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“Will the euro survive 2012 and beyond?”, London

14 Mar 2012

Open Europe organised a panel discussion in London entitled “Will the euro survive 2012 and beyond?” The event was kindly hosted by CMC Markets PLC, and was chaired by the Wall Street Journal’s Simon Nixon.

To view excerpts of the event covered on the Guardian's live blog see here.

To view Julian Callow's presentation click here.

To view Raoul Ruparel's presentation click here.

Julian Callow, Managing Director and Head of International and European Economics at Barclays Capital, singled out some reasons for optimism about the future of the eurozone. He noted that eurozone countries are making “good progress in reducing deficit”, while the banking sector (for example in Spain) has begun to provide greater support for government borrowing by purchasing larger amounts of bonds. He argued that a “competitiveness adjustment”, albeit slow, is taking place within the single currency area. He pointed out that wages in Germany are starting to rise at the same time as they are being cut in peripheral eurozone countries.

Julian warned of the risks of a Greek exit from the euro. He argued that if this were to happen, other debt-laden eurozone countries would face significant market pressure, which he described as “a huge externality and a risk to financial stability.” According to him, Greece has already achieved fiscal consolidation worth 10-12% of its GDP, and can achieve more over the next couple of years if bigger cuts are implemented in the public sector. However, Julian stressed that “much greater [financial] transfers” from core to peripheral eurozone countries are “very likely” to be needed to keep the single currency area together.

Megan Greene, Head of European Economics at Roubini Global Economics, rejected the “myth” that the eurozone crisis is a “fiscal crisis”, and described it as a “balance of payment crisis and a growth crisis.” She argued that Greece would “return to growth more quickly” if it decided to re-issue the drachma, adding that Greece’s eurozone exit “could be handled much like an amicable divorce.” However, she noted that this would probably not happen before next year’s general elections in Germany, as German Chancellor Angela Merkel “will not accept responsibility for whatever occurs if Greece defaults and exits the eurozone.”

Megan argued that “really hard work for Portugal is just beginning”, and predicted that Portugal will default and leave the eurozone by the end of 2014. Once Greece and Portugal have left the single currency, she opined that “the Irish government could go for a strategic default.” During the Q&A, Megan noted that, in spite of all the efforts to move towards greater integration, the crisis has worsened the “cacophony” within the eurozone. She pointed out that historically, it is “quite normal for currency unions to break up.”

Raoul Ruparel, Head of Economic Research at Open Europe, noted that the Greek problem has not been solved by the second bailout, but only delayed slightly. In fact, he argued, only a small amount of the bailout will actually go to Greece. This means that the second bailout offers little real debt reduction and simply shifts debt from the private sector onto the books of taxpayer-backed institutions. Raoul suggested that this could give rise to wider political tensions and instability in the eurozone. He claimed that persistent political volatility ahead of the Greek elections risked jeopardising the formation of a stable coalition which would be willing to implement the austerity programme.

Raoul noted that the ECB’s long-term loans to banks (LTRO) have had a positive impact on the eurozone economy, since they helped avoid a massive funding freeze for European banks, although they certainly did not offer any long-term solution to the region’s problems. In particular, he highlighted the existence of “zombie banks”, which are completely reliant on ECB funding, meaning that the central bank cannot reduce its liquidity provisions in the future without risking market distortions. Raoul also noted that the wall of funding which needs to be rolled over in 2015 is huge and could present a substantial challenge to banks. During Q&A, Raoul argued that the political fallout from some of the attempts to keep the eurozone intact could in fact be self-defeating and cause more problems for the EU.

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