Megan Greene’s vision on the Eurozone future is clear: the Euro is doomed, Greece is very likely to leave the Eurozone, and this would almost certainly mark the end of the euro area. She designates a clear responsible: the EU leaders whose “capacity for muddling through never ceases to astound” her. For Greene, the only solution is for the Europeans to create a fiscal union.
Megan Green is an experienced analyst of the European union and its economy. She worked as an economist at the Economist Intelligence Unit from 2007-11 as the company’s euro crisis expert, focusing on developments in the PIIGS, in Germany and at the EU level. She now runs the “Euro Area Debt Crisis” page where she provides political and macroeconomic analysis and forecasting for Greece, Ireland, Portugal, Spain, Italy and Germany.
Is there a real possibility for Greece to leave the Eurozone? What it would mean for the Eurozone and for the rest of the world?
There is a very real risk that Greece might leave the Eurozone. The implications of this for Greece and the rest of the world depend in part on when it takes place. If Greece were to leave the Eurozone this year or next, it would be doing so with a primary deficit (ie: needs to borrow money to run government without even considering interest costs). This means Greece would be frozen out of the markets and cut off from EU and IMF funding at a time when it needs money immediately. This would be an absolute disaster for Greece. The impact on European banks also depends to a certain degree on the timing. The Greek debt that the ECB and IMF hold are senior to other Greek government debt, and European banks would be forced to accept a massive haircut on Greek sovereign bonds if Greece were to leave the Eurozone. The sooner that happens, the greater European bank exposure to Greek debt is. Whatever the timing, a Greek exit of the Eurozone would have major implications for global trade as it would almost certainly mark the end of the Eurozone.
"A Greek exit of the Eurozone would have major implications for global trade as it would almost certainly mark the end of the Eurozone"
The end of the Eurozone means that Greece would be followed by other countries, right?
If Greece were to leave the Eurozone, I expect Ireland and Portugal would follow suit shortly, yes. At this point the crisis would spread even further to Italy, Spain and France, all of which are too big to be bailed out and the political will to keep the Euro project going would collapse. The Eurozone is one of the world’s biggest markets, and it’s disintegration would hit global markets hard.
You seem to share the forecast of some analysts who think the Eurozone has no bright future ahead...
"I think that the Euro is doomed"
I think that the Euro is doomed. EU leaders have repeatedly demonstrated that they are unwilling to take the steps necessary to create fiscal union and issue Eurobonds. In the absence of this political will, the Eurozone will break apart. This could happen as early as December. In December, the troika will return to Greece to assess the government’s progress in implementing the terms of a bailout programme that cannot possibly work. At this point the EFSF should have been ratified so that it can step in to bail out banks and attempt to ringfence the contagion of a Greek default through the European banking sector. The troika will inevitably have a difficult time finding positive things to report in Athens. The Greek public will be even more fed up with austerity than it already is. The rift within the Greek ruling party Pasok will have grown. It is possible that the Greek government will refuse to implement more austerity come December, and consequently the EU and IMF will refuse to transfer any more funding to Greece. At this point, Greece will be forced to default, and will have to either stop paying its public sector workers and face social unrest/civil war, or leave the Eurozone. Once Greece exits the Euro, other countries would likely follow. There is a huge risk this is how the Eurozone will break up, though there are several other potential choreographies as well. EU leaders’ capacity for muddling through never ceases to astound me, so a break-up could be delayed beyond December. Either way, unless EU leaders start to actually display some visionary leadership, the Euro area will break apart.
"Greece will be forced to default, and will have to either stop paying its public sector workers and face social unrest/civil war, or leave the Eurozone"
An urgent and real solution is crucial then. What are the necessary steps to avoid this dramatic scenario?
Either the EU needs to create a European Debt Management Agency to issue and guarantee Eurobonds, or the ECB’s competencies will have to be expanded to include this role as well in order to finally draw a line under this crisis. It would be absolutely unorthodox for a central bank to play this role. But equally it is already unorthodox to have created a monetary union with a central bank but no debt agency.
Unorthodox measures like spending and spending and spending money buying bonds. Is it sustainable?
In theory there is no upper limit to ECB bond buying. The ECB could stop sterilizing its purchases and undergo a course of significant quantitative easing as has occurred in the US and the UK. This is extremely unlikely given opposition to it in Germany. The ECB has indicated throughout this crisis its reticence to perform non-standard measures such as purchasing government bonds in secondary markets through the Securities Markets Programme. As soon as EU governments have ratified the EFSF reforms agreed in July, including the expansion of the EFSF’s remit to include bond buying, the ECB will make moves to unravel or discontinue the SMP. However, the EFSF has a ceiling of €440bn, and will run out of cash quickly if it is responsible for the bailouts as well as buying up government bonds to stabilize yields. Unless this ceiling is significantly raised or removed altogether, the ECB will have no choice but to continue to buy bonds in the secondary markets.
"The first necessary step is a willingness on the part of EU leaders to take steps towards fiscal union"
Would consolidation of the European debt into a Single National Debt be the first necessary step towards a solution then?
No, the first necessary step is a willingness on the part of EU leaders to take steps towards fiscal union. This involves coordinated fiscal policy and a European Debt Agency (or in the absence of the latter allowing the ECB or EIB function as a European Debt Agency). So far EU leaders have proven again and again that they are not willing to take the steps necessary for fiscal union, and certainly not in the time frame necessary to ring fence this crisis.
It seems clear for you that EU leaders are responsible of this almost dead end situation... what about the speculators? Are they to be blamed too?
I don’t buy that speculators are to be blamed for this crisis. The onus is not on them to buy up European debt. The onus is on European leaders to ensure that investors feel confident in buying European government bonds.
Changing of stage, in a recent article, you wrote that the Euro banks could be in big trouble...
As IMF chief Christine Lagarde highlighted in Jackson Hole, Europe’s banks need to be recapitalized immediately. European banks have become increasingly reliant on the ECB’s bank deposit facility and have increasingly borrowed from the ECB in USD. There has been dismal banking news coming out of both the periphery (particularly Greece) and the core (particularly France). (See: Europe's banks could be in big trouble.)
Furthermore, economic indicators for growth in the Eurozone and the US have been disappointing over the past few weeks, indicating that economic powerhouses such as Germany are finally beginning to stagnate. If growth continues to stall in the Eurozone as I expect, bank balance sheets will be hard hit.
"There is a significant precedent examining economic history for monetary unions breaking apart"
Putting the debt problem into perspective... Do you see any solution taken from the whole economic history that could work here?
The only two solutions are fiscal union or Eurozone break-up. The Euro area has fundamental flaws in its structure as has been argued since its inception. If these flaws are not addressed, it will break apart. There is a significant precedent examining economic history for monetary unions breaking apart. The only exception is the United States, which was built on a very different premise from the EU.
Looking ahead... Trichet will be replaced soon by Mario Draghi at the head of the ECB. How do you think Draghi will drive the ECB compared to Trichet?
I think Draghi will be as hawkish as Trichet, and the beginning of his tenure as the head of the ECB is likely to be spent compensating in part for Juergen Stark’s resignation from the ECB board in opposition to the ECB’s bond buying programme. In order to be seen to have not been weakened by Mr Stark’s departure, I think the ECB will remain aggressive. Rates will likely remain on hold for the rest of this year, but in early 2012 I expect the ECB will be forced to cut rates as the Eurozone heads towards a double dip recession.