The Chief Economist and Group Head of Global Research at Standard Chartered Bank explains the genesis of the current problems in the euro area and argues that the common currency faces an existential crisis.
A two-speed euro is the mostly plausible solution, Dr. Gerard Lyons says, as it would allow weaker members of the euro zone to reignite growth while keeping the euro project alive.
The collapse of Lehman Brothers three years ago triggered a financial crisis and brought the world economy to its knees, says Lyons. 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.On July 21st, European leaders to gathered in Brussels for another crisis summit and 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, ensuring a sharing of the burden. Despite this, the latest deal does not solve the underlying economic problems in the euro area.
In my view, a two-speed euro has always seemed the most natural scenario for the euro zone, says Lyons. 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. The problems inflicting the euro zone should not have come as a surprise. Since its inception, the euro has faced multiple economic challenges. These issues have always been met by a solid political commitment to make the project succeed. Just as those outside the euro area should not under-estimate this political commitment, it would be wrong for politicians in the euro zone to under-estimate the economic pain ahead for many countries as they try and remain in the common currency area.
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, he adds.
(LB)