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The Euro Isn't Dead (Yet)

June 4, 2018 in Economics

By Diego Zuluaga

Diego Zuluaga

People have been forecasting the end of the euro since the
currency came into being in the late 1990s. Yet the euro has
survived five sovereign bailouts—including three successive
ones of Greece (the continent’s most troubled
economy)—and two bank rescues aimed at Spanish and Cypriot
banks. The Eurozone debt crisis reached a climax in the summer of
2012, when European Central Bank Chairman Mario Draghi defused it
with his vow to do “whatever it takes” to preserve the
single currency.

Regardless of one’s views on the prudence of the
ECB’s subsequent monetary easing, Draghi’s promise
succeeded in calming financial markets.

Yet six years on, political uncertainty in Italy and Spain has
people pondering the imminent demise of the euro again:

To many southern
Europeans, euro membership is the lesser of two evils when greater
monetary control by their national governments is the
alternative.

Earlier this week, the Italian president’s refusal to appoint a finance minister who had
previously advocated contingency planning for a
potential Italian exit from the euro unsettled bond markets,
causing interest rates on the country’s debt to skyrocket. While
subsequent negotiations have ended the stalemate and delivered a coalition
government, their members’ strong anti-EU disposition will prolong
policy uncertainty.

In Spain, a vote of no confidence in the centre-right
government has led to its replacement by a left-wing administration
propped up by communists and separatists, igniting fears that the
market reforms undertaken since 2012 may be unraveled.

And raising taxes, increasing regulation and centralizing power
would indeed spell doom for the Spanish economy, whose GDP has been
growing at annual rates in excess of 3 percent for three years.
Unemployment, which topped 26 percent at the height of the crisis,
has since fallen rapidly thanks to a much-needed loosening of
hiring and firing rules.

Italy’s recovery has been less resplendent, with tepid growth,
stagnant labor productivity and wages, and a national debt of
around 130 percent of GDP. Nevertheless, its fiscal position had
stabilized in recent quarters and business investment had picked up
after a number of modest regulatory reforms.

* * *

Skeptics of the euro blame the single currency for the poor
economic outcomes of southern European countries (the uncharitably
nicknamed “PIGS”).

However, if you look closely at the data, it’s clear that
bad performance long precedes the advent of the euro: Unemployment
rates of 25 percent have characterized every major Spanish
recession since the 1970s. Greece has defaulted on its external
debt on half a dozen occasions since it became an
independent country. Italian productivity growth began to falter in
the early 1990s, hampered by onerous …read more

Source: OP-EDS

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