Vives discussed the content of the EEAG Report on the European Economy 2012 published by CESIFO. He noted that, regarding the growth in EU member states, those with flexible exchange rates such as Sweden and Poland are doing much better than the countries in the Eurozone. “How many Europes are there?” he asked, and concluded that there are three. The first includes Germany, Netherlands and Finland; the second Greece and Portugal and, somewhere between the two, Spain, France, Italy and Belgium.

 

The origin of Europe’s problems lies in the difference in competitiveness within the euro which the financial crisis threw into relief. Sovereign bonds were all worth much the same a few years ago but the crisis revealed the underlying reality of the various Eurozone economies. The result is that sovereign risk is now linked to bank risks. “The problem is a lack of political credibility and the conflict between the center and the periphery,” Vives said. He pointed to Sweden as a country that has successfully achieved fiscal consolidation and economic growth. As for Spain, he said it needs credible policies and a vision that goes beyond austerity.

 

John S. Reed then went on to offer an American perspective on the European situation. “We Americans don’t know what Europe is,” he said. “Who is in charge of the economic situation? Europe appears to be a work in progress. In the U.S. we have our disagreements but we have one central government and the Federal Reserve and we know who is in charge.”

 

What Americans see is Europe saying that what happened in Greece can’t happen, but it did happen, he said. The need for finance is greater than that which Europe is capable of producing, Reed added. There are not many examples of making the sort of fiscal adjustments that are needed in Europe without being able to adjust the value of the currency, he said.  “We don’t see where the money will come from.”