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Rich Pickings

Regional Head of Research at Standard Chartered Bank, Marios Maratheftis discusses the eurozone, Greece and a common currency for the GCC.

July 16, 2012 4:16 by

So, Marios, what do you make of the eurozone? Where is it going?

The eurozone is going some­where, but unfortunately it’s not a very happy place. There is signifi­cant issues and significant problems in the eurozone.

There is a perception that the problem in the eurozone is a fiscal and a debt prob­lem; there is a perception that the southern European countries have been irrespon­sible with their fiscal behavior and hence they need to pay now so there is no other problems. This sounds reasonable, but un­fortunately it’s not true. When you look at the economic data it reveals a different story. The problem in the eurozone was never a fiscal problem or a debt problem. It was an imbalance problem. The diag­nosis of the patient has been wrong, the medication is wrong and the patient is get­ting worse, not better. The only one coun­try that was facing fiscal irresponsibility of this fiscal problem from the beginning was Greece. But Greece is 2.5 percent of the eurozone GDP, if Greece was the only problem it shouldn’t have mattered. The very fact that it matters shows that there are fundamental design flaws in the euro­zone and if there is this persistence from fiscal austerity everywhere, without ad­dressing the imbalances through more realistic policies, their problems will get worse and worse.

Austerity everywhere does not work because it leads to recession, and during recession it makes your debt burden big­ger and makes your fiscal problem bigger as well. It’s what we are seeing in Spain, their problem was not a fiscal problem, it has become a fiscal problem because of the recession.

The second problem with imbalances is competitiveness. We hear southern Eu rope is not competitive if one compares to Germany, this is true but southern Europe is not competitive because for seven years they were flooded in cash from the North, they were facing inflation and that was re­lated to their cash coming from the North and nothing was being done to stop it. Now we need to see Southern Europe ad­justing versus Germany. You cannot have the full adjustments through deflation in the South, you can also have it through some inflation in the North. If you get in­flation in the North, you are going to make the adjustment easier without a deflation that is spiralling, which will also make it easier for Southern Europe to reduce its debt burden. Unfortunately we are not seeing that and if we do not see this, the problem will get worse and worse. There is a high likelihood that Greece will be left with no option than to leave the Euro and I don’t think that if one country leaves the Euro, European policy makers will be able to reinforce into a project and make sure that no other country will be vulner­able. So there needs to be a change in policy, the problem is solvable, but if they keep doing what they are doing they will keep getting what they are getting and what they are getting is the deterioration of the situation. 

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