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” Source: World Economic Forum, licensed under the Creative Commons Attribution-Share Alike 2.0 Generic license 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." 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: Britain’s Exit: Black Wednesday Source: http://anderb.wordp ress.com/2012/02/ Became White Wednesday The Gold Standard: Britain Joined in 1925 Winston Churchill Source: Library of Congress, Reproduction number LC-USW33-019093- Exited in 1931 Sustained Recovery from 1932 “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 .