The experts' view on the euro's future: it doesn't have one

Thursday, 2 February 2012

The eurozone cannot survive in its current form – that is the alarming prediction of top economists and politicians of all political hues, among them the former Chancellors Alistair Darling, Nigel Lawson and Norman Lamont.

In interviews and articles for The Independent today, the experts were asked for their short-term and long-term predictions for the future of the euro. While most believe the eurozone may well survive the current Greek debt crisis – especially given the political will invested in preventing a disorderly default – none is confident that the contagion could be contained, and most believe the new European Fiscal Compact agreed in principle on Monday is unsustainable as it would take key financial powers from national governments – and their electorates.

Many of the politicians and economists criticised the rush to austerity being imposed on Greece and Italy, suggesting it would be counter-productive by depressing growth, and said the competitive imbalances between eurozone members would be impossible to overcome. They suggested the ultimate consequence of the crisis would be a much smaller eurozone with Germany at the centre and countries such as Greece, Portugal, Italy and Ireland on the outside.

The only strong note of optimism was sounded by Olli Rehn, vice president of the European Commission responsible for the euro, who predicted the currency would emerge stronger from the crisis. "We are undertaking nothing less than an economic reformation of Europe," he said. "Step by step, we are creating financial stability and the conditions for sustainable growth and job creation."
But Mr Darling said: "I don't think anyone can realistically say the eurozone will survive with its present membership and the longer the inaction goes on, the greater the chance that one or more countries will be forced out.
"I think there is an eerie calm at the moment which I hope people are not taken in by. We haven't had a crisis in January, but none of the problems around at the end of 2011 have gone."
Nouriel Roubini, the professor of economics at New York University who predicted the collapse of the US housing market which led to the 2008 crash, agreed: "The eurozone is a slow-motion train wreck. Not only Greece, other countries as well are insolvent. There's a 50 per cent probability that over the next three to five years the euro zone will break up. Not all the members are able to stay."
Danny Blanchflower, professor of economics at Dartmouth College and former member of the Bank of England's monetary policy committee, added: "The fundamental problem that has not been addressed is that there is no growth plan for Greece. Even if you give them a new loan, they have no means of paying it back."
Former Chancellors Lords Lawson and Lamont believed the crisis had been long in the making – and could not be addressed by policy makers.
"You cannot impose a political union against the wishes of the people – at least in countries which call themselves democracies," said Lord Lawson. "If you cannot impose political union then the monetary union is not going to work."
The Economists
Danny Blanchflower, Professor of Economics, Dartmouth College
“The fundamental problem that has not been addressed is that there is no growth plan for Greece. Even if you give them a new loan they have no means of paying it back. The markets seem to have priced in an orderly default. The problem is that if there is a disorderly default. That would mean default and exit for Greece. There are still moments to play out at the final hour, but two and a half years down the road I have little confidence now that there will be an orderly way out. Suppose something happens at 4pm on Thursday afternoon, such as a bank not being able to make a payment, can the European authorities respond fast enough? That’s the great worry: that they simply don’t have the flexibility to move fast enough. I have little confidence.”
Nouriel Roubini, Professor of Economics, New York University
“The euro zone is a slow-motion train wreck. Not only Greece, other countries as well are insolvent. There’s a 50 per cent probability that over the next three to five years the euro zone will break up. Not all the members are able to stay. Greece and maybe Portugal may exit the euro zone - Greece within the next 12 months. Portugal may take a while longer. This doesn’t look like a G20 world it looks like a G-Zero world because there is no agreement on global imbalances, how to change the international monetary system, international trade, banking regulation, on all the fundamental issues.”
Gerard Lyons, chief economist Standard Chartered Bank
“The euro cannot survive in its current format. That either means a collapse is inevitable or there needs to be rapid moves to political union. The way I would characterise it is: who tires first? Does the periphery tire of austerity? Does the market tire of buying the debt and demand much higher interest rates? Do the core tire of providing assistance? I think the euro is fundamentally flawed. Normally good economics is good politics. Good politics is not always good economics. And the euro has been driven by politics from the very beginning. Therefore for the euro to survive it needs the politics to really change. But if it’s left to the economics then the euro will collapse. They [Europe’s leaders] have identified the wrong problem. And when you identify the wrong problem you get the wrong solution. Europe does not have a debt problem, Europe has a growth problem. Debt is high, but a debt problem can be contained by growth. If you address it from the beginning as only a debt problem then you get the wrong solution.”
Vicky Pryce, economist and former head of Government Economic Service
"In my view in the short term there is the political will to get over the current Greek crisis and the amount of money that the ECB has made available to European banks is helping to avoid another credit crisis.
"But the question is what happens later. What people have not realised is that the underlying debt levels of Greece, Italy, Portugal, Spain and Ireland are still too high to be sustainable. This means the pressure won’t go away and that will be the make or break of the euro project.
"I also don’t think that the fiscal compact will work at all. The EU, led by Germany, says it will be imposing all sorts of restrictions on what is being spent by eurozone countries but that creates a democratic deficit. It means countries becoming more nationalistic in their attitude with a lot of anti German feeling across Europe. This is why I think we may end up with a break-up."
George Soros, currency trader whose was dubbed “the man who broke the Bank of England“ for his role in speculating over Britain’s exit for the Exchange Rate Mechanism.
"We remain in the acute phase of the crisis; the prospect of a meltdown of the global financial system has not been removed. The trouble is that the cuts in government expenditures that Germany wants to impose on other countries will push Europe into a deflationary debt trap. Reducing budget deficits will put both wages and profits under downward pressure, the economies will contract, and tax revenues will fall. So the debt burden, which is a ratio of the accumulated debt to the GDP, will actually rise, requiring further budget cuts, setting in motion a vicious circle.
"The fact that a counterproductive policy is being imposed by Germany creates a very dangerous political dynamic. Instead of bringing the member countries closer together it will drive them to mutual recriminations. There is a real danger that the euro will undermine the political cohesion of the European Union."
The politicians
Alistair Darling, Chancellor of the Exchequer 2007-2010
"I don’t think anyone can realistically say that the eurozone will survive with its present membership and the longer the inaction goes on the greater the chance that one or more countries will be forced out.
"Anything that leaves Greece with 120 per cent debt to GDP is unsustainable and there are ominous signs for Spain as well.
"A policy of austerity alone will not work – especially a policy of austerity which is imposed from abroad and decided upon by judges rather than elected politicians.
"People elect Governments democratically – you may not like the result but for the most part you’ll put up with it. But if economic policy has been imposed it   becomes pretty nigh intolerable. I think there is an earie calm at the moment which I hope people are not taken in by. We haven’t had a crisis in January but none of the problems that were around at the end of 2011 have gone away."
Lord Lamont, Chancellor of the Exchequer 1990-1993
"I have a fairly clear view, probably wrong, that in the long run the eurozone will not work. It is not fit for purpose and was possibly the biggest policy mistake since 1945.
"I think the reason it will not work is not really the crisis we have now but a crisis of competitiveness.
"Italy, Greece, Spain and Portugal are not competitive enough compared to Germany and I just do not believe that the degree of austerity and deflation required to make them competitive will be politically acceptable.
"In the immediate future I think it is possible the eurozone will get through this year – although perhaps not with Greece - because there is such political will behind this venture.
"(But) what has emerged in a terrifying form in the last few days is how the eurozone will require political intervention from the centre to survive in a way which is extremely difficult to reconcile with parliamentary democracy.
"All this talk about a commissioner taking over budgets is unattractive and underlines the wisdom of Britain having kept out – despite any underlying economic consequences."
Nigel Lawson, Chancellor of the Exchequer 1983-89
"The eurozone is fundamentally flawed and can’t work. This is something that is now clear. But it is something that once you are in it is very hard to get out of.
"The cleverer architects of the euozone realised that monitory union could not work without complete political union. That is not a disreputable thing to want. The snag is that the people of Europe don’t want it as you see with Greece at the present time. You cannot impose a political union against the wishes of the people – at least in countries which call themselves democracies. If you cannot impose political union then the monitory union is not going to work."
Jim O’Neil, Chairman of Goldman Sachs Asset Management. Formerly head of global economic research at the bank.
"The reality is that too many countries joined the euro in the first place and ultimately without dramatic change they can’t probably survive. But I don’t think that is an issue for this year because the policy makers have ring-fenced the contagion and you wouldn’t get all this staggering amount of fuss about making sure Greece stays in the euro only for them to turn round in two months time and say we’re pulling out.
"However Greece and Portugal still, in my opinion, have to demonstrate that they can survive in this system in the longer term.
"They have to boost their productivity and competitiveness so much to be able to be able to start growing again and (because of the euro) they will not have the benefit of a currency devaluation to help them."
Lord Ashdown, leader of the Liberal Democrats 1988-1999 
"I don’t think that the eurozone in its present form can survive.
"The question then is where you draw the line. I am very clear what the core is: It is Germany, Austria, Finland and Benelux and Denmark. For economic reasons you probably not want France but for political reasons you can’t keep them out. The next question is whether Italy is in or out.
"My political view remains that while the German people would fund the recapitalising of their own banks I’m not sure they would hand money to the Italians.
"Everybody is saying why don’t the Germans put more money in but if you take two minutes to think about it there is no way the Germans are going to put more money in until you create the institutions to ensure its going to be wasted again."
David Laws, Chief Secretary to the Treasury 2010 and former vice president of JP Morgan
"The key over the next few months is the extent to which the eurozone and the ECB can bolster confidence so that the problems that there are in Greece and Portugal don’t spread to Italy and Spain – two countries where the size of the debt and the refinancing and interconnectedness within the European banking system are such that if you end up with a breakdown in confidence it is going to be very difficult to repair.
"Portugal is a particularly sensitive link between Greece and Spain and Italy which are much bigger economies. The situation in Portugal has been pretty grim - Interest rates soaring to levels that people are already assuming some kind of haircut in terms of its debt.
"It feels that we are never going to have a moment when the political leadership are able or willing to decisively break the crisis. The issue is are we going to continue to have the muddle through we’ve had this last year with ever diminishing friction in the financial system so things gradually head in the right direction?"
Ed Balls
"Far from being over, I fear the eurozone crisis is this year entering a more chronic, drawn out but equally dangerous phase.
"While the bouts of market turmoil which characterised the crisis of last year may have receded – at least for a time - don’t be fooled. The underlying pressures have not gone away. There is still no plan for Greece. And endless summits have still not got to grips with what needs to be done to properly restore market confidence, stop contagion spreading and promote growth.
"I believe it’s essential that the European Central Bank is given political backing to act as lender of last resort. It is the logic of the monetary union these 17 countries have signed up to. Investors need to know that eurozone countries will do whatever it takes to stand together. As long as that doubt remains the current crisis and risk of contagion will continue.
"And look at what is happening to growth, unemployment and debts. The credit rating agency Standard and Poor’s got it right when, in downgrading France and others last month, they said 'austerity alone risks becoming self-defeating'.
"Yes, all countries need to make tough decisions on tax and spending. But to successfully get deficits down we need a proper plan for jobs and growth across Europe – just as we need one here in Britain. Yet the new Treaty risks locking in an austerity straitjacket that even the credit rating agencies have now criticised.
"In Britain we know what self-defeating austerity means – no growth, soaring unemployment and £158 billion of extra borrowing. Outside the euro, Britain had a choice. But we made the wrong choice and choked off our domestic recovery well before the recent crisis on the continent.
"That belief in collective austerity means David Cameron and George Osborne are unable to argue for a proper solution to this crisis, which is vital for our own fragile economy – especially since only rising exports kept us out of recession last year. In Britain and the eurozone, as long as political leaders carry on like this, 2012 is going to be a grim year."
Neil Kinnock, European Commissioner 1995-2004
"The eurozone is not going to collapse and I don’t think there will be any departures this year or probably at all. The basic reason for that is that if any eurozone member was allowed to fall out it would have a really damaging effect which nobody wants – not even the strongest economies.
"Gradually the eurozone members are putting together a series of measures which combine discipline with support. It’s not finished yet but it’s going in the direction which will prevent breakdown.
"My regret is that the only formula that is being employed by most states in Europe is really pressing down heavily on growth.
"Everybody sensible knows that without growth deficit reduction will be so far in the distance that it will cease to have any effect as a motive. People in democracies will accept austerity if its undertaken with manifest justice. But if it is undertaken in a punishing way without fairness there is resentment and resistance.
"I think the next chapter is that the people arguing for growth as the wise economic course and as the best means as reducing deficit will win the argument.
"Just as war is the mother of invention crisis is also a parent of evolved policies. People will describe it as muddling through - but muddling through is what democracies do. Its only totalitarian systems which don’t muddle through."
Olli Rehn, Vice President of the European Commission responsible for the euro
"The euro is here to stay and will emerge stronger from the current crisis.
"The events of the last two years have created the conditions for us to strengthen its foundations decisively.
"We have put in place new rules to greatly strengthen our capacity to ensure sound public finances.
"We have introduced systems to detect and prevent macroeconomic imbalances – such as house price bubbles – that threaten stability.
"This is about learning the lessons of the past. That is also why we are undertaking a root-and-branch overhaul of financial regulation and supervision.
"Europe must cut public debt levels to restore confidence – while avoiding cuts in areas essential to future growth like education and research. This must be matched by structural reforms to tackle youth unemployment, support small businesses and complete the single market.
"For countries most vulnerable to the crisis, we are strengthening our firewalls so as to give them the space to put their own houses in order.
"We are undertaking nothing less than an economic reformation of Europe. Step by step, we are creating financial stability and the conditions for sustainable growth and job creation. "