Friday, March 19, 2010
The €uro : A recession proof currency?
Europeans are wondering about the prospect for the €uro (www.spiegel.de ,march 9, 2010), following the seriousness of the Greek economy difficulties these days. Three unbalanced account (Public debt, fiscal deficit (12% of GDP) and current account deficit), is the usual menu for economic crisis, which might turn out to be political ones. The financial situation of other European countries , has made a usual post recession scenario, a highly complicated situation to care about.
A mix of doubt and fear goes across borders within European Union concerning the implications of such a risk. Will the €uro be capable of coping with these difficult times? .
Just a few months ago international analysts were predicting the fall of the Dollar as a global currency, because of the US economy long run prospect for solving its fiscal deficit and debt. The €uro, seemed quite in good shape to take a better stand as a global currency. All of a sudden, it seems all is gone. Speculators as usual, take advantage of this uncertainty , betting against the €uro ,just as they did some time in the past against the dollar, or other weak currencies.-
Since the beginning of the €uro experience, (1999),it should have been clear that although from the economic point of view was an interesting approach to Europe economic progress and political stability , from the political point of view was not that much friendly. A currency which works like a fixed exchange rate among its different partners which are include in the monetary Union , means very unpopular and some time politically unsustainable requirements to keep it working.
Thus, there are key elements which are hard to get implemented for a single country, more so for a community of countries. These are : Flexible markets (specially labour and goods market,), steady productivity increases, and fiscal deficit under control. The founders of the monetary union ,cared publicly only about the third requirement ,setting tough restriction for making fiscal policy €uro friendly ,fixing the limit of overspending at 3%.Of course such a target become just good intentions when the recessions wind comes along the way. In fact, most of the current problems in the €uro zone ,deal with the fact that the European monetary framework is not recession proof, which means that it exacerbates the implication of fiscal activism for the €uro stability, in those countries forced to go ahead with more spending. Any adjustment follow a different path, because there is no way to depreciate local currencies, to support tradable goods to reallocate resources from domestic spending to exporting sectors , and with low level of productivity , alternatives fall within a very narrow space: To reduce both labour cost and incomes ,which is politically unthinkable .Thus ,external financial support is the only way to get through at the cost of losing sovereignty.
What is it next?. It is unlikely that the €uro will be short lived. It is more likely that the whole institutional framework which support it, will have to be more flexible, including better design for the lender of last resort issues, and the prevention of moral hazard behaviour.