15 Nisan 2011 Cuma

Chief economist warns about eurozone break-up


A pedestrian walks past a banner advertising discounts at a store closing in suburban Athens. Bloomberg photo

A pedestrian walks past a banner advertising discounts at a store closing in suburban Athens. Bloomberg phot0
Even some European politicians admit that one or more member countries might withdraw from the European Monetary Union, or EMU, according to ING Group’s chief economist.
“The EMU was designed to be irreversible and the sovereign debt crisis has set the markets thinking that this may no longer be so,” Marc Cliffe said during a Wednesday meeting in Istanbul.
German politicians are discussing openly about EMU’s continuing to be the sole option, he said.
According to a recent ING report written by Cliffe, there are two scenarios in front of the member countries: a Greek exit or a compete break-up of the monetary union.

The results of the second scenario “might be dramatic and traumatic,” the chief economist said. In such case, output would fall by between 5 and 9 percent in numerous member states and asset prices would plummet. “With their [possible] new currencies falling 50 percent or more, the peripheral economies such as Spain and Portugal would see their inflation rates soar toward the double digits.”

Noting that the break-up scenario might lead to massive divergence in both interest rates and bond yields, the one-year bond yields in Germany would fall below 1 percent while those in the peripheral markets might soar into a 7-12 percent range.

“Spain is too big [for Europe] to save, unfortunately,” Cliffe said, speaking to the Hürriyet Daily News & Economic Review. He added that Greece, Ireland and all the peripheral countries have started to follow the tight policies set by European Central Bank, or ECB. A further bail out for Spain might accelerate substantial weakening of the euro as well, according to him.

Saying that Turkey has performed considerably well in the wake of the global recession compared with many European countries, Cliffe said the country’s  “biggest advantage is its independence in monetary and fiscal policies that peripheral country do not have.”

The growing economies will have a bigger portion from the world economy, Şengül Dağdeviren, the chief economist of the lender’s local branch, said at the meeting.

Turkey should increase its competitiveness with Asian economies in the next two decades, she said. Talking to the Daily News, Cliffe said, “Rather than trying to penetrate independently into Asian markets, Turkey could be plugged into Germany and increase its chances in these markets.”

Many firms from Germany’s neighboring countries – such as Netherlands and Austria – work with Germany in order to penetrate indirectly into Asian markets, he said.

According to him, Germany would come up with a solution for the debts of peripheral countries since the country’s economy is performing relatively well since it has penetrated into Asian markets. According to recent figures, business confidence is rising in the country, Cliffe noted. Germany is the engine powering the fiscal policies, measures and debt-restructuring models for the peripheral countries of the eurozone, he said. “We are all Germans.”

Rating increase for Turkey

Commenting on the domestic side, Dağdeviren said, “Turkey is much more immune to micro changes in the economy as the sensitivity is on the rise according to global economic trends.”

Noting that Turkey has enjoyed the efficiency of reforms that took place after 2001 crisis, she said: “Turkey’s economic growth will slow down inevitably to 4.6-5 percent at the end of this year.” Dağdeviren said the inflation rate in Turkey would float between 7.5 and 11 percent over the next 10 years. Noting that Turkey’s increasing current account deficit still is a threat to the country’s economy, she said: “Turkey is still safe as the country does not have low GDP growth, high budget deficit, and high public debt together as most of the European countries have currently.”

Break-up scenarios

ING chief economist Marc Cliffe’s two scenarios on the future of the European Monetary Union include the withdrawal of debt-hit Greece or a total break-up:

Scenario A: Exit of Greece

- At the mild end of the spectrum, the most plausible scenario is that Greece will be the only country to exit the eurozone.
- Greece is the most challenged country from solvency and a competitiveness perspective, and it is most observers’ favorite candidate for leaving EMU.
- The modest size of the Greek economy means that its departure would be far less disruptive than if one of the bigger economies were to leave.
- Greece’s exit will not happen in a chaotic manner. The eurozone and IMF would provide medium-term funding to ease the pain of Greece’s exit.
- The Greek exit gives further impetus for reforms in other highly indebted countries such as Spain and Portugal.

Scenario B: Complete breakup of the eurozone

- At the extreme end of the spectrum, eurozone countries and the financial markets conclude that the monetary union has failed.
- Members decide to revert to national currencies and monetary policy.
- If a core member leaves the zone, there would be protracted economic, political and financial tensions that would leave open the possibility of further departures.
- Exit from the EMU and reverting to national currencies do not directly improve fiscal solvency. Even in the absence of restructuring, foreign investors will still bear huge losses as a result of a leaver’s currencies depreciating and asset prices plummeting.

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