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2-speed currency for euro zone
By Gerard Lyons |
July 28, 2011, Thursday
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Print Edition
Print Edition
THE collapse of Lehman Brothers three years ago triggered a financial crisis and brought the world economy to its knees. In recent months, there has been a fear that a collapse in the euro zone might have equally damaging consequences.
In recent months, the combination of excitable markets and ineffective politicians has seen the euro crisis spread. While the core of the euro zone led by Germany has been strong, the economies on the periphery have suffered badly, with recession and rising debt. Worries about default in Greece and a failure to resolve the problem has seen Spain and Italy dragged into the mess.
This led European leaders to gather in Brussels for another crisis summit on July 21. The outcome was a deal that pulled the euro zone back from the brink and which eased immediate pressure on Greece. More government money was provided, and the private sector participated. Despite this, the latest deal does not solve the underlying economic problems in the euro area.
A two-speed euro has always seemed the most natural scenario for the euro zone. Perhaps now is the time to consider it seriously. It would allow euro zone countries to stay committed to the project while trying to address the need for economic growth in the countries on the periphery, particularly Greece, Portugal, Spain and Ireland.
In monetary terms, one size does not fit all. The interest rate for one region or country may not be the same as for another.
Indeed, the recent decision by the European Central Bank to raise policy interest rates, driven by the solid core economies of Germany and France, will likely compound the problems for the periphery. Thus, as has been widely recognized, a central Treasury is necessary in order to fund fiscal transfers from the core, or the richer regions, to the periphery, or those in most need. Yet even a central Treasury may not be enough.
(To be continued tomorrow. The author is chief economist and group head of global research at Standard Chartered Bank.)
In recent months, the combination of excitable markets and ineffective politicians has seen the euro crisis spread. While the core of the euro zone led by Germany has been strong, the economies on the periphery have suffered badly, with recession and rising debt. Worries about default in Greece and a failure to resolve the problem has seen Spain and Italy dragged into the mess.
This led European leaders to gather in Brussels for another crisis summit on July 21. The outcome was a deal that pulled the euro zone back from the brink and which eased immediate pressure on Greece. More government money was provided, and the private sector participated. Despite this, the latest deal does not solve the underlying economic problems in the euro area.
A two-speed euro has always seemed the most natural scenario for the euro zone. Perhaps now is the time to consider it seriously. It would allow euro zone countries to stay committed to the project while trying to address the need for economic growth in the countries on the periphery, particularly Greece, Portugal, Spain and Ireland.
In monetary terms, one size does not fit all. The interest rate for one region or country may not be the same as for another.
Indeed, the recent decision by the European Central Bank to raise policy interest rates, driven by the solid core economies of Germany and France, will likely compound the problems for the periphery. Thus, as has been widely recognized, a central Treasury is necessary in order to fund fiscal transfers from the core, or the richer regions, to the periphery, or those in most need. Yet even a central Treasury may not be enough.
(To be continued tomorrow. The author is chief economist and group head of global research at Standard Chartered Bank.)
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