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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