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The reports of my death have been greatly
exaggerated /Mark Twain/
… or why is the euro still alive and should Latvia join the EMU?
Mārtiņš Kazāks, PhD
Deputy Group Chief Economist
Chief Economist in Latvia
Swedbank
November 28, 2012
Global Economy: subpar growth, stagnation,
recession… well, it looks like a sick and shaky man…
GDP annual growth, %
15
10
5
0
-5
-10
China
Sweden
USA
Russia
Germany
Eurozone
UK
-15
2006
2007
2008
2009
2010
2011
2012
2010
2011
2012
Quarterly GDP growth in euro zone, s.a. (%)
1.5
0.0
-1.5
-3.0
2006
2007
2008
2009
Source: Eurostat
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Europe: … well, more like a sick and beaten man with
low self esteem put in an intensive care ward…
Purchasing manager's index in manufacturing
70
above 50
denotes expansion
65
60
55
50
45
40
China
Sweden
USA
Russia
Germany
Eurozone
UK
35
30
2007
2008
2009
2010
2011
2012
Source: Reuters EcoWin
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3
Universal response: print some money, which is ok
as part of the measures…
Avots: www.karikatura.lv
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4
Europe: monetary policy transmission mechanism is
broken and money printing has a very limited effect…
Stress and financial system
4.5
1000
ECB refinancing rate
4.0
TED spread
3.5
ECB deposit facility, bn EUR (rs)
800
3.0
600
2.5
2.0
400
1.5
1.0
200
0.5
0.0
2007
0
2008
2009
2010
2011
2012
Source: Reuters Ecowin
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Europe: ample liquidity has some quite predictable but
not that positive side effects…
Government 10-yr bonds yield, pp
8
Government 2-yr bonds yield, pp
8
Germany, EUR
Sw eden, SEK
Germany, EUR
Sw eden, SEK
Italy, EUR
Spain, EUR
Italy, EUR
Spain, EUR
6
6
4
4
2
2
0
0
-2
2008
2009
2010
2011
2012
Source: Reuters
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-2
2008
2009
2010
2011
2012
Source: Reuters
6
Europe: it surely does not look nice, but is it really that
bad?
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7
Europe: much has been done indeed, but the house is
surely not complete and lots more still needs to be done…
For instance,
• Into what will the EU evolve and what will be the role of the EMU?
– Banking union… single supervisor, single resolution, deposit
guarantees?
– Integrated budgetary framework… more Europe with less money?
– Integrated economic policy… what does it really mean?
– Democratic legitimacy and accountability… yes, we do need that!
• What will be the financial cost of all this?
• What will be the political cost of all this?
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8
Europe: financial markets are worried about the risk of
default, not that much about the exit…
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9
Latvia: the fastest growing EU economy for three
quarters running… do we need all this “euro stuff”?
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10
Latvia: what are the benefits from joining the euro?
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Latvia and the euro: what are the options?
Avots: www.karikatura.lv
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12
Euro 2014: not a windfall hefty pension but a valuable
opportunity which would be a shame to waste
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Avots: www.karikatura.lv
13
Latvia: it seems we will be able to meet the criteria…
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14
Thank you!
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