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Eurozone certainly imperfect, but not unsustainable

Xinhua, January 29, 2012

• Euro and the single currency, which are still young, have many deficiencies, but fears that the currency would collapse are overblown, a senior economist of an influential think tank said Saturday.

  "The euro area is certainly imperfect, but that does not mean that it is unsustainable," Daniel Gros, director of the Centre for European Policy Studies (CEPS), told Xinhua.

  Gros' comments came in response to British Prime Minister David Cameron who said on Friday that there is no systemic support to make euro a successful currency.

  Speaking at the Annual Meeting of the World Economic Forum (WEF) at Davos, Cameron said that all successful single currency have the same characteristics and need to improve and mature as a support system.

  "The eurozone's problem is not lack one of these systems, but simply a no," referring to the eurozone's lacking of "a strong unified central bank, a sound financial system, a high degree of integration and flexibility to respond to economic shocks," among other things, said the prime minister.

  "I don't agree with Cameron," Gros said. The eurozone is still young, and the support system would be gradually installed as eurozone countries undergo structural adjustment, he added.

  "Adjustment has happened in the past. Germany, for example, entered with an overvalued exchange rate, but then was able to adjust. Italy, Spain and other countries will also adjust," Gros said in an emailed message to Xinhua.

  The CEPS director also said the adjustment would take time, but is expected to be completed gradually. "It will take longer than optimal, but it will happen gradually - provided financial market turbulence remains limited."

  Gros specifically pointed Cameron's comment about the eurozone's lack of a strong unified central as something against the fact. "Luckily, the one point on which Cameron is dead wrong is the European Central Bank: it is very strong."

  In a CEPS commentary published earlier this month, Gros said key macroeconomic indicators do not suggest any problem for the eurozone as a whole. "On the contrary, it has a balanced current account, which means that it has enough resources to solve its own public-finance problems."

  "In this respect, the eurozone compares favourably with other large currency areas, such as the United States or, closer to home, the United Kingdom, which run external deficits and thus depend on continuing inflows of capital," he added in the commentary.

  In terms of fiscal policy, too, the eurozone average is comparatively strong. It has a much lower fiscal deficit than the U.S., being 4 percent of GDP for the eurozone, compared to almost 10 percent for the U.S., according to the commentary.

  "Much has been written about Europe's sluggish growth, but the record is actually not so bad," Gross said. Over the last decade, per capita growth in the U.S. and the eurozone has been almost exactly the same, he added.

  "Given this relative strength in the eurozone's fundamentals, it is far too early to write off the euro, but the crisis has been going from bad to worse, as Europe's policy-makers seem boundlessly capable of making a mess out of the situation," Gros said in the commentary.

  The senior economist, who had done research work in the International Monetary Fund (IMF) and the European Commission, attributed the worsening debt crisis to the unbalanced internal distribution of savings and financial investments.

  There is an excess of savings north of the Alps, but northern European savers do not want to finance southern countries like Italy, Spain, and Greece, Gros said.

  "That is why the risk premium on Italian and other southern European debt remain at 450 to 500 basis points, and why, at the same time, the German government can issue short-term securities at essentially zero rates."

  Both the German government and the European Central Bank could take care of the problem if it were willing to, but "they are understandably reluctant to take such an enormous risk," Gros said.

  The euro's long-run survival requires the correct mix of adjustment by debtors, debt forgiveness where this is not enough, and bridge financing to convince nervous financial markets that the debtors will have the time needed for adjustment to work, Gros said.

  "The resources are there. Europe needs the political will to mobilize them," he added.

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