Euro

Ahead of this week’s gathering of European finance ministers in Brussels to hash out new bail-out systems for the eurozone, two magazines have weighed in with their views of what needs to come next to rescue the single currency – and both suggest going further than ministers have been willing to thus far.

On Sunday, the New York Times Magazine published a highly readable summary of the crisis by Nobel Prize-winning economist Paul Krugman entitled “Can Europe be Saved?” in which he appears to back the idea of a Europe-wide bond.

And the new issue of the Economist advocates a different and far more pessimistic route: a restructuring of Greek debt, followed potentially by similar moves in Ireland and Portugal. Read more

The most significant EU-related development over the holidays was Estonia’s official entry into the eurozone on New Year’s Day, an event that is worth revisiting as the single currency prepares for what is likely to be another year of turmoil.

As Fredrik Erixon, director of the Brussels-based European Centre for International Political Economy, notes in a new “Obituary for the Estonian kroon”, it wasn’t too long ago that the Estonian government was being advised to drop its peg to the euro and let its currency float in order to save its economy from the ravages of the European debt crisis.

But Tallinn hung tough, and as we noted in an article last month, is now poised for gross domestic product growth that is the pride of the EU. According to forecasts by Eurostat, its 4.4 per cent 2011 real GDP growth would make it the best performer in the eurozone.

When I talked to Estonian President Toomas Hendrik Ilves last month, he recalled with hard-to-contain smugness the amount of pressure the country resisted to devalue during the early days of the euro crisis. “All three Baltic economies were in serious trouble, and all kinds of people said devalue, devalue, devalue,” he said. Read more

The euro has fallen by almost 20 per cent against the dollar since last November, and the general view in Europe is that this is good news – indeed, one of the few pieces of good economic news to have come Europe’s way recently.  The argument goes as follows: euro weakness = more European exports = higher European economic growth.

Unfortunately, the real world is not as simple as that.  Inside the 16-nation eurozone, not every country benefits equally from the euro’s decline on foreign exchange markets.  As Carsten Brzeski of ING bank explains, what matters is not so much bilateral exchange rates as real effective exchange rates.  These take into account relative price developments and trade patterns, and their message for the eurozone is far from reassuring. Read more

There is a gulf separating Germany from France on how to cure the eurozone’s ills, and it does not bode well.

Germany identifies the eurozone’s chief problems as excessive budget deficits, weak fiscal rules and a general culture of over-spending in the region’s weaker countries.  The remedy, say the Germans, lies in austerity measures, tougher punishments for rule-breakers and better housekeeping.  Germany is so sure that it has got the answer right that it is introducing a €80bn programme of tax increases and spending cuts – not because the German economy desperately needs such measures, but because the government in Berlin wants to set an example to other eurozone states.

France knows the eurozone has a fiscal problem, but it disagrees with the German view that immediate and drastic austerity measures are essential.  The French contend that, if budget hawks win the day, Europe’s fragile economic recovery will fade away and there may even be another recession (as Paul Krugman notes, an example often cited in support of this argument is the “Roosevelt recession” of 1937, when President Franklin D. Roosevelt, having just about dragged the US economy out of the Great Depression, inadvertently caused another economic downturn with a premature attempt to balance the budget). Read more

Speaking with one voice.  Singing from the same song sheet.  Communicating clearly with financial markets.  Avoiding needless disputes with governments.  These are essential attributes of high-level policymakers at a modern central bank.  So what are we to make of an extraordinary speech given last Friday in the Moroccan city of Rabat by Lorenzo Bini Smaghi, an executive board member of the European Central Bank?

To put it bluntly, Bini Smaghi told the German government that it had screwed up Europe’s response to the Greek debt crisis. Germany’s ineptitude meant that the final price of the emergency rescue package ended up being far higher than necessary, he complained. Read more

Well, did he say it or didn’t he?  I am referring to President Nicolas Sarkozy of France.  According to El País, Spain’s most reputable newspaper, Sarkozy told his fellow eurozone leaders at a May 7 summit that France would “reconsider its situation in the euro” unless they took emergency collective measures to overcome Europe’s sovereign debt crisis.  The source?  Officials in Spain’s ruling socialist party, quoting remarks purportedly made after the summit by José Luis Rodríguez Zapatero, prime minister.

It would be extraordinary, if true – for two reasons.  First, if France were to leave the euro area, European monetary union would have no reason to continue.  It would collapse.  And that would be like dropping a financial nuclear bomb on Europe.  Secondly, it is inconceivable that France would consider it to be in its national interests to take such a drastic step.  We are left to conclude that if Sarkozy really did utter these words, it was just a bluff to get Chancellor Angela Merkel of Germany to sign up to the eurozone rescue plan that was ultimately agreed in the early hours of May 10. Read more

The €500bn eurozone stabilisation package agreed in the early hours of Monday, to be topped up by as much as €250bn from the International Monetary Fund, represents the first time since the Greek debt crisis erupted in October that European political leaders have moved decisively ”ahead of the curve”.  All along, the only way of calming financial markets was to produce an initiative that would exceed their expectations and convince them that Europe would do whatever was necessary to save its monetary union. Read more

One frequently aired proposal for overcoming the ever more dangerous strains in European monetary union is to encourage Germany, which enjoys a large current account surplus, to buy more from Greece and other southern European countries struggling with large deficits.  This, so the argument goes, would rectify the imbalances that are destabilising the eurozone and would demonstrate Germany’s sense of responsibility and solidarity with its 15 euro area partners. Read more

The financial rescue plan devised by eurozone governments for Greece doesn’t look like a rescue plan in the classic sense.  Like a thermonuclear weapon, it appears intended never to be used at all.  The idea is that the Greek government itself, backed by calmer financial markets, will succeed in overcoming its debt crisis without ever drawing on assistance from its 15 euro area partners. Read more

I take it that everyone has seen the insulting picture on the cover of the February 22 edition of Focus, a lightweight German news magazine?  Under the headline ”Swindlers in the euro family”, it shows the Venus de Milo statue, a monument of ancient Greek civilisation, sticking up a middle finger at Germany.  In this way the magazine’s editors convey, as offensively as possible, the idea that debt-ridden Greece is robbing Germany blind by forcing it to come to Greece’s financial rescue.

The Greek response has been predictably furious.  The Greek consumers’ federation has called for a boycott of German goods, commenting that Greeks were creating timeless works of art like the Venus de Milo at a time when Germans were “eating bananas in the trees”. Read more