Events - 19.12.2011 - 00:00 

What is the path ahead for the Euro?

Did the European Council meeting in Brussels last Friday create hope for the solution to the Euro Zone crisis? A panel discussion at the University of St Gallen (HSG) seems to think not.

$alt16 December 2011. With the European Council meeting in Brussels last Friday, hopes have been high that Europe is closer to solving the current economic crisis. However, a panel at the University of St Gallen (HSG) seems to think that we have moved farther away.

The panel discussion entitled "Ramifications of the Euro Zone Crisis" consisted of Prof Dr Simon J. Evenett, Prof Dr Manuel Ammann, Prof Dr James Davies, and Prof Dr Dirk Lehmkuhl. The discussion focused on the political, banking and economic consequences of the ongoing crisis.

The Brussels agreement
The Panel began with Prof Lehmkuhl giving a summary of what was agreed in the Brussels meeting on 9-10 December, particularly emphasizing an agreement at the national level for the creation of a Debt Break rule with automatic penalties that says a country's debt cannot exceed .5% of GDP.

There will also be a bail out mechanism with money paid in by the governments that will be adopted into the treaty of the European Union. However, while these developments may seem promising the structure of the mechanism as well as much of the agreements remain unclear.

"Part of this story is still open to constitutional change as well as to directors and regulators," said Prof Lehmkuhl, explaining that much of the actual structure of the agreements and mechanisms would be developed and reported by March 2012. "Only then will we really know the complexity of the entire story."

Is it enough?
The panel largely agreed that European investors including the European Central Bank (ECB) were looking for an indication last week that the Euro Zone governments were taking concrete steps to get their fiscal balances under control before they begin buying up more vulnerable debt. However, with so much of last week's outcome left to be decided later, the signal appears too vague and not reassuring to investors or the ECB.

"I think we are actually worse off than we were two weeks ago," said Professor Evenett. "We actually have less clarity, we have the ECB that is no closer to being the lender of last resort, and the problem is just propitiating itself."

Market reactions

The market seems to agree with the panel, as stocks tumbled around the world, the euro slid to an 11-month low and borrowing costs spiked for heavily indebted Italy.

"I think the only reason that financial markets are not in more turmoil and more pessimistic is this hope that the ECB will finally step in and finance governments deficits," said Prof Ammann. "In that respect I find problematic talking about the ECB in that context because it was never intended to be a lender of last resort for countries. It was intended for banks."

Why is it so hard to act?

Prof Davis discussed the erosion of trust in political and economic institutions, focusing on the friction created by the difference between economic logic and political logic. Looking at Germany, Prof Davis said Chancellor Angela Merkel faces what he called the paradox of financial success.

"If she takes costly measures to save the financial systems and they are successful, voters will punish her for that," said Prof Davis. After action is taken, voters only see the cost and not what was prevented. "They don’t believe the cost were necessary."

As Chancellor Merkel is up for election again she is in somewhat of a bind as she will likely be punished by voters if she acts to save the financial system and if she doesn’t. This conflict between political and economic forces has lead to an erosion of trust between these two entities that need to work together. With each side blaming the others - politicians blaming the banks, banks blaming politicians and investors blaming both - it just makes it more difficult to form a lasting deal.

Picture: Photocase /

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