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What Next for the EZ?

What Next for the EZ?. Megan Greene, Director of European Economics Roubini Global Economics. Contents. Future of the eurozone (EZ) Greece as a model What to do about Spain and Italy? Upside risks Downside risks Global implications. Greece: What kind of crisis?. Fiscal crisis.

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What Next for the EZ?

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  1. What Next for the EZ? Megan Greene, Director of European Economics Roubini Global Economics

  2. Contents • Future of the eurozone (EZ) • Greece as a model • What to do about Spain and Italy? • Upside risks • Downside risks • Global implications

  3. Greece: What kind of crisis? Fiscal crisis Balance of payments crisis Banking crisis Depression Institutional crisis

  4. IMF vs European Commission OSI to follow PSI from earlier this year? Greece: Divisions on how to address fiscal crisis 2012 (50% haircut non-IMF GGBs) 120.5% of GDP 2012 (est) 167.7% of GDP Source: RGE estimates, IMF., European Commission, EFSF

  5. Greece: Model for an Amicable Divorce Greece: Growth strategy Exit the EZ Austerity and retrenchment Reissue Drachma Internal devaluation Devaluation (Decade of depression) Regain competitiveness Regain Competitiveness Return to growth

  6. It is all up to the ECB to plug deposit and capital flight with liquidity operations Is contagion inevitable? Source: Bank of Spain

  7. EU bailout funds are not big enough for Spain and Italy The EU bailout funds and ECB as a double act

  8. ECB announced OMT (Outright Monetary Transactions) programme in August 2012 ECB to the rescue? OMT 3-yr LTROs Source: Bloomberg

  9. Spain pushes off request for assistance (probably temporary) Debt restructuring and EZ exit by Greece Italian election Terrible economic indicators Steepening of the yield curve Dwindling EFSF/ESM Backsliding by policymakers on full political, banking and fiscal union What is likely to dash OMT euphoria?

  10. Growth ECB engages in “mission creep” and monetizes all debt Policymakers come up with clear, credible roadmap for full political, fiscal and banking union Spain and Italy manage to aggressively implement structural reform programs Core countries agree to a fiscal transfer union for weaker countries Eurobonds Upside risks

  11. Recession deeper and longer than expected Unilateral, disorderly default and EZ exit for Greece Social unrest Italian elections result in greater political instability, structural reforms stall Finland unilaterally exits the EZ ECB stops financing the bank run with liquidity operations Downside risks

  12. Implications for EU budget • EU budget revised every 7 years, must be agreed by year-end • Guides approximately EUR1 trillion in spending for 2014-20 on subsidies for farmers and infrastructure projects. CAP is largest slice. • Inherent tension between increasing the budget while calling for austerity at national level • Could growth be stoked by investing in common resources?

  13. Implications for global growth Source: RGE, forecasts updated September 2012

  14. Contact details Megan Greene Director of European Economics Roubini Global Economics Blog: www.economistmeg.com Twitter: @economistmeg

  15. Thank you

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