Home » Opinion » China Knowledge
Europe: Are 2 heads better than 1?
January 26, 2011, Wednesday
|
Print Edition
Print Edition
EDITOR'S note:
The article is the third in a series of four Wharton Business School's analyses of the global economy in 2011.
IN Europe this year, whoever takes over from Jean-Claude Trichet as head of the European Central Bank in October will inherit a different set of issues than the French banker did when he began his term back in 2003.
Back then, the euro zone's single currency was still in its infancy, and most Europeans were happy to give fiscal and monetary union the benefit of the doubt.
But the European Union's big macroeconomic imbalances and debt crises that began with Greece's near-default last year and spilled over to Ireland, Spain, Portugal - and potentially could affect Italy and Belgium - have left plenty of skepticism over the lack of policy flexibility granted to members of the 17-nation euro zone.
The Frankfurt-based institution is expected to announce Trichet's successor this spring, and the appointment "will really matter a lot," says Wharton finance professor Franklin Allen. A frontrunner is Axel Weber, head of Germany's central bank. Another strong candidate is Mario Draghi, governor of the Bank of Italia, "who is extremely talented," notes Allen.
All that will unfold as euro zone countries tumble through recovery at different speeds, depending on the range of austerity measures undertaken. But collectively, according to a recent report from Guillaume Menuet and Silvia Ardagna, analysts at Bank of America Merrill Lynch, "while the pace of recovery in Europe post the 2008 recession looks to be quite reasonable, overall levels of GDP have a long way to go before recouping output lost in the downturn."
While by the spring the worst of the sovereign debt crisis is expected to be over, the analysts note that "since the existence alone of the EU and IMF's financial safety net has not proved a sufficient deterrent to arrest the contagion that threatens to engulf one country after the other, Europe must be ready to consider new solutions, including preventive action."
But thus far, for experts such as Allen, there are few signs that this is happening. "The level of the debate is going back to very basic stuff - for example, they're talking about collective action clauses" to be included in sovereign debt contracts in order to protect investors. "It's good to have them, but that's not the main issue. It's financial stability."
Beyond the traditional inflation-fighting concerns, the European Central Bank's new head will need to guide the euro zone through a resolution of the region's sovereign debt woes.
The 750 billion euro (US$1 trillion) crisis-rescue fund the ECB and the International Monetary Fund put in place last May expires in 2013. According to Bloomberg, Weber expects the ECB to start withdrawing early this year some of its emergency measures, such as buying up the government bonds of the troubled countries to restore liquidity.
What then? Will it agree to monetize the debt or allow countries like Portugal to default?
While the chances of the euro zone dissolving "in one go" are around 10 percent, predicts Allen, another option would be to have two euro zones overseen by separate central banks - with France, Spain, Italy and the smaller countries staying with the current system, while the likes of Germany, the Netherlands and a few others join a new bloc.
"In my view, that's probably the best solution to the problem," he says. "Rather than trying to force these very different countries with very different histories in terms of fiscal responsibility into one area, it would be much better to have two."
(Reproduced with permission from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved.)
The article is the third in a series of four Wharton Business School's analyses of the global economy in 2011.
IN Europe this year, whoever takes over from Jean-Claude Trichet as head of the European Central Bank in October will inherit a different set of issues than the French banker did when he began his term back in 2003.
Back then, the euro zone's single currency was still in its infancy, and most Europeans were happy to give fiscal and monetary union the benefit of the doubt.
But the European Union's big macroeconomic imbalances and debt crises that began with Greece's near-default last year and spilled over to Ireland, Spain, Portugal - and potentially could affect Italy and Belgium - have left plenty of skepticism over the lack of policy flexibility granted to members of the 17-nation euro zone.
The Frankfurt-based institution is expected to announce Trichet's successor this spring, and the appointment "will really matter a lot," says Wharton finance professor Franklin Allen. A frontrunner is Axel Weber, head of Germany's central bank. Another strong candidate is Mario Draghi, governor of the Bank of Italia, "who is extremely talented," notes Allen.
All that will unfold as euro zone countries tumble through recovery at different speeds, depending on the range of austerity measures undertaken. But collectively, according to a recent report from Guillaume Menuet and Silvia Ardagna, analysts at Bank of America Merrill Lynch, "while the pace of recovery in Europe post the 2008 recession looks to be quite reasonable, overall levels of GDP have a long way to go before recouping output lost in the downturn."
While by the spring the worst of the sovereign debt crisis is expected to be over, the analysts note that "since the existence alone of the EU and IMF's financial safety net has not proved a sufficient deterrent to arrest the contagion that threatens to engulf one country after the other, Europe must be ready to consider new solutions, including preventive action."
But thus far, for experts such as Allen, there are few signs that this is happening. "The level of the debate is going back to very basic stuff - for example, they're talking about collective action clauses" to be included in sovereign debt contracts in order to protect investors. "It's good to have them, but that's not the main issue. It's financial stability."
Beyond the traditional inflation-fighting concerns, the European Central Bank's new head will need to guide the euro zone through a resolution of the region's sovereign debt woes.
The 750 billion euro (US$1 trillion) crisis-rescue fund the ECB and the International Monetary Fund put in place last May expires in 2013. According to Bloomberg, Weber expects the ECB to start withdrawing early this year some of its emergency measures, such as buying up the government bonds of the troubled countries to restore liquidity.
What then? Will it agree to monetize the debt or allow countries like Portugal to default?
While the chances of the euro zone dissolving "in one go" are around 10 percent, predicts Allen, another option would be to have two euro zones overseen by separate central banks - with France, Spain, Italy and the smaller countries staying with the current system, while the likes of Germany, the Netherlands and a few others join a new bloc.
"In my view, that's probably the best solution to the problem," he says. "Rather than trying to force these very different countries with very different histories in terms of fiscal responsibility into one area, it would be much better to have two."
(Reproduced with permission from China Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved.)
- About Us
- |
- Terms of Use
- |
-
RSS - |
- Privacy Policy
- |
- Contact Us
- |
- Shanghai Call Center: 962288
- |
- Tip-off hotline: 52920043
- 沪ICP证：沪ICP备05050403号-1
- |
- 互联网新闻信息服务许可证：31120180004
- |
- 网络视听许可证：0909346
- |
- 广播电视节目制作许可证：沪字第354号
- |
- 增值电信业务经营许可证：沪B2-20120012
Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.
