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HOW ASYMETRIES IN EUROPEAN
ECONOMIES JEOPARDISE THE EURO?
What is the future of Euro ?
1
L. Dupré Bhatti – Bahria and University/
Preston University, isalmabad - 2013/10/24
Specialist of Behavioral Finance
• Professor of Economics and Business Studies
• Teaching Banking Techniques, and Business & Finance
at University Paris Est Marne-La-Vallée
• Research Scholar at CEMI-EHESS Paris
• Former Analyst at Paris Stock Exchange (Fortis
Securities)
2
L. Dupré Bhatti – Bahria and University/
Preston University, isalmabad - 2013/10/24
LAURENCE DUPRE BHATTI
3
CONFERENCE PLAN
L. Dupré Bhatti – Bahria and University/
Preston University, isalmabad - 2013/10/24
CONFERENCE PLAN
 Reasons and intentions of « constructing »
the Euro
 Good years, bad years: federalism as an
obvious solution?
 Why is the Euro so fragile?
 What about the future of Euro?
4
L. Dupré Bhatti – Bahria and University/
Preston University, isalmabad - 2013/10/24
5
I- REASONS AND INTENTIONS OF
«CONSTRUCTING » THE EURO
L. Dupré Bhatti – Bahria and University/
Preston University, isalmabad - 2013/10/24
I- REASONS AND INTENTIONS IN CONSTRUCTING EURO
1- the EU: « never again »
 building a unified and fraternal Europe :
“never again” following the second World
War.
 founding fathers: jurists
 Impossibility of institution building in Europe
 start with economic ties
 Federalism would naturally impose itself in future
 economic integration worked well
 thirty-year post-war economic boom 6
L. Dupré Bhatti – Bahria and University/
Preston University, isalmabad - 2013/10/24
I- REASONS AND INTENTIONS IN CONSTRUCTING EURO
2- the idea of Euro… emerging from the 70s’
crisis
 A currency to replace $:
 the IMS gold-$ exchange standard collapsed but $
remained THE “global currency”
 € should :
 allow Europeans to buy oil and all imports with their own
money
 compete with $ to be the global currency
 A common money to replace the EMS :
 Trade as a way out of the crisis
 The EMS unable to suppress exchange risk among
European countries
 2/3rd of trade is intra-European: a common money 7
L. Dupré Bhatti - BahriaUniversity - 2013/10/24
8
II- GOOD YEARS, BAD YEARS: FEDERALISM AS
AN OBVIOUS SOLUTION?
L. Dupré Bhatti - BahriaUniversity - 2013/10/24
II- FEDERALISM AS AN OBVIOUS SOLUTION?
1- in the « good » years, no reason to change
 € in 1999 at the beginning of an 8-year
prosperous time: no reason to change its
national system
 Enlarged trade:
 Within Europe: enlarged EU
 New opportunities in BRICS
 European finance (new financial tools)
distributing credit worldwide, especially in USA
 Debt helped the early 2000’s economies
worldwide to prosper
9
L. Dupré Bhatti – Bahria and University/
Preston University, isalmabad - 2013/10/24
II- FEDERALISM AS AN OBVIOUS SOLUTION?
2- in the « bad » years, haro to European institutions
 For people, liberalised EU destruct their nation’ s
protection
 Elections can be lost
 Failure of ” European constitution referendum”
 2008 financial crisis: 2 or 3 years later → Euro crisis:
most fragile states are too indebted
 What about Federalism’s solidarity?
 Federal states like US: taxes of Wyoming help the indebted
State of California...
 EU not Federal: Germans refused to help Greek or Spanish
people...
 The Euro saved by political will:
 problem is taken at an “expert” level: financial institutions
 ECB CHANGED : lend money to a state
 Federalism never in Europe:
 EU fragile during turmoils 10
L. Dupré Bhatti – Bahria and University/
Preston University, isalmabad - 2013/10/24
11
III- WHY IS THE EURO SO FRAGILE?
L. Dupré Bhatti – Bahria and University/
Preston University, isalmabad - 2013/10/24
III- WHY IS THE EURO SO FRAGILE?
1- a political construction… not completely achieved?
 Monetary integration:
 the final act of the Bela Balassa theory (1961) founding the EU...
 But based on the quantitativism.
 no last step: political integration (in a federal system) with a unique
economic policy.
 WAEMU :
 economic union (sponsored by the EU) in 2000
 common currency for 40 years: CFA franc
 national economic and financial institutions inhereted from French
system
 similar economic policies guided by France and the EU
 European MU: quantitativism:
 Central Bank completely independent from national government
views
 Status: low inflation rate whatever economic situation of countries
 theory: economies healthy as long as no inflation... Vs reality:
structural differences in national economies 12
L. Dupré Bhatti – Bahria and University/
Preston University, isalmabad - 2013/10/24
III- WHY IS THE EURO SO FRAGILE?
2- Monetary policy have different results on national
economies
 Huge differences in economic systems of the states :
 results of policies encouraging credit :
 banking systems, housing loan systems, tax systems, savings system, social protection
systems, etc… are different.
 global tax level in all Europe: not the same impact everywhere...
=> some countries more attractive than others to FDI
 “natural” inflation & the unique rate policy :
1) Natural inflation rate ↔ structure of economy :
 some countries export oriented: credit to invest & be competitive abroad
 countries with elderly population nearing retirement ↔ higher real interest rates to
remunerate savings
 others with younger domestic market: credit for consumers => more credits mean more
inflation
 no problem in higher inflation rates in Italy or Spain, compared to Germany: still low but
adapted to the (younger) structure of the economy that needs credit to work.
2) Natural inflation rate also depends on liquidity of the credit system.
 country with liquid credit, efficient business law and fast justice: no friction in the system of
credit and payment among companies
 => inflation rate is structurally lower in Northern countries: no need for companies to inflate
13
L. Dupré Bhatti - BahriaUniversity - 2013/10/24
 A unique ECB rate
…. For economies with different needs
 … before 2007
Greece – Spain : 3,5%
AVERAGE RATE: 2,5%
Germany-Frce : 1,9%
Netherlands : 1,4%
… increasing problems during crisis times !
INFLATION
A unique ECB rate
Too high to finance
economic growth in the
Nethelands
Too low to incite Gr. And
Spain to limit their
inflationist credits
L. Dupré Bhatti – Bahria and University/
Preston University, isalmabad - 2013/10/24
III- WHY IS THE EURO SO FRAGILE?
2- Monetary policy have diffrent results on national economies… (more)
 strength of Euro on the exchange markets:
 the ECB maintains a strong euro: give confidence in € to foreign investors
 positive for high quality exporting countries like Germany
 bad for Italian, Greek, Portuguese or even most French products: less
competitive by increasing the labour costs
15
L. Dupré Bhatti – Bahria and University/
Preston University, isalmabad - 2013/10/24
III- WHY IS THE EURO SO FRAGILE?
3- international markets and sovereign debts
 Speculation about interest rates: and burden of sovereign debt :
 Interest rates from the market: 2% for Germany, 3% for France, .. and 6% for
Greece!
 nearly all the burden of sovereign debt from interests to the market
 consequences in term of inflation
 Instead of federalism, the SGP (stability and growth pact) :
 federalism : entitled to national governments’ expenses control from partners:
impossible!
 Solution: independent central bank + budgetary policies constraint by SGP
(public debt<60% GDP; public deficit< 3% GDP)
 Debt and fiscal efficiency linked to growth:
 when prosperity, SGP worked
 No sanction mechanism
 Some fiscal systems inefficient when no growth
 60% for all countries unreasonable in turmoil times
 Austerity to replace tax homogenisation:
 taxing homogeneity should be the first step… but impossible
 austerity proves immediate action both to European neighbours and to the
financial markets... but inefficient in the longer term. 16
L. Dupré Bhatti – Bahria and University/
Preston University, isalmabad - 2013/10/24
III- WHY IS THE EURO SO FRAGILE?
4- crisis increased asymetries and the debt burden
 Germany:
 quality exports independent from high prices: no problem with strong Euro
 labour costs constrained by social negotiation
=> strong euro + constrained labour costs: high revenues from exports
 aging population: need to keep retired population savings
=> need for low inflation: imposed to every country!
 Scandinavian countries (Sweden)
 economic model based on domestic demand
 social assistance
 sharing efforts and benefits from the economic driving forces through high tax
 redistribution favouring domestic demand.
 France
 protected and rigid labour market : labour costs
 high domestic demand
 help to big national industrial companies exports (not enough loans for
exporting SMEs)
17
L. Dupré Bhatti – Bahria and University/
Preston University, isalmabad - 2013/10/24
III- WHY IS THE EURO SO FRAGILE?
 Greece
 1997-2007 boom years: dynamic tourism sector: debts to develop
 taxation system not efficient enough : austerity for budget equilibrium
 banking and credit system unable to finance the economy: international markets in the
booming years.
 external indebt => trap leading to forced austerity.
 Italy
 dynamic competitive SMEs and industry : exports based on prices
 Weakness: regional disequilibrium
 underground economy to finance the economic activity ↔ banking credit not flexible
enough
 politicians and businessmen: drift in national public accounts
 Tax system not efficient enough
 Spain
 flexible labour market + jobs thanks to public investments (real estate, exports...)
 banking system offered credits (real estate boom, like in the US) thanks to liquidities on
external financial markets
 consumer credit helped high domestic demand
 return of the Spanish economy hard (EU exports + banking system + domestic demand
through loans + regional debts) 18
L. Dupré Bhatti – Bahria and University/
Preston University, isalmabad - 2013/10/24
III- WHY IS THE EURO SO FRAGILE?
 decrease in all sources of revenue (demand from the USA):
 Decrease of non-EU exports in Germany (driving force of Europe!)
 Collapse of real estate in Spain: people unable to pay back
 Big decrease of Italian exports to Europe
 Big decrease of tourism in Greece
 Etc…
 entreprises don’t sell => decrease corporate taxes
 unemployment and decrease in salaries, consumption collapses => less VAT and income
tax
 worsen the burden of sovereign debt
 lower confidence of the markets
 higher interest rates
 worsen even more the situation
 deapen the Euro crisis
19
L. Dupré Bhatti – Bahria and University/
Preston University, isalmabad - 2013/10/24
III- WHY IS THE EURO SO FRAGILE?
Conclusion
 Heterogeneity of the European national
economies and institutions:
 hard to make decisions for common economic
policies
 jeopardises the Euro currency in times of crisis
(debt, recession in low-activity countries)
 speculation on interest rates increases the burden of
debt where deficient tax system
 Austerity reduces economic activity
 exports (being mostly inside EU) cannot
compensate for the domestic demand collapse
=>European economies miss a driving economy
... 20
L. Dupré Bhatti – Bahria and University/
Preston University, isalmabad - 2013/10/24
21
IV- WHAT ABOUT THE FUTURE OF EURO?
L. Dupré Bhatti – Bahria and University/
Preston University, isalmabad - 2013/10/24
IV- WHAT ABOUT THE FUTURE OF EURO?
Conclusion
 The Euro currency: a political ideal… saved
 its economic conception and contruction (monetarist dogma): jeopardise
Euro & EU
 …BUT Euro crisis revealed:
 political will stronger than national views and dogmas: Euro should survive
because of its symbolic political utility
 able to move the institution:
1) states borrowings… to ECB instead of the market in extreme need;
2) solidarity: creation of « lender in last resort »,
3) SGP budgetary constraint and austerity: allowed to lower it
4) common ECB rate vs different inflation rates: nationally adapted ECB rates
 political Will: lower economic contraints but it didn’t solve the real problems: lack
of Federal solidarity and economic structure heterogeneity
 other adaptations necessary : European will to adapt
22
L. Dupré Bhatti – Bahria and University/
Preston University, isalmabad - 2013/10/24
IV- WHAT ABOUT THE FUTURE OF EURO?
 Euro as a global currency?
 crisis made this dream vanish
 also jepardised the dollar in this role
• Global currency,: for transactions (perfect liquidity, global acceptance, and
preference for one unique currency to compare prices worldwide)… and reserve of
value
• Liquidity: Euro handicap: credit restriction by ECB / USA live on credit: dollar more liquid
• Acceptance of the currency: economical and political power worldwide: Europe never
managed to appear politically stronger than the USA, rather the opposite
• Reserve of value in €: once existed; China & Russia get rid of € and $ to invest in
commodities
• Conclusion: if Russia and China change their habits they might soon be followed
• => 2008 financial crisis and Euro crisis put an end to Euro as global currency
• questioned the politico-economic power of the USA, and the trust in their money.
=> during the last G20, both China and Russia suggested an new international reserve
• If dollar loses its power of global currency:
• collapse in worldwide economic and political power of the USA
• compromised future of all « western » countries, including Europe
• => political will of Europeans concerning Euro and the EU would be helpless! 23
L. Dupré Bhatti – Bahria and University/
Preston University, isalmabad - 2013/10/24
Your questions are welcome…
24
THANK YOU FOR YOUR ATTENTION…
L. Dupré Bhatti – Bahria and University/
Preston University, isalmabad - 2013/10/24
Specialist of Behavioral Finance
ldupremailbox-univMLV@yahoo.fr
• Professor in Economics and Business Studies
• Teachings in Banking Techniques, and Business & Finance at University Paris
Est Marne-La-Vallée
• Scholar at CEMI-EHESS Paris
• Former Analyst at Paris Stock Exchange (Fortis Securities)
•Please visit :
https://sites.google.com/site/behavioralfinanceeconomics
25
L. Dupré Bhatti – Bahria and University/
Preston University, isalmabad - 2013/10/24
LAURENCE DUPRE BHATTI

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Conférence islamabad 24 10-13

  • 1. HOW ASYMETRIES IN EUROPEAN ECONOMIES JEOPARDISE THE EURO? What is the future of Euro ? 1 L. Dupré Bhatti – Bahria and University/ Preston University, isalmabad - 2013/10/24
  • 2. Specialist of Behavioral Finance • Professor of Economics and Business Studies • Teaching Banking Techniques, and Business & Finance at University Paris Est Marne-La-Vallée • Research Scholar at CEMI-EHESS Paris • Former Analyst at Paris Stock Exchange (Fortis Securities) 2 L. Dupré Bhatti – Bahria and University/ Preston University, isalmabad - 2013/10/24 LAURENCE DUPRE BHATTI
  • 3. 3 CONFERENCE PLAN L. Dupré Bhatti – Bahria and University/ Preston University, isalmabad - 2013/10/24
  • 4. CONFERENCE PLAN  Reasons and intentions of « constructing » the Euro  Good years, bad years: federalism as an obvious solution?  Why is the Euro so fragile?  What about the future of Euro? 4 L. Dupré Bhatti – Bahria and University/ Preston University, isalmabad - 2013/10/24
  • 5. 5 I- REASONS AND INTENTIONS OF «CONSTRUCTING » THE EURO L. Dupré Bhatti – Bahria and University/ Preston University, isalmabad - 2013/10/24
  • 6. I- REASONS AND INTENTIONS IN CONSTRUCTING EURO 1- the EU: « never again »  building a unified and fraternal Europe : “never again” following the second World War.  founding fathers: jurists  Impossibility of institution building in Europe  start with economic ties  Federalism would naturally impose itself in future  economic integration worked well  thirty-year post-war economic boom 6 L. Dupré Bhatti – Bahria and University/ Preston University, isalmabad - 2013/10/24
  • 7. I- REASONS AND INTENTIONS IN CONSTRUCTING EURO 2- the idea of Euro… emerging from the 70s’ crisis  A currency to replace $:  the IMS gold-$ exchange standard collapsed but $ remained THE “global currency”  € should :  allow Europeans to buy oil and all imports with their own money  compete with $ to be the global currency  A common money to replace the EMS :  Trade as a way out of the crisis  The EMS unable to suppress exchange risk among European countries  2/3rd of trade is intra-European: a common money 7 L. Dupré Bhatti - BahriaUniversity - 2013/10/24
  • 8. 8 II- GOOD YEARS, BAD YEARS: FEDERALISM AS AN OBVIOUS SOLUTION? L. Dupré Bhatti - BahriaUniversity - 2013/10/24
  • 9. II- FEDERALISM AS AN OBVIOUS SOLUTION? 1- in the « good » years, no reason to change  € in 1999 at the beginning of an 8-year prosperous time: no reason to change its national system  Enlarged trade:  Within Europe: enlarged EU  New opportunities in BRICS  European finance (new financial tools) distributing credit worldwide, especially in USA  Debt helped the early 2000’s economies worldwide to prosper 9 L. Dupré Bhatti – Bahria and University/ Preston University, isalmabad - 2013/10/24
  • 10. II- FEDERALISM AS AN OBVIOUS SOLUTION? 2- in the « bad » years, haro to European institutions  For people, liberalised EU destruct their nation’ s protection  Elections can be lost  Failure of ” European constitution referendum”  2008 financial crisis: 2 or 3 years later → Euro crisis: most fragile states are too indebted  What about Federalism’s solidarity?  Federal states like US: taxes of Wyoming help the indebted State of California...  EU not Federal: Germans refused to help Greek or Spanish people...  The Euro saved by political will:  problem is taken at an “expert” level: financial institutions  ECB CHANGED : lend money to a state  Federalism never in Europe:  EU fragile during turmoils 10 L. Dupré Bhatti – Bahria and University/ Preston University, isalmabad - 2013/10/24
  • 11. 11 III- WHY IS THE EURO SO FRAGILE? L. Dupré Bhatti – Bahria and University/ Preston University, isalmabad - 2013/10/24
  • 12. III- WHY IS THE EURO SO FRAGILE? 1- a political construction… not completely achieved?  Monetary integration:  the final act of the Bela Balassa theory (1961) founding the EU...  But based on the quantitativism.  no last step: political integration (in a federal system) with a unique economic policy.  WAEMU :  economic union (sponsored by the EU) in 2000  common currency for 40 years: CFA franc  national economic and financial institutions inhereted from French system  similar economic policies guided by France and the EU  European MU: quantitativism:  Central Bank completely independent from national government views  Status: low inflation rate whatever economic situation of countries  theory: economies healthy as long as no inflation... Vs reality: structural differences in national economies 12 L. Dupré Bhatti – Bahria and University/ Preston University, isalmabad - 2013/10/24
  • 13. III- WHY IS THE EURO SO FRAGILE? 2- Monetary policy have different results on national economies  Huge differences in economic systems of the states :  results of policies encouraging credit :  banking systems, housing loan systems, tax systems, savings system, social protection systems, etc… are different.  global tax level in all Europe: not the same impact everywhere... => some countries more attractive than others to FDI  “natural” inflation & the unique rate policy : 1) Natural inflation rate ↔ structure of economy :  some countries export oriented: credit to invest & be competitive abroad  countries with elderly population nearing retirement ↔ higher real interest rates to remunerate savings  others with younger domestic market: credit for consumers => more credits mean more inflation  no problem in higher inflation rates in Italy or Spain, compared to Germany: still low but adapted to the (younger) structure of the economy that needs credit to work. 2) Natural inflation rate also depends on liquidity of the credit system.  country with liquid credit, efficient business law and fast justice: no friction in the system of credit and payment among companies  => inflation rate is structurally lower in Northern countries: no need for companies to inflate 13 L. Dupré Bhatti - BahriaUniversity - 2013/10/24
  • 14.  A unique ECB rate …. For economies with different needs  … before 2007 Greece – Spain : 3,5% AVERAGE RATE: 2,5% Germany-Frce : 1,9% Netherlands : 1,4% … increasing problems during crisis times ! INFLATION A unique ECB rate Too high to finance economic growth in the Nethelands Too low to incite Gr. And Spain to limit their inflationist credits L. Dupré Bhatti – Bahria and University/ Preston University, isalmabad - 2013/10/24
  • 15. III- WHY IS THE EURO SO FRAGILE? 2- Monetary policy have diffrent results on national economies… (more)  strength of Euro on the exchange markets:  the ECB maintains a strong euro: give confidence in € to foreign investors  positive for high quality exporting countries like Germany  bad for Italian, Greek, Portuguese or even most French products: less competitive by increasing the labour costs 15 L. Dupré Bhatti – Bahria and University/ Preston University, isalmabad - 2013/10/24
  • 16. III- WHY IS THE EURO SO FRAGILE? 3- international markets and sovereign debts  Speculation about interest rates: and burden of sovereign debt :  Interest rates from the market: 2% for Germany, 3% for France, .. and 6% for Greece!  nearly all the burden of sovereign debt from interests to the market  consequences in term of inflation  Instead of federalism, the SGP (stability and growth pact) :  federalism : entitled to national governments’ expenses control from partners: impossible!  Solution: independent central bank + budgetary policies constraint by SGP (public debt<60% GDP; public deficit< 3% GDP)  Debt and fiscal efficiency linked to growth:  when prosperity, SGP worked  No sanction mechanism  Some fiscal systems inefficient when no growth  60% for all countries unreasonable in turmoil times  Austerity to replace tax homogenisation:  taxing homogeneity should be the first step… but impossible  austerity proves immediate action both to European neighbours and to the financial markets... but inefficient in the longer term. 16 L. Dupré Bhatti – Bahria and University/ Preston University, isalmabad - 2013/10/24
  • 17. III- WHY IS THE EURO SO FRAGILE? 4- crisis increased asymetries and the debt burden  Germany:  quality exports independent from high prices: no problem with strong Euro  labour costs constrained by social negotiation => strong euro + constrained labour costs: high revenues from exports  aging population: need to keep retired population savings => need for low inflation: imposed to every country!  Scandinavian countries (Sweden)  economic model based on domestic demand  social assistance  sharing efforts and benefits from the economic driving forces through high tax  redistribution favouring domestic demand.  France  protected and rigid labour market : labour costs  high domestic demand  help to big national industrial companies exports (not enough loans for exporting SMEs) 17 L. Dupré Bhatti – Bahria and University/ Preston University, isalmabad - 2013/10/24
  • 18. III- WHY IS THE EURO SO FRAGILE?  Greece  1997-2007 boom years: dynamic tourism sector: debts to develop  taxation system not efficient enough : austerity for budget equilibrium  banking and credit system unable to finance the economy: international markets in the booming years.  external indebt => trap leading to forced austerity.  Italy  dynamic competitive SMEs and industry : exports based on prices  Weakness: regional disequilibrium  underground economy to finance the economic activity ↔ banking credit not flexible enough  politicians and businessmen: drift in national public accounts  Tax system not efficient enough  Spain  flexible labour market + jobs thanks to public investments (real estate, exports...)  banking system offered credits (real estate boom, like in the US) thanks to liquidities on external financial markets  consumer credit helped high domestic demand  return of the Spanish economy hard (EU exports + banking system + domestic demand through loans + regional debts) 18 L. Dupré Bhatti – Bahria and University/ Preston University, isalmabad - 2013/10/24
  • 19. III- WHY IS THE EURO SO FRAGILE?  decrease in all sources of revenue (demand from the USA):  Decrease of non-EU exports in Germany (driving force of Europe!)  Collapse of real estate in Spain: people unable to pay back  Big decrease of Italian exports to Europe  Big decrease of tourism in Greece  Etc…  entreprises don’t sell => decrease corporate taxes  unemployment and decrease in salaries, consumption collapses => less VAT and income tax  worsen the burden of sovereign debt  lower confidence of the markets  higher interest rates  worsen even more the situation  deapen the Euro crisis 19 L. Dupré Bhatti – Bahria and University/ Preston University, isalmabad - 2013/10/24
  • 20. III- WHY IS THE EURO SO FRAGILE? Conclusion  Heterogeneity of the European national economies and institutions:  hard to make decisions for common economic policies  jeopardises the Euro currency in times of crisis (debt, recession in low-activity countries)  speculation on interest rates increases the burden of debt where deficient tax system  Austerity reduces economic activity  exports (being mostly inside EU) cannot compensate for the domestic demand collapse =>European economies miss a driving economy ... 20 L. Dupré Bhatti – Bahria and University/ Preston University, isalmabad - 2013/10/24
  • 21. 21 IV- WHAT ABOUT THE FUTURE OF EURO? L. Dupré Bhatti – Bahria and University/ Preston University, isalmabad - 2013/10/24
  • 22. IV- WHAT ABOUT THE FUTURE OF EURO? Conclusion  The Euro currency: a political ideal… saved  its economic conception and contruction (monetarist dogma): jeopardise Euro & EU  …BUT Euro crisis revealed:  political will stronger than national views and dogmas: Euro should survive because of its symbolic political utility  able to move the institution: 1) states borrowings… to ECB instead of the market in extreme need; 2) solidarity: creation of « lender in last resort », 3) SGP budgetary constraint and austerity: allowed to lower it 4) common ECB rate vs different inflation rates: nationally adapted ECB rates  political Will: lower economic contraints but it didn’t solve the real problems: lack of Federal solidarity and economic structure heterogeneity  other adaptations necessary : European will to adapt 22 L. Dupré Bhatti – Bahria and University/ Preston University, isalmabad - 2013/10/24
  • 23. IV- WHAT ABOUT THE FUTURE OF EURO?  Euro as a global currency?  crisis made this dream vanish  also jepardised the dollar in this role • Global currency,: for transactions (perfect liquidity, global acceptance, and preference for one unique currency to compare prices worldwide)… and reserve of value • Liquidity: Euro handicap: credit restriction by ECB / USA live on credit: dollar more liquid • Acceptance of the currency: economical and political power worldwide: Europe never managed to appear politically stronger than the USA, rather the opposite • Reserve of value in €: once existed; China & Russia get rid of € and $ to invest in commodities • Conclusion: if Russia and China change their habits they might soon be followed • => 2008 financial crisis and Euro crisis put an end to Euro as global currency • questioned the politico-economic power of the USA, and the trust in their money. => during the last G20, both China and Russia suggested an new international reserve • If dollar loses its power of global currency: • collapse in worldwide economic and political power of the USA • compromised future of all « western » countries, including Europe • => political will of Europeans concerning Euro and the EU would be helpless! 23 L. Dupré Bhatti – Bahria and University/ Preston University, isalmabad - 2013/10/24
  • 24. Your questions are welcome… 24 THANK YOU FOR YOUR ATTENTION… L. Dupré Bhatti – Bahria and University/ Preston University, isalmabad - 2013/10/24
  • 25. Specialist of Behavioral Finance ldupremailbox-univMLV@yahoo.fr • Professor in Economics and Business Studies • Teachings in Banking Techniques, and Business & Finance at University Paris Est Marne-La-Vallée • Scholar at CEMI-EHESS Paris • Former Analyst at Paris Stock Exchange (Fortis Securities) •Please visit : https://sites.google.com/site/behavioralfinanceeconomics 25 L. Dupré Bhatti – Bahria and University/ Preston University, isalmabad - 2013/10/24 LAURENCE DUPRE BHATTI

Editor's Notes

  1. We will see how asymetres in European economies jeopardize the Euro and wonder if there is a possible future for the Euro. The Euro was not an economic but a political construction, and I will show that its future can only be political too.
  2. In the early 1950s, the founding fathers of the EU wanted to build a unified and fraternal Europe to free Europeans from repeated wars all over the centuries, in a motus vivendi of “never again” following the second World War. The founding fathers were all trained as lawyers, not economists, so they thought that institutional building of Europe was necessary, thinking that it would lead naturally to a Federal system as in other countries, especially the USA. However they knew that their people were not ready for a Federal system, war memories being still fresh. This is the reason why they decided to start with economic ties, thinking that once tight economic links would be established among European nations, they would overcome their different political views, and Federalism would naturally impose itself on everyone as the best way to stabilise Europe… - The economic integration – development of trading links among European states – worked well, all the more since it was just the beginning of the thirty-year post-war economic boom. Moreover, a new generation – my generation - was born, with same European and worldwide interests (music, cinema, fashion...), with more liberty, and we all felt European and thought that UE had brought us the best.
  3. The idea of having a common European currency was probably a consequence of the 70’s crisis : After the International Monetary System had collapsed in 1971 and 1973 (system with fixed but adjustable exchange rates where the currencies were pegged against the dollar, with the dollar itself convertible into gold), the $ remained the “international currency” or “global currency” since worldwide trading exchanges are made in $, especially oil: Europeans wanted to compete with the $, buy oil and all imports with their own money and ambitioned to become the referent global currency After the international oil crisis, in the late 70’s Europe struck by massive unemployment and lack of demand, exports appeared as a way out. A European monetary system had been built on the model of the former IMS but it didn’t prevent intra-European trade from exchange risk since there was speculations and periodic devaluation of currencies: a common money would ease and develop trade in Europe (2/3rd of trade is intra-European), and through competition, would accelerate innovation to export, and decrease prices to European consumers in a virtuous circle.
  4. the € (common money for 11 countries) was introduced in 1999 (cash money in 2002) and since then, all countries were more or less prosperous, each of them being satisfied with its economic national system and not wanting to change it for a foreign one [Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain] the EU enlarged with former communist East-European countries and seemed to work well too while BRICS were growing fast, opening new opportunities for European trade and reinforcing the hope for  € to be the global currency. at the same time, Europen finance (from France and Germany espacially) expanded worldwide surfung on the wave of new financial tools distributing credit worldwide, especially in the US to let consumers consume!!! Indebtment helped the early 2000’s worldwide economies to be prosperous
  5. Since the middle of the 90’s, people have slowly been convinced that liberalised EU have destructed what once protected them at a national level... - during the bad economic years of 90’s, people started complaining about Europe and politicians realised that it was a possible reason to lose an election in better-off year of 2005, when competition of East-European countries and BRICS appeared as destructing national jobs, governments of Ireland, France and the Netherlands lost the ” European constitution referendum” which was meant to give more power to European institutions for liberalisation which appeared to jeopardize countries’ national social security systems as for the 2008 financial crisis, Europeans’ real economy was seriously hit only 2 or 3 years later which conducted to the Euro crisis when one found out that the most fragile states were highly indebted In Federal states like the US, nobody would wonder that, at a federal level, the taxes of Wyoming or Iowa would help the indebted States of California or New York but the EU has never been Federal and the German people loudly claimed that it would not pay for the Greek or Spanish people... What saved (temporarely) the Euro was conditional help at financial level, not Federalism: In turmoil, when each people has its own economic problems, no solidarity is possible... UNLESS... the problem is taken at an “expert” level : politicians turned the problem into a financial and banking problem where the ECB for the first time lent money to a state... Under political pressure the institutions were able to change and evolve! - Federalism will probably never exist in Europe, which makes the UE fragile, depending only on common political will, especialy during turmoils (would they be financial or not)
  6. According to me, the EURO is a dogmatic construction not built for political purposes rather than to serve national economies. It is the only currency worldwide common to different nations and built as the final act of economic integration of the Bela Balassa theory (1961) of regional integration that was the founding theory for the foundation of the EU... As the whole EU, the monetary integration was due to a strong political will to make an economic theory alive, this theory being quatitativism. But it is primordial to note that in the Bela Balassa theory, the last step is the political integration (in a federal system) with a unique economic policy. The only other economic and monetary union in the world is the WAEMU (West African Economic and Monetary Union) of seven French-colonized independent countries, but they built an economic union (sponsored by the EU) in 2000 while they already had a common currency for 40 years since their independence: the CFA franc, which value is fixed to the Euro and warranted by France. Their national economic and financial institutions are quite one like the other since they all inhereted the French system and there are similar economic policies guided by their international bailers, essentially France and the EU! The European monetary union was built on the theory of quantitativism, believing that this dogma was strong enough to work on its own: the Euro zone is the only place worldwide were the Central Bank is completely independent from national government views (for sure, it is easier to make decisions when national government cannot agree on any policy), and its only status purpose is to maintain a low inflation rate, not caring about the economic situation of countries... Like in the quantitative theory, everything in economies would be right as long as there is no inflation! Of course, this dogmatism could not stand for long the reality of structural differences in national economies!
  7. In fact there are big differences in economic systems of the states in Europe, because of different historical trajectories: example : results of policies encouraging credit : when you want to encourage credit at a European level, each country needs to adapt it and it is hard to obtain the same result everywhere, would you try to be as equal as you wish. You would be surprised to see how systems are so different on such a small territory in Europe (even among one nation sometimes), and how neighbouring countries can be ignorant of the reality of the system in other European countries! The banking systems, the housing loan system (sometimes based on real warranties, or sometimes on mortgage on buying price, or mortgage on estimated selling price), the tax system (including VAT, corporate taxes, separate taxation of the rich and the civil servants…), the savings system, the social protection system (beweridgian or bismarckian, or both, or private) etc… are different. As a consequence, when you suggest a global tax level in all Europe, it will not have the same impact everywhere, accept if you build a unique tax system… which would be a huge work and a big battle since every nation would wish to impose its system. So, some countries seem more attractive to foreign investments than others in term of taxes! example : “natural” inflation rate and problem with the unique rate policy : 1) Natural inflation rate depends on structure of economy : some countries have export oriented economies and the companies there need credit to invest and have a better performance abroad, whereas others, like France, have a younger domestic market and need credit for consumers. In a country where you have a greater elderly population nearing retirement and who can save more than in a younger nation, it is normal that you need to have higher real interest rates to remunerate savings than in a country where people are young and need to borrow in order to build their lives and to consume…. Northern European nations (Germany, Sweden, the Netherlands, even Poland) have older populations than France, Italy or Spain, or even Greece. Yet, more credits mean more inflation, especially if the credit system is not fast enough. In my opinion, one of the main mistakes of the ECB leaders is to think there should be only one same low inflation rate all over Europe (they wish economies were more homogenous, so they do as if it was!). What they don’t see is that there is no problem in higher inflation rates in Italy or Spain, compared to Germany: it is still low but adapted to the (younger) structure of the economy that needs credit to work. 2) Natural inflation rate also depends on liquidity of the credit system. In a country where the credit system is well developed and quite liquid, in a system where business law is well developed and where companies can recover their credits form other companies fast enough, it is normal that you have lower inflation rate since there is no friction in the system of credit and payment among companies. Unlike Northern Europeans states, it is well known that in France, Italy or Spain, justice (including for companies) is very slow. So, inflation rate is structurally lower in Northern countries (no need for companies to inflate prices to compensate the problem of short term payments). Moreover credit has been developed earlier and faster in Northern European states than in southern countries. As a consequence, the credit system is much more efficient and liquid. For all these reasons, the “natural” inflation rate is structurally higher in southern Europe. Let us insist: there is no problem with a higher level of inflation in itself: it is still low but adapted to the structure of the economy that needs credit to work
  8. In spite of different “natural” inflation rates, principles of the euro zone are that there is a unique independent monetary policy from the ECB. The ECB interest rate to fight against inflation in the Euro zone is ONE but unique, while there are 15 inflation rates! The interest rate is an average one. If fixed for average level, it will be too low for countries that are not much indebted and that need money from their credit and banking system to finance investments of their companies. It is not low enough to prevent indebted countries to slow their credits and borrowings in an economy that runs too fast and overheats.
  9. Another example of unequal consequences in policies’ implementation is the strength of Euro on the exchange markets: the ECB maintains a strong euro to give confidence to foreign investors in the euro currency. This exchange rate is positive for exporting countries like Germany which can keep selling its products outside Europe at a higher price since they are high quality products. A strong Euro is bad for Italian, Greek, Portuguese or even most French products where the exchange rate makes them less competitive by increasing the labour costs of these countries, already high compared to most nations.
  10. Besides the dream that euro could once replace US dollar and the wish to ease trade among European countries, by suppressing exchange risk; the other objective was to protect each nation from markets speculating on their exchange rate, as well as competition among states using artificial devaluation (problem of the EMS). It remains to be achieved as it transformed into speculation about interest rates: even in the booming times, Germany could borrow from the markets at a just-above 2% interest rate while the one for France was not too far from 3%... and Greece at 6%! Nearly all the burden of sovereign debt don’t come from bad budgeting but rather from interests to pay to the financial private markets! In a unique currency zone, states’ borrowings conditions were then different in Europe, an unspoken competition being in place, and Portugal or Greece having already a quite high burden of interests… which also generated a higher inflation rate in those countries than in France or Germany! Instead of federalism, the SGP (stability and growth pact) : a unique currency should mean mutualisation of debts – federalism in political terms – but for historical reasons, European national public opinions could not accept this solution, all the more since it would mean being entitled to national governments’ expenses control from partners. The chosen solution to give confidence to financial markets was an independent central bank, but different national budgetary policies from each state as long as they respect the two rules of the Stability and Growth Pact: no public debt should be over 60% of GDP; no public deficit should be over 3% of GDP. Debt and fiscal efficiency linked to growth: when the eurozone was experiencing prosperity, identical rules for all countries were fine. But there was no sanction if it was not respected (France and Germany were the first “bad students” in 2004!). And in times of turmoil, things have changed. The common 60% of GDP indebt of countries seems unreasonable. As we have seen, some countries have efficient fiscal systems, other do not. Some countries have fiscal systems that are efficient in prosperous times but that collapse in terms of returns when the economy gets worse. Is this unique 60% goal appropriate when countries have different efficiencies in collecting taxes? Austerity to replace tax homogenisation: we can find that structural changes towards better homogeneity in collecting taxes should be the first step… But it would be very long to implement and even longer to negotiate an agreement all over eurozone countries (15 countries) and EU (27 countries!). Austerity proves immediate action both to European neighbours and to the financial markets, would it be inefficient in the longer term, because EU economies are so interconnected that austerity everywhere means growth nowhere!
  11. Driving forces in the economies are different: German economy: is based on high quality and high value added exports. The export level can so be independent from high prices due to the strength of the euro currency maintained by the European Central Bank (ECB) on exchange markets. However, labour costs are constrained because it is a tradition in Germany that these are regularly negotiated between companies and unions. Strong euro and constrained labour costs ensure high revenues to German companies. All the more, the country having an aging population, they also need high real interest rates to maintain the pension level. The domestic demand is quite low. Banking credit, which circulates fast, helps exporting companies to invest, and the sound banking system benefits from a high financialization of German economy. In conclusion, Germany « exports the German quality » and imposes law inflation dogma in Euro zone in order to keep savings for the retired aging German population, while this aging jeopardises the German model in the future. Scandinavian countries like Sweden have an economic model based on social assistance while sharing efforts and benefits from the economic driving forces. In return, the labour market is flexible (unemployed people must accept any job) and so is the social assistance, depending on age or region. Both taxes and redistribution are high while Scandinavian countries keep aging. Redistribution favours the domestic demand. France has a more protected and rigid labour market inducing higher labour costs. But the economy benefits high domestic demand thanks to high salaries and to social compensation. French institutions help exports of big national industrial companies. The credit financing competitive SMEs could work better if the wealthy French banking system – sound enough – would take more risks for its national economy instead of extending internationally towards more profitable operations.
  12. Thanks to the 1997-2007 boom years and to a dynamic tourism sector formerly driven by Europeans, Greece had been able to develop and to contract debts. But its taxation system now clearly appears not efficient enough to recover the country’s debt. Since the government cannot depend upon tax revenues, the only solution it could find to reduce debt was harsh austerity measures. The national banking and credit system appears neither well developed nor really sound to finance the economy which mostly resorted to debt from international markets in the booming years. The external indebt has transformed into a trap leading to forced austerity. Italian driving forces come from dynamic competitive SMEs and from the industry which can export as long as the exchange rate does not influence prices. The main weakness comes from regional disequilibrium. The part of underground economy to finance the economic activity is still quite high and access to banking credit is not flexible enough. Politicians and businessmen are tightly linked which leads to drift in national public accounts. Taxation can seem quite high but the system is not efficient enough compared with what we could hope in such an economy. Spanish economy took advantage of the 1997-2007 European economic boom to transform towards a flexible labour market where people could easily find jobs since SMEs, bigger companies, regional institutions or the Spanish state investing in many sectors such as real estate or in export sectors. The banking system offered then a lot of credits while the country benefited from the real estate boom, based on mortgage, and found liquidities on external financial markets. Consumer credit has helped high demand in Spain, developing extremely fast and at a large scale. High domestic demand permitted one of the highest growth rates in Europe. But the return of the Spanish economy was all the more hard when other European economies started to contract. The banking system now appears very weak needing help and restructuring because of its engagements abroad. Domestic demand driving force disappeared while austerity measures reduced revenues. And, even if the public national debt seems quite low, worries are increasing that Spain may become the fourth Eurozone country to require a full bailout because regional debts in many very important regions like Catalonia could oblige the Spanish government to ask for the help of European partners.
  13. Because of the 2008 financial crisis which was external to Europe … There was a decrease in all sources of revenues for those economies: it stated with the demand for EU products from the US, and then: Decrease in non-EU exports financing german spendings for its retired people… Germany being the driving force of Europe! Collapse of real estate in Spain, people being unable to reimburse loans Big decrease of Italian exports to Europe because of the lack of demand Big decrease of tourism in Greece Etc… Since national entreprises don’t sell anymore neither in Europe nor outside, the national governments see a huge decrease in their corporate taxes revenue. Because of unemployment and decrease in salaries, consumption collapses, which means less VAT and income tax revenues. All this worsen the burden of debt in most countries, lowering confidence of the markets in sovereign debts and forcing higher interrest rates wich worsen even more the situation and deapen the Euro crisis
  14. Heterogeneity of the European national economies and institutions : not only makes it hard to make decision to implement common economic policies, efficient everywhere; it also jeopardises the Euro currency in times of crisis, increasing both inflation in indebted countries and recession in low-activity countries. Speculation on interest rates increases the burden of debt for the most indebted states which have at the same time the less efficient systems of tax collection. And austerity prevents most national governments from unbalancing their budgets through taxes in a reduced economic activity, all the more since exports cannot compensate for the domestic demand collapse since most exports are inside the eurozone. This is in this way that austerity in Europe has cumulative effects, and European economies miss a driving economy to be back on the growth path. We are lucky enough that the growth force, not coming from domestic demand, comes from exports towards emerging countries which were able to partially protect from the crisis.
  15. The Euro currency is a political ideal: while its economic conception and contruction in a strong monetarist dogma meant the end of the money and jeopardised the Euopean Union itself, the Euro crisis revealed that: The political will to stay together and keep Euroepan institution alive, including the Euro, was stronger than national views and dogmas: as long as Europeans are convinced that they are stronger together the Euro should survive not beacause of its economic utility (we could imagine a new SME) but because of its symbolic political utility For this, European were able to forget the dogma and move the institution: problem of borrowing to the markets at different rates : states can borrow to the ECB instead of the market in extreme need (OMT); 2) problem of solidarity: the ECB accepted to create and be part of a system of « lender in last resort », 3) problem of budgetary constraint and need for an engine country within Europe in crisis: key-countries were allowed to lower their budgetary constraint over 3% of GDP, 4) problem of a common ECB rate vs different inflation rates: a system of partially adapted ECB rates according to national banking system was created Political will found a way to lower economic contraints but it didn’t solve the real problems: the lack of budgetary solidarity through Federal system and lack of unique policies, and the heterogeneity of economic structures and institutions, especially banks, and taxation (including on labour force). So, other adaptations will be necessary in the future, after other technical Euro crises, but I am now confident that Europeans will adapt
  16. Concerning the Euro as a global currency: not only the crisis made this dream vanish but it also jepardised the dollar in its role. To be a global currency, the money needs to be the best for transactions (perfect liquidity, global acceptance of the currency, and the preference for one unique currency in order to compare prices worldwide)… and trustable as a reserve of value. - Liquidity: the Euro had this handicap of the retriction of credit by ECB while the USA live on credit, so the dollar is more liquid - Acceptance of the currency is linked to trust in both economical and political power of the country worldwide: Europe never managed to appear politically stronger than the USA, rather the opposite - And concerning the value reserve power of the Euro, it once existed since both China and Russia had a lot of Euros in their reserves but both countries are changing their strategie… getting rid of both euros and dollars to invest in commodities such as gold, silver, wheat, oil and sugar. Conclusion: if Russia and China change their habits they might soon be followed by others, showing that the 2008 financial crisis and the Euro crisis not only put an end to the hope for Euro to become the global currency, but also questioned the politico-economic power of the USA and the trust in their money. The proof of this is that, for the first time during the last G20, both China and Russia suggested that an international reserve currency (currencies basket) might be created. If the dollar loses its power of global currency it will certainly destruct both worldwide economic and political power of the USA and compromise the future of all « western » countries, including Europe. Against this danger, the political will of Europeans concerning the existence of Euro and the EU would be helpless!