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