27 January 2011

Stewart Fleming: "Crucial months for the euro"

In his article for European Voice, Fleming writes: "The greatest threats to the eurozone may be passing. It now needs to agree on rigorous governance structures."

Anxious followers of the fortunes of the single currency are increasingly coming to the conclusion that the eurozone will survive the sovereign-debt crises in peripheral countries such as Greece, Ireland and, potentially, Portugal.

Today, however, the key question is what will carry it from its current risky position to safety. Will the euro's survival now be ensured because the far-reaching reforms to economic governance and financial market regulation that Germany, France and the European Central Bank (ECB) are calling for, will be put in place?

Or will it survive because a package of half-measures is adopted by eurozone countries and proves enough to satisfy, at least temporarily, the bond-market ‘vigilantes' who have been driving up interest rates in countries such as Portugal, even though those half-measures are not tough enough to lay the foundations for the euro's long-term stability?

- Spending and reform: As always in resolving sovereign-debt crises, a balance has to be struck between how much finance to provide and how much economic reform (adjustment) can be expected in return. Unfortunately, in a departure from the norm of most sovereign-debt crises, the eurozone's troubled sovereign borrowers have more negotiating leverage than they would as small unitary states with their own currencies, partly because they share (and can therefore damage) the euro.

- Competitiveness and discipline: At the heart of the euro crisis is a loss of competitiveness and a lack of discipline in the problem countries. Some euro members were unwilling to recognise that joining the single currency required them to adopt policies to improve their economic performance to match their competitors in the eurozone, not to mention globally.

Crucial, now, is for eurozone governments to agree in the next few weeks on the rigorous economic governance structures, oriented to the long term, and the crisis-management mechanisms that are required to underpin the foundations of Europe's future in a globalised world economy.

Graham Bishop, an expert on both the euro and financial-market regulation, suggests in a new book on the euro crisis that if a visionary approach commensurate with the historical challenge is adopted, “the eurozone [will] emerge from...an economic and political abyss without parallel in modern times...as a political federation, loose in some respects, but with tightly centralised economic governance at its heart”. We learnt from last week's Eurogroup meeting (17 January) that getting from here to there will not be easy. 

This is excerpted from the article appearing in European Voice. To read full article, subscribe to European Voice here.