the future of the euro
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The Future of the Euro
A. G. MalliarisLoyola University Chicago
Loyola University ChicagoPublic SymposiumChicago, Illinois,
Wednesday, April 18, 2012
KEY QUESTIONS FOR DISCUSSION
• Will the Euro Survive the Recent Crisis?• Is the Euro Still a Good Idea for the EU?• Is there a Sufficient Political Commitment to
Preserve the Euro? • What Are the Choices of the Weak EMU
Countries?
HOW TO APPROACH THESE QUESTIONS?
• Few Methodological Choices• Review Recent History• Economics of Optimum Currency Area• Global Financial Crisis of 2007-09• Persistent Global Financial Imbalances• Use the Concept of STABILITY
How to Proceed?
• How Stable is the Euro?• Stability as a Unifying Theme• But “What is Stability?”• An Economic System is Stable if it Recovers After an
Internal or External Shock.• Recovers Means Return to Potential GDP • Claim: The Euro is Stable• Challenge: How Stable?• Offer 7 Reasons for Euro’s Stability
First Argument for Stability
• Global Markets View the Euro as a Stable Currency; No Evidence of Imminent Collapse
Second Argument for Stability
• The EMU Economy Remains Stable
• EMU GDP is about 20% of Global Economy
• 2012 EMU GDP to contract by -0.3%
• 2013 EMU GDP Expected to Grow 0.9%
Q1-2007
Q2-2007
Q3-2007
Q4-2007
Q1-2008
Q2-2008
Q3-2008
Q4-2008
Q1-2009
Q2-2009
Q3-2009
Q4-2009
Q1-2010
Q2-2010
Q3-2010
Q4-2010
Q1-2011
Q2-2011
Q3-2011
Q4-2011
-4%
-3%
-2%
-1%
0%
1%
2%
Euro Area GDP growth
Source: Eurostat
Third Argument for Stability
• Robust Global Growth of 3.3% Will Help the EU
• A Weak Euro Will Help Also Exports
Fourth Argument for Stability
• Excellent Corporate Balance Sheets
• Bank Deleveraging is Going Well and May End by 2012
• Additional Easing Expected by the ECB
Sources: Federal Reserve Board, Bank of England, Bloomberg
Fifth Argument for Stability
• Solid Past Record on Growth
• Solid Record on Low Inflation
• Low Interest Rates
• PARADOX: Past Success May Have Contributed to Excessive Sovereign Borrowing
Euro Area Deficit Level
Source: Eurostat
Sixth Argument for Stability
• Despite Political Complexities There Is Sufficient Political Will to Stabilize the Euro
• Dramatic Success of Political Developments in Greece and Italy (Papademos and Monti Governments of Technocrats)
• Long History of Political Initiatives for Over 50 Years Towards Establishing the EMU
Seventh Argument for Stability
• Core Germany and France are Stable• Serious Imbalances for Greece, Ireland and
Portugal• Options to Leave the Euro Are not Attractive• The Euro Commands a 25% Share of Global
Reserves; Second to US Dollar with 60%• British Pound is 4% and Japanese Yen is also
about 4%
Global Reserve Currencies
Reserve Currencies
dollareuroyenpoundfrancother
Possible Future Scenarios
• Have Argued In Support of Stability of the Euro with Gradual Return to Normality in 2-3 Years
• If Rescue Plans Fail, Uncertainty May Contribute to Further Instability
• What If Some Countries Choose to Default and Leave the EMU?
• Total Collapse of the Euro? Unlikely
ANSWERS TO QUESTIONS
• Is the Euro Still a Good Idea for the EU? YES.• Will the Euro Survive the Recent Crisis? MOST LIKELY;
CLOSER FISCAL COOPERATION IS NEEDED.• What Has Caused the Recent Euro Crisis? THE GLOBAL
CRISIS AND SUCCESS OF THE EURO.• Is there a Sufficient Political Commitment to Preserve
the Euro? MOST LIKELY; AREA OF UNCERTAINTY DUE TO COMPLEX INSTITUTIONS
• What Are the Choices of the Weak EMU Countries? VERY DIFFICULT
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