Nr. 12-2011 Published monthly by:
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€uro cures As the euro turbulence continues to create headlines and ups-and-downs at the world’s stock exchanges and financial markets, a number of euro cures have been prescribed by an impressive number of persons in the international financial community.

e-focus has taken a look at some of the proposed cures.

The eurobond cure
A common eurobond would result in lower loan interest rates for countries like Portugal, Ireland, Italy, Greece and Spain. But, countries with good credit ratings would have to pay more in interest than what they are doing today.

Not surprisingly, the German Chancellor Angela Merkel is not too positive to the eurobond cure and the German Ministry of Finance regards it as a very final way out.

Christine Lagarde, the new President of the International Monetary Fund, is not too keen on a eurobond either. During her time as Minister of Finance in France she said that introducing the eurobond would be like ‘putting the carriage in front of the horse’.

The Hungarian-American finance man George Soros is however positive to the eurobond idea and says that he finds it natural that the eurozone countries take a common responsibility for their currency.

The former Hansapank CEO Indrek Neivelt says that Eurobonds might be a first move towards centralization of power, or even a move towards the United States of Europe; a common taxation policy, common bonds, the member states having less authority over drawing up their budgets. This would however be a long term process requiring 10 to 20 years before being fully implemented, and neither the eurozone nor the EU has that time now, says Indrek Neivelt.

The euro exit cure
The eurozone needs an exit mechanism, says among several others, George Soros.

Swedbank’s analyst Cecilia Skingsley agrees and says that she would prefer a divorce between Greece and the eurozone with Greece re-introducing their former currency, the drachma. Initially it should be traded 1:1 to the euro and then be allowed to float and at the same time Greece’s debts should be written down, according to Cecilia Skingsley.

A disadvantage with a Greek divorce like this would be that the country’s loans in foreign currencies would increase in value as the drachma will fall. As an alternative to writing the debts down, some analysts advocates that these loans should be converted to the drachma which would mean that the losses are absorbed outside Greece.

The economist Nouriel Roubini, also known as Dr. Doom, says that Greece is bankrupt, not competitive enough and stuck in a depression. The only realistic option is for Greece to leave the eurozone and its debts should be written down. When Greece has introduced their own currency, it should be allowed to fall with minimum 30%, says Nouriel Roubini and puts up Argentina as an example as the country went through a similar process in the early 2000’s.

The North-South cure
The fact that well managed economies are supposed to support bad managed economies upset many people in Europe and maybe especially in Germany.

The former President of the Federation of German Industries, Hans-Olaf Henkel, wants to split the euro into a North and a South currency. The well managed economies in Northern Europe should break free from the eurozone and create a ‘North euro’. That would leave the South European countries with a ‘South euro’ being valued at a lower exchange rate and thereby strengthen their competitiveness and increase their exports. If the eurozone doesn’t split up, it will be like in Germany where rich federal states pay for the poor which is the same as organized irresponsibility, says Hans-Olaf Henkel.

Greece, Italy and other southern European countries will probably fail to agree on the terms for establishing the new so-called southern European monetary union, comments Indrek Neivelt. Besides, it might lead to Greek clients taking their money to German banks, which would result in such a blow to the Greek banks that Greece would be unable to keep them afloat on its own. The IMF and Germany would just have to come to rescue again.

The euro-business-as-usual scenario
Not regarded as a cure, euro-business-as-usual is however indeed regarded as a probable scenario.

Chased by the market, politicians will continue to find ad-hoc solutions. Greece will struggle on with its GDP sliding, the unemployment increasing and facing a long and painful period of internal devaluation with an obvious possibility of national social unrest.

It would be a long period of cut-cut-cut as the Baltic States did, says Indrek Neivelt. Estonia is cited as an example of a nation that increased its competitiveness by cutting spending. At the same time, it is understood that this approach may work for a small country that managed to export itself out of the crisis and from which many people went to work abroad. The whole world cannot increase exports, because somebody has to import as well. A grand-scale migration wave is also out of the question. In conclusion, this scenario would probably lead to the European economy shrinking during the next ten to twenty years.

“It’s a challenge of historical proportions”
- The EU is facing a challenge of historical proportions, said the EU Commission’s Chairman José Manuel Barroso in his September 28th speech to the EU Parliament in Strasbourg.

- Greece will remain a member of the eurozone and there is a need for a deeper economical integration among the EU27 countries to stop tendencies towards a fragmentation of the union, said José Manuel Barroso.

- There is also a need for a deeper integration among the 17 euro countries. When this is accomplished there is a possibility for coordinated borrowing between the countries with a common eurobond, continued Barroso and added that when the eurozone is equipped with the tools needed for securing integration and discipline, eurobonds will be regarded as a natural and beneficial step forward for all.

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