescue terms
Eurobonds
– Perhaps under a European Monetary Fund
– Beset by concerns about moral hazard
    And maybe costing the Germans more…
Multiple decision makers, lack of leaders
  FISCAL UNION DEBATE
Clearly now under discussion
– Massive shift from „No transfer union!‟ mantra
Yet (dangerously) ill-defined
At least three interpretations
1. Closer integration of budgetary policy
2. Provision of liquidity/financing
3. Cross-border transfers
  3.a From common pool: beyond EU budget
  3.b Equalisation through horizontal transfers
   CONCLUDING REMARKS
 Many political economy issues
      Subsidiarity: who controls?
      Winners and losers: who is really being rescued?
 Germany is pivotal
  – Usually does the right thing … eventually
 Progress towards financial stability
      Yet there is, effectively, no „European tax-payer‟
 New realism about costs of non-compliance
      Doubts nevertheless persist about delivery
>> Political will, that elusive ingredient
SO, IS THE EURO IN
       PERIL?

           My answer:
It remains part of the solution,
  but is at a tricky crossroads
If we want things to stay as they
 are, things will have to change

  [tutto deve cambiare perché
        tutto resti uguale]
       Giuseppe de Lampedusa,
            “il Gattopardo”

								
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