A group of well-known European and American economists have concluded that the euro currency itself is to blame for the problems in the eurozone. The report published recently by these economists, who joined forces in Massachusetts under the guise of the National Bureau of Economic Research, is the first at such a high expert level to pass sentence on the single European currency… [1] The document’s authors – Americans Jesús Fernández-Villaverde and Tano Santos and Brit Luis Garicano – are not explicitly calling for the breakup of the eurozone and the return of marks, drachmas, pesos and escudos. However, they do argue convincingly that opportunities for the reform and steady development of the economies of European countries currently being labelled as «problem» economies were undermined exactly when the euro was introduced.
The authors point out that it was already clear in 1999 that any further economic development of countries like Greece, Portugal, Ireland and Spain would directly depend on the implementation of austere and unpopular structural adjustments aimed at increasing the competitiveness of the economy. However, the introduction of the euro opened up the opportunity for these and other countries to achieve their budgetary and fiscal objectives by inflating speculative «bubbles» and appealing to EU funds. As a result, the competitiveness of the economies of primarily Mediterranean countries has dropped further, but their governments have been able to make extensive use of the credit facilities, in spite of the strict budgetary requirements of the Maastricht Treaty. According to the economists’ calculations, joining the eurozone triggered a huge influx of loan funds to countries on the European periphery. As a consequence, over the last ten years Greece, Portugal, Spain and Ireland have increased their net external debt to 100 percent of GDP.
Conclusions for the future made by the experts from the National Bureau of Economic Research are also unpromising. They predict that the trends they have detected may spread even further to countries currently inflating or using new «financial bubbles». The report’s authors also predict that a «deterioration of public and private governance» may take place in the US, which also does not provide any additional optimism for Europeans, bearing in mind how closely the European and American economies are linked.
The last few days have injected financial experts with a new dose of pessimism. The composite indicator of business and consumer confidence in the eurozone economy fell more than expected in March – to 90 points; analysis of the decline in the GDP of France in the fourth quarter of 2012 in comparison with the previous three months and in annual terms remains at a level of 0.3 percent.
The rating agency Moody’s has downgraded the credit rating of Cyprus to the Caa2 level due to the growing threat of the island nation withdrawing from the eurozone. «The sentiment about Europe is bad. The uncertainty created by a bank bailout in Cyprus and the inability in Italy to form a government is weighing on the markets, reminding us that Europe is going to be a negative influence for years to come», stated expert Stephen Halmarick, head of investment markets research for the Australian company Colonial First State Global Asset Management. Faith in the European economy outside Europe is falling, and fewer and fewer investors want to invest in «risk», argues Tomomi Yamashita, senior fund manager for Shinkin Asset Management Co. A general manager at Japanese company SMBC Nikko Securities Hiroichi Nishi, meanwhile, is even warning against the possible «domino effect» if Brussels tries to extend its proposals for solving the banking crisis in Cyprus to other countries in the eurozone. The president of Eurogroup, Jeroen Dijsselbloem, has already hinted at such a possibility, announcing that the plan to restructure Cypriot banks may become a template for rescuing «problem» banks in other eurozone countries.
And just as Cyprus received a respite, Italy once again emerged on the front line of the European crisis. In just one day, 27 March, the yield of Italian government bonds jumped up 21 basis points, showing the highest increase for the whole of March. This happened after the leader of the Democratic Party, Pier Luigi Bersani, assigned with forming an «anti-crisis» coalition government, announced that he could not see any chance of creating a large-scale coalition.
Meanwhile, the business news TV channel Bloomberg reported that the next country in need of an EU and IMF stabilisation programme could be Slovenia. «The public finances of this country in southern Europe are in a sorry state», noted experts, recalling that the yield on Slovenia’s ten-year government bonds had already reached the level of 6.69 percent, having risen by 0.59 percent in just 24 hours and by 1.65 percent over the previous week. In the meantime, the figure is already at 6 percent – the level that the European Commission considers dangerous. And if the level exceeds 7 percent, default looms.
It is entirely possible that the situation in Slovenia is already running away from the new left of centre cabinet. The euro crisis is getting ready to seize its next victims.
