This Report focuses on the main causes and impact of the eurozone crisis, the effectiveness of the mixed policy responses at the Member State and EU governance level, and the implementation of appropriate strategies to mitigate uncertainty and spur growth in Europe.
This Report by Rudi Guraziu and Epidamn Zeqo draws on the speakers’ presentations and the ideas that were developed and discussed at the meeting on Sovereign Debt Crisis and its Impact on World Markets held at the German Embassy in London on 11 May, 2012. The aim of the event and this Report is to provide a constructive input by effectively addressing the current developments in the euro area and other countries.
The meeting noted that in order to understand the current issues in the euro area and their impact on international markets one needs to understand:
i) The history of the European Monetary Union (EMU);
ii) The record of the eurozone in comparison with other currency unions such as the United States (USA);
iii) The integral links between economics and politics in the region;
iv) The cycle from banking and fiscal crisis to sovereign crises, particularly in the light of an increasing interconnection among financial markets around the world;
v) The impact of uncertainty on financial markets and the conflicts between long-term solutions and short-term behaviours;
vi) The feasibility of structural reforms while generating growth in the real economy.
Excerpted from Conclusions:
Understanding the role of banks in cross-border finance has become an urgent priority after the recent crisis where they played a central role. EU legislation for the EMU was not written with the existence of large, systematically important subsidiaries or branches in mind. This report argues that there have been regulatory and systemic shortcomings to deal with large cross-border banks in an efficient way, that have contributed to a deepening crisis. In addition, the report notes that macro-prudential, monetary and fiscal policies have to be adjusted to take into account the repercussions of cross-border banking for asset price and credit booms, currency and maturity
mismatches and contagion.
Sensible macro-economic policy-making is no longer possible without taking into account the feedback loop within the financial system and EMU’s design flaws. Therefore, banking supervision, regulation and resolution need to be elevated to the level at which banks operate in a financially integrated region.
As this report argues, EMU’s design flaws are determinant factors. Some argue that a uniform monetary policy for a heterogeneous group of countries lies at the heart of euro area’s current problems: uniform interest rate policy for a heterogeneous monetary union reinforces the differences between countries instead of leading to their convergence, therefore, representing a mechanism for crisis. However, this does not imply that the monetary union is bound to fail, nor that the heterogeneity of real interest rates is unequivocally a cost of monetary integration. It needs to be said that the theoretical concept of an optimal currency area has made us forget that diversity is the basis for trade, credit and mobility, as well as policy coordination. If the EMU is considered as an insurance policy, than such differences provide an opportunity for risk diversification and thus the possibility of reducing the risk for everyone in the insurance pool. Already we are observing debt sharing mechanism, which some see as a step towards establishing shared eurobonds: eurobonds with a uniform interest rate could address the low growth risks and debt servicing of struggling Member States. That said, eurobonds carry moral hazard and should not be seen as the solution to the crisis, and should be considered to be introduced only after the implementation of structural reforms and fiscal consolidation
especially in the southern indebted European countries.
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