Friday, November 18, 2011
Is it feasible the two speed euro zone?
The notion of the “two speed euro zone” , foster speculation whether it is a kind of yellow light for countries which refuse to go on with necessary reforms to stay in the euro zone, or it is a real possibility to get Europe and the global economy out of the economic recession territory .
European Union, is currently the largest economic zone of the world with 16% of world GDP (IMF 2010). 11,3% of its imports comes from USA, (13,5% comes from NAFTA),and 18,8 % comes from China ,(33,7% comes from BRIC Countries).This means that the global economic recovery, is undoubtedly connected with EU engine running. The latest IMF economic projections , suggest for the Euro zone, weak economic growth with GDP within the 0,5 - 1% range for 2012.
On the other side, the austerity programs in highly debtors EU countries ,has a strong bias to the so called “self adjustment path”. This depend heavily on:
a.- Markets flexibility to get the necessary cost gains to improve competitiveness, (there is a reallocation between losing money sectors, toward those winning profit sectors).
b.- Fiscal policy rejecting its countercyclical nature.
The expected outcome, is a deeper and longer recession than otherwise.
This self adjustment path, has failed before in countries with debt problems ,(although not equivalent to the ones of European countries,Argentina 2001, Chile 1982), because it denies the fundamentals for debtor countries to be succesful in their effort to overcome the situation :
a.- Economic growth (to decrease the Debt /GDP ratio, and as a consequence to improve access for additional financial resources(lower rate of interest).-
b.- Structural investment loans (roads, ports, airports), coupled with structural adjustment loans (higher efficiency in public sectors, incentives to winning sectors and the like)
c.- The Lender of last resort , (Central Bank or the IMF, or both),and the interest rate levels .
Thus, the “two speed Euro zone” arises as an transitory alternative,(just the way when you have to drive your car at lower speed because of bumping in the road), to break up the Euro stability restrictions (self adjustment bias), allowing debtor countries to work within a more flexible framework, (like a physician trying to save a life ). It would also protect those still solvent countries, but with potential liquidity problems, if they cannot get back to the growth path soon. Finally, as it has been suggested by key analysts, there is the risk of disorderly Euro zone break up, which might become increasingly possible, as the recession get deeper (www.economonitor.com ), unless something beyond current approach is done sooner than later, to avoid that the whole effort become politically unsustainable.