EURO: EXECUTE NOT PARDON!

In summer 2010, the British economist Christopher Smallwood of the largest independent consultancy centre Capital Economics released a 20-page report entitled "Why the euro zone should be dissolved". After that, his US counterpart Nouriel Roubini, who had predicted the financial crisis of 2008, published a series of articles predicting that some European countries will be forced to abandon the euro. And at the end of last year, doubts about the appropriateness of the current European single currency system were expressed by the world-renowned financier and billionaire, George Soros.

Seventeen Nobel laureates in economics, who gathered on the island of Lindau in southern Germany, discussed the prospects of the euro area and came to the conclusion that the single European currency was not on the verge of extinction. "I'm an optimist. Europe needs to reform itself. They will sit down, agree and implement reforms. And then Europe will succeed and surpass the United States," the Nobel laureate Edward Prescott said.

Scientists' opinions

The global financial crisis and its consequences resulted in a debt crisis for a number of European countries. Thus, the public debt of the eurozone countries reached a record high in 2010. According to the Statistical Office of the European Union, the average level of debt in the eurozone jumped to 85.4 per cent of GDP last year, compared with 79.8 per cent a year earlier. The highest rate of debt was registered in Greece (144.9 per cent of GDP) and Italy (118.4 per cent). Among the eurozone countries experiencing financial difficulties, apart from Greece and Italy, are also Portugal, Ireland and Spain. It is precisely these two countries that cause the greatest problems for their partners in the currency bloc because of their large external debt and little room for its repayment.

"Debt problems destroy the Western system," said the professor of the American Institute for Advanced Study, Eric Maskin, who was awarded the Nobel Prize in 2007. Columbia University professor Edmund Phelps, who received the top award for the study of the long-term effects of economic policy in 2006, said: "In recent decades, the West has been living beyond its means and, thus, has already consumed part of its future ... The West has to pay for its past mistakes."

"In Europe, the rulers have distorted the system of economic incentives. Now citizens of Western countries must demonstrate courage because in order to pull the economy out of depression, politicians will have to seriously increase the tax burden," Professor Phelps says.

The Nobel laureates, Daniel McFadden and John Nash, believe that the future of the eurozone depends mainly on German leaders. In their words, Germany must understand the role it plays and even out the situation. To do this, they will have to build stable long-term financial systems and learn how to manage them effectively. "The eurozone has a chance to survive the crisis, but on one condition - if its members do their best for unity," John Nash said.

Analysts of MFH Fibo Group noted that the European financial crisis is a unique process in the sense that the eurozone has not just one economy, but 17, and in fact, the 17 different economic views and experiences must solve one problem. "There is still no unity in the issue of exactly how to stimulate the European economic system to solve debt problems and get out of the recessionary hole: strong regional countries such as France and Germany continue to bear the brunt of the problems of the Alliance, while the periphery represented by Greece, for example, is demanding more and more injections. There is really a crisis, but it did not emerge yesterday, and it is hardly possible to solve it in one day," they say.

The calculations of experts of Russia's Sberbank as to how the real effective exchange rates of European currencies diverge from their equilibrium value are very interesting. For example, if Greece had its own currency, its fair rate would be $ 0.97 instead of 1.34, as is the case in the eurozone now. The situation is the opposite in Germany and France, where the euro is undervalued by 5 per cent, while the cheapest euro is in Belgium (undervalued by 6.8 per cent). If the rates were in equilibrium, the current euro would be worth 1.23 in Greece and 0.92 in Germany.

The exchange rate of the dollar is undervalued by 10.6 per cent, while the British pound and Swedish krona are undervalued most of all - by 15 per cent. The level of foreign assets in Greece, Portugal and Spain implies that their currencies should be cheaper by 19.5, 17.8 and 15.5 per cent respectively. The Italian euro is overvalued by 6.1 per cent and Irish - by 9.7 per cent. If the currencies of European countries were independent, calculations would show the scale of the required correction. The weakening of the real exchange rate increases the competitiveness of a country on the world market, cheapening labour costs and, consequently, local products in real terms. To this end, you can devalue the exchange rate, but with the single euro, it is impossible to do so in one country.

Glimpse of hope

Thus, a logical conclusion arises: the "crisis" countries - Greece, Portugal, Spain and Italy - in the euro area are not in a sufficiently advantageous position in terms of competition. But Germany, France and Belgium benefit from the common euro - with the collapse of the eurozone, their currencies will get stronger while the prospects on the world market will decrease, respectively.

For this reason, for example, there are two ways to improve competitiveness for Greece: reducing the budget deficit and salaries or quitting the eurozone. The eurozone can also be saved in another way - if the European Central Bank buys up all public debt. However, in the future, this step will lead to higher inflation in the "core" of the euro area compared to peripheral Europe, and respectively, the appreciation of the real rates in these countries.

Previously, experts of the Swiss bank UBS estimated what a country's withdrawal from the euro area will cost the population. Thus, the first year after the withdrawal of an economically weak country burdened with debt from the eurozone will cost each resident of working age from 9,500 to 11,500 euros, which is about half of GDP. If a country like Germany, which is called the core of the euro area, abandons the euro, the price of this step will be from 6,000 to 8,000 euros per adult resident in the first year.

Meanwhile, George Soros called for a single European Treasury that will be empowered both to impose taxes and raise funds. Only this, in his opinion, will help avoid a repeat of the global crisis. The Great Depression of the 21st century, which, according to Soros, faces the world, will be triggered by the protracted debt crisis in Greece. Such a development can only be avoided with radical measures, which the leaders of developed European countries are not yet ready to take. Soros also believes that the EU should develop a procedure for Greece's withdrawal from the eurozone, which will make it possible not to shift the budget problems of one country to the entire EU.

According to some experts, in order to overcome the crisis, it is necessary to create a single eurozone finance ministry, which will determine the overall monetary policy and control the recovery to prevent disputes. In addition, an interesting way to increase confidence in the economy of the region would be the issue of single Eurobonds secured by all 17 countries at once.

Some experts believe that the way out of the situation is to switch on the "printing press". However, this will lead to a surge in inflation and will not be a panacea for the current crisis. According to analysts of the Pricewater-houseCoopers audit group, in this scenario, "inflation will be much higher than the planned indicator of 2 per cent, while the euro will depreciate".

At the same time, the outcome of the last EU Summit of Heads of State and Government, which adopted the so-called rescue plan for Europe in addition to the existing Lisbon Agreement of 27 EU countries, inspires some hope. This plan envisages strict rules of budgetary discipline and sanctions for failure to implement them. Supra-national oversight of the budget will be introduced. Rules must be binding, and sanctions will be applied automatically. The European Commission will have the right to punish the countries whose budget is higher than the planned deficit - no more than 0.5 per cent of nominal GDP.

The current ceiling on the level of the budget deficit at 3 per cent is still there, but one can be expelled from the EU for this. The decision to punish or pardon the offender country will be automatically discussed at a summit and adopted with two-thirds of the vote. However, the countries with public debt below 60 per cent of GDP may be allowed to slightly exceed the permissible budget deficit. It is assumed that the plan of "budget stabilization" will be developed by March 2012.

This is the 15th summit in two years and the fifth attempt to develop a package of measures to overcome the debt crisis in Europe. According to the results of the summit, member states of the EU agreed on a new financial agreement whose terms will become part of national legislation. The agreement will be signed by representatives of all 17 states of the euro area and nine other EU countries where national currencies are in circulation. Thus, the agreement will be joined by all EU countries except for Britain.

To summarize, we can say that the eurozone has become a frankly weak entity - both politically and economically. Its problems are solved as long as Germany and France keep afloat. If the economy of these two countries starts to decline, the weaker economies of the peripheral eurozone countries will collapse. That the problems of the euro area are only multiplying is proved by the latest disappointing data. Thus, the most problematic country, Greece, will not be able to achieve its goals this year.

Thus, the fate of the euro will be decided by two leading EU countries - Germany and France, and since they need the European market, the life of the euro will be extended, and the crisis in the eurozone will continue even longer than we think. At the same time, we believe that we should agree with the encouraging outlook of the European Central Bank head, Mario Draghi: "The single currency is irreversible."

FIRSTHAND

"I have no doubt about the power of the euro, its permanence and irreversibility".

 Mario Draghi, head of the European Central Bank

"I decided it was time to sound the alarm: the euro is on the verge of collapse, and everyone pretends that nothing is happening."

Jacques Delors, former European Commission president

"All governments have set themselves the task of preserving the eurozone in the form in which it is now."

David Gregosch, an expert of the Konrad Adenauer Foundation for the Economic Development of the EU