Cato Institute 30th Annual Monetary Conference, Part 5

Moderator: Mary Anastasia O’Grady
Member, Editorial Board, Wall Street Journal

Lessons from the Euro Crisis

Opens by saying that the Euro was started with good intentions.  (DM: low praise that it was not designed to fail.)

George S. Tavlas
Director, Bank of Greece

Euro was anticipated to reduce economic problems in Greece, and it worked for a while after 2001.  Interest rates fell and became stable.  Government deficits rose.  Net public saving fell.

Crisis hit. Yields screamed up. Real GDP falls 20% 2008-present, maybe another 6% next year.

Difficult to run large external deficits under a gold standard.  Relatively easy to do so in the short run in the Eurozone.  Mundell’s optimal currency union requiring flexible wages and prices is necessary but not sufficient.

Under a gold standard, credit spreads are high and restrain government borrowing.  Eurozone membership facilitated Greek overborrowing.

Can’t hold a peg without credible fiscal policies.

Jürgen Stark
Former Chief Economist, European Central Bank

ECB will ride to the rescue of European Governments.  This is not a sustainable policy.  Adjustments need to take place.

ECB — principles & rules based. (DM: somewhat subverted at present).  Some countries were allowed to join the Euro who really were not qualified.  Rules were not upheld. Countries did not get the practical impacts of sharing a currency.

Five points to overcome the crisis:

  1. Stabilize and reduce govt debt
  2. Structural reforms — flexibility
  3. Reorganize & recapitalize banking sectors
  4. Reform monetary union
  5. ECB provides liquidity to banking sector

Crisis policies not well thought out, ad hoc, reactive, leaves too much to the ECB to do, too little done by govts


Wolfgang Münchau
Associate Editor, Financial Times

OMT policy not started yet — will it work?  Fundamental problem of Eurozone: No bailout, no default, no exit (inconsistent).  Believes Greece will eventually be bailed out… would go easy on austerity as a policy in Greece.

Banking union necessary to get ECB out of the OMT problem.

Argues that low level economic reform necessary in order to create a economic union.  Political union would likely be needed.

Five conditions for a currency zone:

  1. Real conversions and similarity
  2. (sounded similar to 1)
  3. Political consensus on fiscal & monetary union
  4. Banking union
  5. A willingness to bend political/fiscal priorities in a crisis

Thinks Eurozone will not break up.

Pedro Schwartz Giron
Professor of Economics, San Pablo University, Madrid

How the Eurozone could survive.  Quasi-gold standard — ECB was supposed to be independent from all.  No exploiting money illusion. No devaluation. No excessive debt.

Debt Intolerance: Debt> 90% GDP in developed countries. 60% in emerging markets.  Spain at 90%+ in 2013.

Monetary must be rules-based because we don’t really understand what monetary policy does in the intermediate-term

Inflation will happen instead of default or dissolution


Tavlas: Argentina 2001 vs Greece now — like gold standard in Great Depression, those that left early did best.  Leaving euro: capital flight, new currency has extreme risks, foreigners would not accept new drachma, contagion effects.  Credit Anstalt failure turned a recession into a depression (DM: something would have failed… too much debt.)

O’Grady: Argentina: convertibility, not a currency board.  Very different.  Argentina has not had good results.

Stark: Latvia, Ireland austerity may be working.  Austerity fatigue in the south.

Munchau: Can Germany leave the EU?  Not likely and only Americans ever suggest it.  Unthinkable politically.

Stark: Anyone suggesting this does not understand European history or politics.

Basel II impacts on the crisis 1.6% capital lending to Greece, 8% to a German corporation?  Stark: this is not a key problem.