Against the backdrop of an EU-Italy budget crisis we welcomed the visit of Alfred Mifsud, former Deputy Governor of the Central Bank of Malta. To an audience of students and colleagues he shared his views about the future of the Euro.
Mifsud powerfully argued that action needs to be taken if the Euro is to survive. He explained that the fundamental problem with the Euro is an underlying lack of convergence in economic fundamentals. If the Euro is to succeed then we need European countries to grow and fall in concert. Instead we see wide divergence in things like productivity and the cost of labour. In simple terms it is relatively easier to produce goods in some countries (like Germany) than others (like Italy). This creates winners and losers with money inevitably flowing more freely to the winners.
The 2009-2013 sovereign bond crises powerfully illustrated the problems with the Euro. In countries, like Ireland, Cyprus, Portugal and Spain the crises were well managed with appropriate policies to readjust the economy. By contrast Greece ‘went through hell’. In a drawn out game of chicken Greece ultimately blinked first and signed up for a prolonged period of austerity. But, it demonstrated the perils. According to Mifsud the ‘Greece experience shows that it is easier for UK to exit the EU than for a Euro country to exist EMU. … The euro is a strong political project and that it is indissoluble except if it blows up completely.’
The logical implication of this is that the success of the Euro will be determined by the mechanisms to maintain stability. And Mifsud argued that two things are still crucially missing: First a credible resolution backstop to bail out struggling countries and second deposit insurance scheme. So, the ‘EMU is still a wobbly structure’. Worse still, the ‘current system is a sure recipe for election of extremist parties to government’ because it favours the strong and punishes the week. The strong ‘work on the wrong assumption that EMU cannot blow up. They assume that populists can be tamed’. So, can the Euro survive? The game of brinkmanship we are observing with the Italy budget crisis will likely go a long way to resolving this question.
We would like to acknowledge that the visit of Mifsud was supported by the Duomo Initiative which offers online courses, lessons and other supporting materials. Check out their website for courses and lectures on a range of economics and finance topics.