3. Every crisis reveals unexpected
consequences of economic
policies. The current Euro crisis
should be no exception. As EU
governments grapple with the
crisis.
6. What is the Problem? For Greece -
- For the Euro zone
7. PROBLEMS ARE
1. Currency zones don’t solve the problem .
2. The “structuralists” got it wrong, the
“economists” got it right.
3. There is no French-German Compromise on
Policy Convergence.
4. Increased Competition reduces inflation, but
does not guarantee Growth Convergence.
5. A Common Currency does not eliminate the
need for internal adjustments.
8. Thecreation of the European Central Bank as the
issuer of the common EU currency meant that the
zero-risk sovereign debts of Euro zone governments
where no longer fully sovereign in the sense that they
could always be redeemed by the issue of additional
debt or national currency. With the advent of the
Euro, the debt of national governments became the
equivalent of private debt.
10. On entry into the Euro a high debt economy such as
Italy should have had a fiscal surplus higher than a
low debt country to achieve an equivalent credit
rating. However, the common interest rate set by the
ECB, and the failure of financial markets to price
government debt according to sustainability meant
that highly indebted countries saw their debt service
decline, and thus reduce the necessity to run higher
surpluses. Indeed, pre-Euro introduction market
speculation to profit from the capital gains on high
coupon debt that was expected to occur with interest
rate convergence produced that result.
12. Differential Impact OF Capital Flows
• Northern” economies attracted investments
in “productive” sector
• “Southern” economies attracted investment
in real estate
• Positive relationship between FDI and trade
balances for “North”
• Negative relationship for the “South”