The Future of the Euro

1. The Future of the Euro G. Malliaris Loyola University Chicago Loyola University Chicago Public Symposium Chicago, Illinois, Wednesday, April 18, 2012

2. KEY QUESTIONS FOR DISCUSSION • Will the Euro Survive the Recent Crisis? • Is the Euro Still a Good Idea for the EU? • Is there a Sufficient Political Commitment to Preserve the Euro? • What Are the Choices of the Weak EMU Countries?

3. HOW TO APPROACH THESE QUESTIONS? • Few Methodological Choices • Review Recent History • Economics of Optimum Currency Area • Global Financial Crisis of 2007-09 • Persistent Global Financial Imbalances • Use the Concept of STABILITY

4. How to Proceed? • How Stable is the Euro? • Stability as a Unifying Theme • But “What is Stability?” • An Economic System is Stable if it Recovers After an Internal or External Shock. • Recovers Means Return to Potential GDP • Claim: The Euro is Stable • Challenge: How Stable? • Offer 7 Reasons for Euro’s Stability

5. First Argument for Stability • Global Markets View the Euro as a Stable Currency; No Evidence of Imminent Collapse

7. Second Argument for Stability • The EMU Economy Remains Stable • EMU GDP is about 20% of Global Economy • 2012 EMU GDP to contract by -0.3% • 2013 EMU GDP Expected to Grow 0.9%

8. Source: Eurostat

9. Third Argument for Stability • Robust Global Growth of 3.3% Will Help the EU • A Weak Euro Will Help Also Exports

10. Fourth Argument for Stability • Excellent Corporate Balance Sheets • Bank Deleveraging is Going Well and May End by 2012 • Additional Easing Expected by the ECB

11. Sources: Federal Reserve Board, Bank of England, Bloomberg

12. Fifth Argument for Stability • Solid Past Record on Growth • Solid Record on Low Inflation • Low Interest Rates • PARADOX: Past Success May Have Contributed to Excessive Sovereign Borrowing

13. Euro Area Deficit Level Source: Eurostat

14. Sixth Argument for Stability • Despite Political Complexities There Is Sufficient Political Will to Stabilize the Euro • Dramatic Success of Political Developments in Greece and Italy (Papademos and Monti Governments of Technocrats) • Long History of Political Initiatives for Over 50 Years Towards Establishing the EMU

15. Seventh Argument for Stability • Core Germany and France are Stable • Serious Imbalances for Greece, Ireland and Portugal • Options to Leave the Euro Are not Attractive • The Euro Commands a 25% Share of Global Reserves; Second to US Dollar with 60% • British Pound is 4% and Japanese Yen is also about 4%

16. Global Reserve Currencies

17. Possible Future Scenarios • Have Argued In Support of Stability of the Euro with Gradual Return to Normality in 2-3 Years • If Rescue Plans Fail, Uncertainty May Contribute to Further Instability • What If Some Countries Choose to Default and Leave the EMU? • Total Collapse of the Euro? Unlikely

19. ANSWERS TO QUESTIONS • Is the Euro Still a Good Idea for the EU? YES. • Will the Euro Survive the Recent Crisis? MOST LIKELY; CLOSER FISCAL COOPERATION IS NEEDED. • What Has Caused the Recent Euro Crisis? THE GLOBAL CRISIS AND SUCCESS OF THE EURO. • Is there a Sufficient Political Commitment to Preserve the Euro? MOST LIKELY; AREA OF UNCERTAINTY DUE TO COMPLEX INSTITUTIONS • What Are the Choices of the Weak EMU Countries? VERY DIFFICULT