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The Credit Crisis and the Euro . Ben Broadbent Managing Director & Senior European Economist. September 2010. Summary. Europe recovering but sharp divergence within the Euro-zone. Partly industrial composition: investment-driven cycle so sharpest “V”s in capital-goods-producing countries.

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the credit crisis and the euro

The Credit Crisis and the Euro

Ben BroadbentManaging Director & Senior European Economist

September 2010

summary
Summary
  • Europe recovering but sharp divergence within the Euro-zone.
  • Partly industrial composition: investment-driven cycle so sharpest “V”s in capital-goods-producing countries.
  • Credit crunch has also blown away a decade of interest-rate convergence between “core” and “periphery”.
  • Eurozone needs (i) more fiscal discipline ahead in good times &/or (ii) more support in bad times. Will politics allow this?
estimated banks losses march 2009
Estimated banks’ losses, March 2009
  • Eurozone banks: EUR 920bn (10.1% of GDP)
  • UK banks: GBP 210bn (14.6%)
  • Total: USD 1.4tn (15.1%)
us not as central as it once was
US not as central as it once was

Source: GS Global ECS Research

reform the options
Reform: The options
  • Nothing: let countries restructure (if they have to)
  • Piecemeal: More support/control ex post (EFSF plus EC intervention); tighter standards ex ante (Van Rompouy)
  • Wholesale: Full fiscal federalism (note US example: political union precedes monetary union).
  • Euro break-up
macro rebalancing
Macro rebalancing

Keynes (Bretton Woods, 1946):

“the process of adjustment is compulsory for the debtor and voluntary for the creditor. If the creditor does not choose to make, or allow, his share of the adjustment, he suffers no inconvenience. For whilst a country’s reserve cannot fall below zero, there is no ceiling which sets an upper limit”.

disclaimer
Disclaimer

I, Ben Broadbent, hereby certify that all of the views expressed in this report accurately reflect personal views, which have not been influenced by considerations of the firm’s business or client relationships.