Goldman: euro could split apart

[NuovaEra2012]

The chairman of Goldman Sachs Asset Management has said that the need for a German-led fiscal integration in the eurozone would make it increasingly unattractive for all the countries who joined to stay in the single currency.



Jim O’Neill, whose division manages more than $800bn (£500bn) of assets, said that countries as diverse as Portugal, Ireland, Finland and Greece could pull out of the single currency rather than have to operate under a single eurozone treasury.
Yesterday, Angela Merkel, the German chancellor, said the market turmoil could last for a decade and there was still “a chunk of work” to do.
“The Germans want more fiscal unity and much tougher central observation – with the idea of a finance ministry,”
Mr O’Neill said in an interview with The Sunday Telegraph. “That will emerge for those that want to stay in this damn thing, or can stay in.
“With that caveat, it is tough to see all countries that joined wanting to live with that –including the one that is so troubled here [Greece]. If you wind the clock back, it was pretty obvious that economically probably only Germany, France and Benelux of the original joiners were the ones that were ideal for a monetary union.

“For [them] it is not a bad idea – these countries have always had some kind of tight fixing of exchange rates and are very intertwined. For all the rest that originally joined – Spain, Italy, Portugal, Ireland, Finland – it is actually questionable.”
Mr O’Neill said that because Finland and Ireland were adjacent to non-eurozone countries – the UK and Sweden – they might prefer to quit the euro. He said the single currency might be stronger as a result.
Turning to the Brussels bail-out deal, he said that, although some steps had been taken in the right direction, it did not “solve the issue” and that the European Central Bank needed “eagerly” to buy bonds.
“The dilemma is how is this going to be implemented and is everyone fully signed up and, of course, we find in a few days that the key participant hasn’t signed up [Greece],” he said.
The ECB last night disclosed that it has discussed the possibility of ending the purchase of Italian bonds if it concludes Italy is not adopting promised reforms.
Also last night, the chairman of the supervisory board of China Investment Corporation, the country’s sovereign wealth fund, put further distance between China and the eurozone bail-out, saying that Europe’s bloated welfare state meant that people did not work hard enough.
“I think if you look at the troubles which happened in European countries, this is purely because of the accumulated troubles of their worn out welfare societies,” Jin Liqun said in an interview with Al Jazeera television. “I think the labour laws are outdated – the labour laws induce sloth, indolence rather than hard working. The incentive system is totally out of whack.”
Eurozone leaders had been hoping that China would use some of its trade surplus to back the bail-out fund.
Goldman: euro could split apart - Telegraph

[NuovaEra2012]

October 6, 2011 10:07 pm
Europe’s crisis is all about the north-south split
Alan Greenspan
The eurozone is confronted with a crisis of not just labour costs and prices – but culture. The burden is primarily on southern
Europe, where sovereign bond credit spreads (relative to the German Bund) range from 370 basis points (Italy) to 1,960 basis points
(Greece). The northern eurozone countries have tight spreads against Germany – a narrow 40 to 80 basis points for the Netherlands,
Austria, Finland and France. There are thus two distinctly defined eurozone areas: in the north and in the south.
The ranking of credit risk spreads by size across the eurozone in 2010 was almost identical to the ranking of the level of unit labour
costs (relative to that of Germany), suggesting that the higher labour costs and prices have rendered “euro-south” less competitive
and so more subject to credit risk. The more competitively priced net exports of the northern eurozone participants, in effect, more
than covered the rising level of net imports of the south. In short, between 1999 and the first quarter of 2011, there has been a
continuous net transfer of goods and services shipped from the north to the south. Northern Europe in effect has been subsidising
southern European consumption from the onset of the euro on January 1 1999. It is not a recent phenomenon.
I recall that in the early years of the eurozone there was a general notion in the markets that the Greeks were behaving like the
Germans. But there is scant evidence that on embracing the euro southern members significantly altered their behaviour – behaviour
that precipitated chronically depreciating exchange rates against the D-Mark. From 1990 through to the end of 1998, euro-south unit
labour costs and prices rose faster than in the north. In the years following the onset of a single currency, that pace barely slowed. In
fact, the underlying trend was stopped only by the financial crisis of 2008. Since then there have been signs of price level stabilisation
in the north and the south.
The ability for the south to sustain its pre-euro financial excess after 1999 was facilitated by borrowings subsidised by the credit
ratings of euro-north members. Before 1999, borrowing in the legacy currencies of the south was far more expensive than in the
north. But, anticipating the euro, drachma-denominated 10-year sovereign bonds fell more than 450 basis points relative to German
Bund rates in the three years leading up to Greece’s adoption of the euro in 2001. Likewise, Portugal’s escudo yields fell almost 375
basis points and Italy’s lira yields fell by nearly 500 basis points in the three years preceding the formation of the eurozone on
January 1 1999. Changes in pre-euro entry bond rates for France, Austria, the Netherlands, Finland and Belgium were negligible.
Subsidised borrowing may have accounted for much of the acceleration in the ratio of euro-south consumption relative to that of
Germany. It rose between 1995 and 1998 at a 1.26 per cent annual rate. Presumably as a consequence of subsidised euro credit, that
ratio accelerated to a 1.63 per cent annual rate of increase between 1998 and 2007.
Euro-north has historically been characterised by high saving rates and low inflation, the metrics of a culture that emphasises longerterm investments rather than immediate consumption. In contrast, negative saving rates – excess consumption – have been a
common feature of Greece and Portugal since 2003.
There remains the question of whether most, or all, of the south would ever voluntarily adopt northern prudence. The future of the
euro beyond a select group of northern countries with a similar culture will depend on the ability of all eurozone nations to follow
suit.
Failing that, the eurozone will not have the ability to address the key concern of currency-pooling arrangements: that the value
created by a pooling arrangement tends to be distributed disproportionately in favour of the financially less collegial and less prudent
members of the pool. We observed this tendency as growth of the south relative to Germany accelerated following the creation of the
euro. Thus, unless restrained, the less collegial members of the pool will try and often succeed in exploiting their advantage, as
Greece so brazenly did recently.
If the euro is to remain a viable currency across the eurozone, members must behave in the responsible manner contemplated in the
Maastricht treaty. But it is not clear that culture, so integral to a nation’s personality, can be easily altered. As Kieran Kelly noted last
week: “ . . . if I lived in a country like this [Greece], I would find it hard to stir myself into a Germanic taxpaying life of capital
accumulation and arduous labour. The surrounds just aren’t conducive.”
It seems inevitable that for the euro to prevail, something more formidable than the failed stability and growth pact is needed to
constrain aberrant behaviour. It may be that nothing short of a politically united eurozone, or Europe, will, in the end, be seen as the
only way to embrace the valued single currency.
The writer is former chairman of the US Federal Reserve

http://www.astrid-online.it/Dossier-...T_07_10_11.pdf