why the euro will collapse - michael kitson: economist · why the euro will collapse whither...

Why the Euro will collapse

Whither Europe?’

CIBAM Global Business Symposium

21 June 2013

Michael Kitson

University of Cambridge

www.michaelkitson.org

https://twitter.com/MichaelKitson

Europe is not working

Source: Eurostat: 2013

Unemployment in Europe

(April 2013)

Source: Eurostat, 2013

Youth unemployment rates in

Europe, Jan 2000 - April 2013 (%)

Source:

Eurostat,

2013

Source: Eurostat

Explaining the crisis

• A debt crisis

austerity is the solution

• A ‘structural’ or ‘competitiveness’ problem

reducing the role of the state and

more ‘competition’

• A Euro problem

the single currency is structurally

flawed

The Euro problem

• Combined countries together with different

structures and different business cycles

• Lack of policy flexibility

• Lack of market flexibility

• Why has the Euro problem not emerged

before?

• Masked by the twin deficits:

– fiscal

– balance of payments

Source:

Eurostat

database

Source:

Eurostat

database

Balance of payments on current

account, selected countries (% of GDP)

Source: Simon Wren-Lewis:

http://mainlymacro.blogspot.co.uk/2012/03/other-eurozone-crisis.html

The lack of policy flexibility

• Exchange rates

• Monetary policy

• Fiscal policy

• Resource transfers

Eurozone: long-term interest

rates, 1993-2013

Author: Spitzl, available on a creative commons license, (GNU Free

Documentation License)

Data Source: http://sdw.ecb.europa.eu

European Fiscal Compact

• A debt-to-GDP ratio below 60%

• A general budget deficit less than 3.0% of

the GDP

• A structural deficit of less than 1.0% of

GDP if the debt-to-GDP ratio is

significantly below 60% -or else below

0.5% of GDP

• Result: a massive deflationary bias

How to deal with the fiscal constraints?

Ignore them

Author: Spitzl, available on a creative commons license, (GNU Free Documentation

License)

Data Source: European Commission

Resource transfers

• Regional and industrial aid is insufficient

• Would require a massive shift of resources

from the core to periphery

• In effect from Germany to Greece,

Portugal, Spain and Italy

Is there market flexibility?

• Argument that markets will sort it out

• They rarely do

• Requires convergence of unit labour costs

(internal devaluation in the weaker

countries)

– Slow

– Painful

– Possibly terminal

Unit labour costs, selected European

countries, 2000-2012 (2000=100)

Source: FT Alpahville

CAN THE EURO

SURVIVE?

“Whatever it takes”

Mario Draghi, the governor of the European

Central Bank, told the world that he would

do “whatever it takes” to save the Euro.

Source: World

Economic Forum,

licensed under the

Creative Commons

Attribution-Share

Alike 2.0 Generic

license

Draghi (April, 2013) on the Eurozone

doubters:

"These questions are formulated by people

who vastly underestimate what the euro

means for the Europeans, for the euro area.

They vastly underestimate the amount of

political capital that has been invested in the

Euro."

Source: World Economic

Forum, licensed under

the Creative Commons

Attribution-Share Alike

2.0 Generic license

What are the two main issues facing

your country at the moment?

Source: Eurobarometer, 2012

How do you judge the current

situation of your national economy?

Source: Eurobarometer, 2012

Has the crises peaked?

Source: Eurobarometer, 2012

Political capital:

Lessons from

history

The ERM:

Became White Wednesday

Britain’s Exit: Black Wednesday

Source:

http://anderb.wordp

ress.com/2012/02/

The Gold Standard:

Exited in 1931

Britain Joined in 1925

Sustained Recovery from 1932

Winston Churchill

Source: Library of

Congress,

Reproduction number

LC-USW33-019093-

“Nobody told

us we could do

that” One Labour politician’s response to the UK’s

withdrawal from the Gold Standard.

The Future of the EURO

• Fatally flawed

• Recent policy reactions are papering over

the cracks

• A Keynesian/expansionary response will

help but not solve the long-term problem

• Europe will become stronger when the

Eurozone breaks up

References

European Commission, Public Opinion in the European Union,

Standard Eurobarometer 78,Autumn 2012

Eurostat database,

http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_dat

abase

Eurostat News Release

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-14062013-

BP/EN/2-14062013-BP-EN.PDF

Eurostat Unemployment Statistics

http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Unempl

oyment_statistics

FT Alphaville, http://ftalphaville.ft.com/2013/01/18/1344272/all-pain-

and-no-productivity-gains/

Wren-Lewis, http://mainlymacro.blogspot.co.uk/2012/03/other-

eurozone-crisis.html