Let´s Stay Together

20/06/2012 London

A good marriage or a messy break-up? This was the question posed about the eurozone by Prof. Alfredo Pastor in a meeting organized by the Alumni Association at the offices of asset managers Blackrock in the City of London last night. Roger Tooze, Blackrock’s managing director of finance, introduced Pastor and Daniel Franklin, executive editor of The Economist, who began the meeting with a discussion of four possible scenarios.

These scenarios amounted to variations on keeping the euro and Europe either stagnating or being successful, or ditching the euro with the same choice of outcomes. “The separation scenarios look very difficult but that doesn’t mean they won’t happen,” Franklin said. “Because of a lack of political will, the disaster could happen almost by accident. What is happening in this crisis is that the inconceivable has become worryingly imaginable.”
Abandoning the euro would lead to protectionism and an endless round of devaluation, said Pastor. “If your debt burden is in a foreign currency, even devaluation won’t save you. Spain devalued in 1993 but then it didn’t have foreign debt.” If we follow the divorce route, how are we going to restructure debt amicably? “The burden is too great to go it alone. Europe would have to reconstruct a monetary framework in which the stronger currencies would commit to supporting weaker ones.”

Insisting that Europe’s problems are not as great as they are painted, Pastor pointed out that the eurozone debt problem is internal; it doesn’t have external debt. The EU has to guarantee member states’ debts, he said, pointing out that in nation states, wealthier regions have always subsidized the poorer ones and this is the same for Europe as a whole. “If we had a fiscal union there wouldn’t be a debt problem,” he added. And if we don’t, the cost of borrowing could become so high that a country such as Spain would have no option but to default, he said.

Taking up the question of greater union, Franklin commented that there is potentially a big divide between France and Germany over how a federal Europe would look. “The Germans would expect political convergence to precede monetary convergence and but that is not how most people in Europe see it,” he said.

Pastor’s view was that the real problem with integration isn’t Germany, it’s France. “France will never accept just being an equal member,” he said. Franklin pointed out that we have the unusual spectacle of a euroskeptic United Kingdom calling on the eurozone to have tighter fiscal union.

“Euroskeptics see the crisis as an opportunity to get the UK out of Europe,” he said. “Britain may not pull out of Europe but it may fall out of it, especially as all treaty changes have to be put to referendum.” The UK seems to be a spectator but is actually very vulnerable to what happens in the eurozone, Franklin said, while Pastor said he believed that “the UK is indispensable to the EU.”

Franklin asked Pastor if, after a long period of denial, Spain was finally facing up to reality. “There is little left to deny,” Pastor said drily, adding that it was an exaggeration to say the entire Spanish banking system is discredited. “Spain is too inward-looking and not aware enough of it position in the world and as a result it wastes valuable time when it comes to making decisions. The problem is that from the northern point of view it isn’t enough that we have to pay our debts, we also have to be punished.”