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So, let me say a few words about the
euro crisis.
To me the
problem began with
the beginning of the euro.
Europe was not an optimal currency area
An optimal curency area is
where countries are sufficiently similar that they can share
a common currency.
The European countries,
the countries of the Euro zone,
were sufficiently diverse that
having to sharing a single currency was inevitably going to be a problem..
Now, what's the reason it's a problem is that
to have a common currency you take away
the most important adjustement mechanisms: interest rates and
exchange rates.
You can compensate that but to do that you have to put something else
in place. Europe din't put
anything else
in its place, anything else, at least,
effective enough.
The Euro was
basically a politically-motivated project
but the politics wasn't strong enough to
finish the project, to do what needed to be done in order to make
the Euro zone work.
It was actually worse than that because
...
leaders when the euro was founded realized that there was a
a lot of convergence
and thought that
they could succeed in moving the country's together
that the countries will converge, and that the countries would converge if only they satisfied
certain
"convergence criteria", certain macroeconomic conditions in terms of
deficit debt
relative to GDP.
But the fundamental problem was not just macroeconomics,
it was differences in the structure of the economies, differences in
productivity
and ... far more
than those "macro convergence"
criteria would need.
So the irony, of course, it is that 2 of countries in crisis
were 2 of the countries that were performing
best
in the convergence criteria before the crisis.
Spain and Ireland had a surplus and low debt/GDP ratios.
So nobody with a right mind should ever say that it is excessive spending that is the cause of
the Euro problem.
The cause of Euro problem is
the structural conditions
not of the individual countries
but of Europe as a whole.
And that is the
second fundamental mistake they made.
That
was
that the Euro was created in the midst of
what it's sometimes called the
euphoria over market fundamentalism.
That markets by themselves are self adjusting, are efficient,
just get government out of the way,
make sure that central bank focuses on just inflation
and everything would work well.
Well that idea was never justified by economic theory
and in the aftermath of the crisis it was clearly
a false idea.
Our markets
did not work very well
financial markets were unstable,
they were not only unstable, they were
extraordinarily inefficient.
No government has ever wasted money on the scale that
america's private sector
as america's financial system
wasted money
The cost of the mistakes of america's financial system are
in the trillions of dollars.
So we've learned
we should have learned
that markets are not on the wrong stable inefficient path,
but in the euphoria of the 90s,
the time in which Europe was created,
they adopted a set of criteria,
or a set of institutions,
that in a sense were designed
not to work
they were unstable. Let me give you an example:
the single market principle meant it was easy for money to move
anywhere all over Europe.
What did that mean?
It meant that in the absence of a common banking system,
when there's a problem in a country,
money could easily leave that country.
We need to remember that backing any country's banking system is the government.
Remember back in 2008 - 2009
is america's banking system that caused the crisis
It has proven itself
incompetent,
unable to manage risk, unable to allocate resources officially, uh...
It has caused a global crisis
and yet in 2008 - 2009
money flow to the american banking system to american economy.
And why did it too much?
It wasn't because they thought
our backing system was that great or our macroeconomic management under
president Bush was that great.
No, they did it because
they knew that the american government
had the resources and willingness to back up
america's banking system
and to do what ever took to keep the american economy ... floating.
Now put yourself in the place of
somebody having money in,
say, spanish or greek banking system
you could
put your money in Germany, in US.
Put your money in Germany and face NO exchange rate risk.
What is remarkable
is how slow the money has been leaving Spain not that it's left Spain,
But then, you get a
vicious circle that, as money leaves Spain,
the credit crunch is set in
the economy gets weaker
capturing gets slower,
the ability of the government to bail out the banks gest diminished,
and the problems of the banks get increased. Even good banking systems
would find it extraordinarily difficult fighting that
or doing well in a depression
of the magnitude that now faces Spain.
And then this problem comes on
top of
the previous mistakes,
that I mentioned. The belief that all it takes
to make the economy work well is
fiscal austerity
... Fiscal austerity
didn't prevent the crisis. As I say,
Spain had a surplus before the crisis,
and now they're asking Spain to cut back?
It's an experiment that been tried over and over again
Maybe one of the first instances of experience in the US
under Herbert Hoover
that succeeded in converting the stock market crash of 1929 into the great
depression.
Now IMF then tried the experiment in East Asia and Latin America. Every one of
these instances
downturns were converted into recessions, recessions into depressions.
You would have thought with this wealth of evidence
that
people won't try to experiment again, they should have learned, but
Europe seems to not have learned the
lesson and
under pressure from Germany,
ECB and others ..
they've been trying to experiment and the outcome has been just like it was in East
Asia, just like it was in the
US under President Herbert Hoover.
What we have
in Spain, in Greece, it's a depression: 25% unemployment, 30%
youth unemployment,
no light at the end of the tunnel.
Then you take
the combined effect of this
you take a combined effort of this austerity AND the credit crunch
resulting from the single market principle
and you have not only a depression
but a depression
which is only getting worse and in which there is no hope
inside.
What is needed?
What is needed is really
structural change
in the Eurozone framework.
Such things are not so complicated. There are basically three things that are needed:
one is
a single banking system for
all Europe or Eurozone.
A single banking system means
not just common supervision, but
deposit insurance, resolution.
Many people
in Europe
recognize
that this has to be done.
They say, let's do it "step-by-step":
first will come supervision,
then it would go to the next stages. But there is
dissidence between
the politics and the economics.
I don't think the markets
will allow that
pace by pace that's slow.
If you have done it
this back in 2001-2002-2003
maybe they could have done it in 3 years, but now
I don't think there's that pleasure.
The second thing they need to do is mutualisation of debt,
It can take many different forms: eurobonds, ECB borrowing and lending, ...
But the basic point is that without mutualization of debt,
interest rates that Spain, Greece, other
countries pay
are going to be very high.
This is a competitive disadvantage
that means that divergences, that are already there, are going to get larger.
So, again,
you are building in
a built-in
system of instability.
So again
likely the problems can only get worse.
The hopeful note is
that
with mutualization of debt
interest rates will come down
debt/GDP ratio for Europe is lower than that of the United States,
lower interest rates will mean that the countries of Europe can spend more
and stimulating their economy
and
if they do that
growth reaches the level that the likelihood
that there'll be a default is very low.
So infact
this is a way to minimize costs.
In the alternative
the cost of equity will be very high.
The third thing:
leaders of europe recognize that austerity won't bring growth,
It took them a long time to realize that, but I think they'd realize that now. But,
they keep saying we have to have growth, but they keep
failing to come up with any strategy that will produce growth.
They've done little things, like
saying we need to be recapitalizing European investment banks but the amount for the amount of
recapitalization is so small that
it's not going to make any difference in the growth
But there are things they can do to promote growth
but they have to be done
at a much larger scale than anybody's been discussing so far.
If they do these things, I think,
there is some hope that
the Euro will survive.
But where Europe is today
where the Euro is today
I think, it'is not viable.
Either there's going to have to be
more Europe
along the lines I should've guessed.
So there has to be more Europe
or there will be less Euro.