Euro can accept death as salvation

Eurozone and euro are ready to die

In brief: Euro exchange rate and the future of the euro becomes a global problem for all European countries.

Eleven-year European Monetary Union, uniting 11 countries, is tested for durability. States, especially Greece, Portugal and Spain, under pressure of markets in reducing deficits and reforming their economies. Politicians ponder over how to rewrite the rules of membership in the euro area, to prevent new crises. The European Central Bank was forced to intervene in the government bond market – in the central bank certainly not dreamed of that will go to such a measure. Euro fell sharply. But is this tension temporary phenomenon? Will Europe’s leaders to improve the situation? Or do they simply destroy the Eurozone? We consider four possible scenarios.

1. Order has been restored… The crisis has forced the state to fix its public finances and improve the dynamism and efficiency of their economies. The euro zone is becoming an engine of world economic growth. For several years, Greece could become a model for the European economy. With its magnificent nature, culture, history and amazing scenery the country could prosper as a high quality and promote a healthy lifestyle destination for holidaymakers, retirees and entrepreneurs, attracted by a transformed business environment. Anyway, this is the dream of European politicians. Meanwhile, Greece kept on life support apparatus. But the program of the International Monetary Fund and the European Union would once again put the country’s public finances on a sustainable basis. Future years of austerity, could create the conditions for releasing the entrepreneurial spirit among the Greeks and turn into years, reduced competitiveness. Within the euro area Greek shock could encourage pre-emptive action, which would contribute to growth in countries such as Portugal and Spain. Germany could contribute to the process by stimulating domestic demand, rather than focus exclusively on exports. Now it would be a stronger and more dynamic Eurozone. This idea is not so absurd. Athens under immense pressure in the restoration of the country’s economy from scratch, because the alternative would have been catastrophic: the likely bankruptcy, insulation in the financial markets and large-scale social unrest (see the fourth scenario). Similar turns one hundred eighty degrees has occurred in the world. Sweden refreshed after a nearly fatal banking and economic crisis in the 90-ies. and is an example for others, even though that is not included in the euro area. “I fear that in the euro area will negative fiscal shock” – said Pontus Bronerhelm Swedish business forum. “Each country will be like Germany, and this can have a huge impact on demand. But our experience shows that in many countries it would facilitate the reform process. Otherwise, we risk in a downward spiral.” Meanwhile, European politicians could agree on procedures to prevent future crises. Greece too long to hide the true state of its public finances. However, statistical control is now increasing. In the future, could take early action against the economic imbalances – for example, when countries are losing competitiveness because of the excessively high salaries. You could create the institutions of organized struggle with crises when they are offensive – because, for example, if there is need to restructure the debt of, say, in Greece, other countries, the destruction would have been minimal. The ECB would be able to absolve themselves of responsibility and focus exclusively on combating inflation.

Probability: it is possible, but do not count on it.

Implications for the euro: the single currency would be a serious competitor to the dollar as a strong and stable reserve currency.

2. Chaotic search

The euro area is stabilized, but not trying to solve the fundamental structural problems discovered through the crisis. Taken by States and the ECB measures, including an agreed last month a program of emergency assistance in the euro area, amounting to? 750 billion ($ 925 billion, £ 640 billion), could reduce anxiety, and flaming are now in financial markets. Investor confidence in Greece may start to recover, together with the implementation of the austerity program. Budget cuts and tax increases conducted by Spain and Portugal, would be the appropriate balance between the reduction in public sector deficits and neprovotsirovaniem sharp downturn in the economy. But these changes, probably not enough to significantly improve the growth prospects of the euro area, and Greece is likely to have to wait for the moment when it will be Europe’s answer to Florida. Most importantly, the fundamental weaknesses in the monetary union, which were identified during this crisis, would have remained uncorrected in the future could lead to new problems.

According to Daniel Gros, director of the Brussels-based Centre for European Policy Studies, most of the first decade of the euro area was a dream come true. Germany joined the alliance on too high exchange rate and become “weak link in Europe”, but was able to return to its former condition, to restore international competitiveness through labor market flexibility. Gross believes that the euro area “flew past the goal.” Not only that Germany was able to compensate for the overestimation of the exchange rate, strict cost control also gave a significant competitive advantage, a mirror image of which was a significant loss of competitiveness in countries such as Greece. Now the turn of the last to reduce costs, but to surpass Germany’s not so simple. “So arranged the European economy – in many countries have national labor markets and social institutions are characterized by considerable inertia” – said Gros. “Swing of the pendulum is likely to continue.”

The debate among the European politicians today go far beyond the theme of how to improve the fight against crises and affect the methods of early identification and elimination of such “imbalances.” Nevertheless, it is unclear whether agreement on this issue. Some believe that the debate is already in the wrong direction. In Germany, the ECB intervened on the government bond market last month only as the promotion of fiscal profligacy with the increase of inflationary risks. Berlin opposes any measures that undermine the competitiveness of Germany in the production. Even if the reforms are designed to improve the functioning of the euro area, the policy can opt out of the deal. In the end, France and Germany have accelerated the weakening of the fiscal rules in 2005, when they themselves have exceeded budgetary constraints. In Stockholm Bronerhelm said: “The whole history of Europe, tradition and development of the EU indicate that it will be a slow, gradual process, not a shock to change.

Probability: definitely possible.

Implications for the Euro: Prospects of a weaker growth and strengthening of long-term political troubles will increase downward pressure.

3. Flesh-wound

Eurozone long time weakened its long-term perspective is compromised. Requirements to be met southern eurozone countries could be prohibitive. Greece, may remain in hospital for longer than expected time, and it threatens to debt restructuring. Portugal or even Spain are likely to follow her. Public discontent is likely to reach unacceptable levels if the austerity measures, which have to be the International Monetary Fund and the EU, will not yield results. Continue talks on the collapse of the euro area. Impact on the Germanic and French banks, coupled with falling economic confidence threatened to turn into a deep recession across the euro area, while the falling euro would support inflation. These are the consequences if the euro-zone leaders do not find a way to change the fate of countries such as Greece. Jean Pisani-Ferry, director of the Brussels-based research center Bruegel, notes that the combination of the poor state of public finances and uncompetitive industries became fatal for the peripheral countries of southern Europe. To restore competitiveness, countries need to “undertake a deflation” by lowering wages and prices, but if prices go down, and your debt remains high and growth rates are falling, your debt burden increases. Ideally, says Director Brugel, Germany must assume the increase in inflation above target for the euro area level of 2%, to help other countries to regulate. However, it is unlikely to agree to the population, which is very wary of inflation.

The risk is that, Pisani-Ferry argues that parts of the euro area turned into “a sort Meddzodzhorno [southern Italy] or eastern Germany, where free account management coupled with high unemployment.” Unlike Sweden, the 90-ies. Experiencing difficulties Eurozone countries can not devalue its currency against the currencies of its major trading partners, although the weakening of the euro has clearly contributed to export growth throughout the region. For the ECB such a scenario would be extremely dangerous. The Central Bank has been criticized in Germany for their still relatively modest intervention in the markets of government bonds. The fact that the ECB would be forced to increase the program to the full “quantitative easing”, in which the inflationary impulse is not neutralized by the withdrawal of liquidity from other sectors of the financial system. Similar measures have been taken by the Federal Reserve Board and the Bank of England at the peak of the global economic crisis that followed the collapse of Lehman Brothers in September 2008. But for the Germans quantitative easing ECB would be a violation of two principles, which they considered fundamental to the euro area at the time of its founding in 1999: the strict independence of the Central Bank of politics and public national responsibility for order in their public finances. Concerns about high inflation continued to grow, increasing the widespread dissatisfaction Monetary Union.

Probability: significant.

Implications for the Euro: the long-term weakening.

4. Collapse

End of the single European currency. Tension becomes too large to cope with it. One or more countries decide that they would be better outside the euro area, or other Eurozone countries decide to exclude them. The economic collapse of Greece, the recession and rising unemployment across the euro area, the growing resentment against the euro – with a significant deterioration of the situation a nightmare scenario could become a reality. Instead of becoming an easy way out of difficulties, as expected, some in the financial markets, defaulted on debt or debt restructuring in a country of the euro area could have unpredictable consequences for the disequilibrium in the region.

Nobody ever planned collapse of the euro area. Joining the monetary union seemed irreversible process, so the position of the output from it is simply absent. But this does not mean that the collapse is impossible. According Ansgar Proteins, professor of economics at the University of Duisburg-Essen in Germany, organized way out of the euro area would be quite expedient for countries that are “fundamentally different from each other.” “Portugal is practically nothing to export. They compete with emerging markets, to improve the economic situation, they would reduce wages so that it would lead to a very deep recession. The same can be said for Greece.” One possibility, said proteins, is that an organized system for the “orderly default” member countries could also include the probability of monetary union. Germany’s Chancellor Angela Merkel has suggested that in future the country of complying may be asked to leave the Eurozone.

The problem is that an orderly exit would be difficult, perhaps impossible task. Most economists also agree that the cost of leaving the euro would be huge, regardless of the nature of this release – in disgrace (for example, Greece) or at their own request (eg, Germany). Greeks would be faced with the prospect of huge debt payments in euros, but with a much weaker drachma, and German companies would be forced off the market because of excessively high exchange rate for the German mark. Cost of doing international business for the exporters would increase, and the volatility in the currency market would be a major obstacle to economic growth. If it became clear that to leave the euro area, in the end, perhaps the pressure would rise so that the door that says “exit” there would have been pandemonium. Accordingly, the Monetary Union – the dream of European politicians since the second world war – could collapse. The direction of further European economic integration would be changed to the opposite. Speaking in the city of Aachen in Germany, Merkel has said that if the euro fails, “it will be a failure not only of the single currency. It will be a failure of Europe and the idea of European unity, as such.”

Probability: a distant, but not as much as previously thought.

Implications for the Euro: a strong currency depreciation long before any decay looming on the horizon.

Ukrainian Globalist
2010-06-13 18:03, Economics.

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