Download Eurozone, Greece and catastrophic debt crises

Eurozone, Greece and
catastrophic debt crises
Zdenek Kudrna
University of Salzburg
EMUchoices.eu
Euro’s future: current status
• The Euro architecture is incomplete
→Currency union also needs economic, banking, fiscal & political unions
• The Euro is stable
→ECB policies bought time for reforms (better economic news also help)
→Some macroeconomic and banking reforms were implemented, but …
→… plans for further fiscal & political union remain non-committal
• The Euro remains fragile
→Unexpected or unintended events can derail the tentative stability
The short-term future of Euro =
‘North-South’ political economy game under uncertainty
③
Euro future =
game between
creditor and
debtor states
+
surprises
White swans
Solidarity accepted
①
Muddling through
Austerity rejected
Black swans
②
1. Muddling through: gradual reforms
• Definition = minimal reforms at the last moment
→ECB buys time: ‘whatever it takes’ + QE, negative IR, OMT, (T)LTRO
→Banking union: gradual bank restructuring
→Asymmetric adjustment: South austerity, North non-expansion
→Fears of break-up suppressed => gradual rebalancing through REER
→Lower energy prices & cheaper Euro help
• Price for muddling-through = lost decade in some MS
→challenges to extreme gradualism
2. Southern challenge: the rejection of Austerity
•
‘Southern’ voters/governments reject austerity & reform
• The economic consequences of a single country (Gr)exit manageable
→First-round effects are reasonably understood and actors have scenarios
→The Euro area has infrastructure to dampen contagion (ESM, BU)
• BUT legal and political risks are unpredictable and thus uncontainable
→There are no rules for exit & redenomination of Euro contracts
→Misguided court decision or unilateral policy => uncontrollable chain reaction
→Other crises only increase the uncertainty
•
Any EuroExit still has a potential for a ‘Lehman II’ event’
3. Northern challenge: the acceptance of solidarity
•
’Northern’ voters/government accept expansion & solidarity
→Macroeconomic expansion in Northern creditor countries
→Anything that increases demand (for ‘Southern’ exports)
•
Acceptance of any element of the fiscal union
→Greek debt restructuring
→Fiscal backstop for the banking union and common deposit insurance
→Cyclical adjustment insurance fund (1-2 % GDP)
→Some form of common unemployment insurance (2-3 % GDP)
→Various schemes of Eurobills /Eurobonds/Eurotreasury (risk pooling up to 60% GDP)
•
‘North’ can shorten muddling-through & make EZ less vulnerable
→ The election of populist parties can deepen it
Black & white swans: (un)known unknowns
• Low probability, high impact events
• Black or White swan?
→Brexit
→Russian pressure
→break up of UK, Spain or Belgium
→massive escalation of security and/or migration crises
• … anything else than we cannot imagine yet
Prediction: sustained muddling through
•
Muddling through: most likely scenario
• Delivers most minimalist & most gradual Euro reforms unless external
shock forces rapid progress or break-up
•
Political disagreement: the key obstacle
• Many good proposals lack political support, especially in creditor states
•
Euro area remains stable at a fragile impasse
• Still waiting for a political shock to induce break-up or reform