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The Euro: to be or not to be?

Published time: February 03, 2012 13:02
Edited time: February 03, 2012 19:25

The future of the Euro is becoming increasingly dull

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None of the experts at the Russian Forum 2012 are in doubt. Even if the ‘end of the world’ scenario for the Euro doesn’t play out, the economic recovery will be painful and long lasting.

So will it be farewell to the Euro?…

Paul Krugman, renowned economists and a Nobel laureate is all but pessimistic about the future of Greece.

“They (Greece) will default on their debt. In fact they already have. The question is whether they will also leave the Euro, which I think at this point is more likely than not,” he said.

Charles Wyplosz, Professor of International Economics, shares the doom and gloom scenario. A major crisis is most likely to take place, with Greece and Portugal defaulting at some point soon. “These are small countries, small debts – that’s ok,” Wyplosz comments. But Italy is likely to be the next, with the banks following suit. That’s when the European Central Bank will come in, which may take around a year or so to happen.

“If you have a patient as ill as we do, you need emergency measures,” Satyajit Das, Risk Consultant andauthor of “Extreme money” told Business RT. The periphery European economies should leave the Euro and then default – that’s what the ‘Doctor’ Das ordered.

Europe will need around €10trl, which includes €8.5trl of overall state debts and another €1trl to aid the world banking system, says Wyplosz. “We don’t need to spend it, but we have to have it ready,” which will basically put the end to the crisis. And the ECB is the only possible source of that, so much needed, pile of money.

“It’s not the European Stability Fund, it’s not the IMF, it’s not the German Government,” but the ECB that “can threaten the market with this amount of money,” Wyplosz explains.

He says that the ECB should just step into the market and say “we will do it, if need be,” which will immediately stop the crisis. However, currently it is being done another way, where the ECB “puts commercial banks at the centre of solutions.” It gives the banks huge amounts of money, that are further used to buy government debt.Given that the banks are extremely vulnerable at the moment, such “channelling of the money through commercial banks is bringing a short term solution, but is creating a longer term problem,” Wyplosz concludes.

A possible rescue plan for the EU leading economies drafted by Satyajit Das would include massive debt write offs, coupled with recapitalisation of banks around the world. And the last, but not least component would be another financial mechanism to replace the existing European Stability Mechanism (ESM).

“I call it the EIM – the European Instability Mechanism. Because it can’t work,” Satyajit Das says.

The periphery economies in turn should start implementing painful necessities. They need to cease using the single European currency to start improving their competitiveness and bottoming out of the crisis.

“There’s no way they can gain competitiveness by basically cutting their labour cost,” Satyajit Das explained referring to the Greek example. There was a cut on wages, of around 30%, which was basically undermining domestic demand – one of the key components of economic growth.

The European turmoil is certainly becoming increasingly important not only for the periphery economies, but for the world leaders as well, such as Germany and France, Satyajit Das adds. “Trying to save other people they now have become infected with the same disease.”

… or is there light in the end of a tunnel?

Jean-Michael Six, Chief European Economist at Standard & Poor's, takes a more positive stance. He expects demand from the emerging markets, particularly from Asia, to recover in the 2nd half of 2012, “which should be supportive of a very gradual recovery in the Euro zone.”

This will be further underpinned by recovering investor confidence, as “the ECB provides ample liquidity for the banking sector in the Euro zone.”Interestingly, despite all the doom and gloom hanging around the Euro zone, the Euro has so far performed quite well, Jean-Michael Six stresses. “Obviously it’s the factor of confidence that remains,” he explained. However, “fundamentally, I’m not seeing anything spectacular happening to the Euro.”

Anders Еslund, a Senior Fellow at Peterson Institute, Washington, D.C., also says the Euro is unlikely to collapse. “Basically, the European crisis is bottoming out,” he told Business RT.

“One part of that is that you have to reduce the budget deficits, which is happening. Another point is that you need sufficient financing from the ECB for the European bailout mechanism, which is also happening,” Еslund explained.