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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 © Swedbank 2 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 © Swedbank 3 Universal response: print some money, which is ok as part of the measures… Avots: www.karikatura.lv © Swedbank 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 © Swedbank 5 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 © Swedbank -2 2008 2009 2010 2011 2012 Source: Reuters 6 Europe: it surely does not look nice, but is it really that bad? © Swedbank 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? © Swedbank 8 Europe: financial markets are worried about the risk of default, not that much about the exit… © Swedbank 9 Latvia: the fastest growing EU economy for three quarters running… do we need all this “euro stuff”? © Swedbank 10 Latvia: what are the benefits from joining the euro? © Swedbank 11 Latvia and the euro: what are the options? Avots: www.karikatura.lv © Swedbank 12 Euro 2014: not a windfall hefty pension but a valuable opportunity which would be a shame to waste © Swedbank Avots: www.karikatura.lv 13 Latvia: it seems we will be able to meet the criteria… © Swedbank 14 Thank you! Global economic outlook, Global economy monthly newsletters, etc.: http://www.swedbank-research.com/english/archive.csp To subscribe to our research: http://www.swedbank-research.com/latvian/subscribe.csp © Swedbank 15