HomeWorld BusinessImportant lesson in euro crisis — Marcus

Important lesson in euro crisis — Marcus


Developments in the euro crisis have significant lessons for other single currency areas, including moves towards monetary integration in Africa, SA Reserve Bank governor Gill Marcus said on Tuesday.

She was addressing members of the SwissCham Southern Africa SA Chapter in Johannesburg.
“It is not sufficient to have macroeconomic convergence criteria. This is a static approach, in the sense that once achieved, the pressure is off.”

Marcus said recent experience had shown how quickly these ratios could be reversed.

“An effective monetary union needs to ensure that there are effective mechanisms to guarantee that these criteria are sustained. The Growth and Stability Pact failed because there was no real sanction involved for countries that transgressed the rules.” (The Growth and Stability Pact is an agreement among the 17 member states of the European Union that take part in the eurozone to maintain the stability of the economic and monetary union).

This pointed to the need for a single fiscal authority, Marcus noted.

“While this was previously recognised, the political difficulties of achieving agreement on this and to allow politically sensitive issues such as tax policies, expenditure requirements, and fiscal transfers to be made by a supranational body, would have significantly delayed or even perhaps stymied the implementation of the euro.

Marcus said it was increasingly apparent that a further weakness in the design of the eurozone was the lack of a lender of last resort.

“While in principle the European Central Bank (ECB) can, and has been in effect playing this role and taking a large amount of risky assets onto its balance sheet, it is questionable whether it can continue to do so without intense political pressure from some of the member states who feel that the ECB is operating outside of its mandate.”

At present it was the individual central banks that stood behind the ECB.

“There is no unified fiscal authority that guarantees its activities.”

Marcus added that it would be wrong to think sorting out the fiscal issues would have prevented the eurozone crisis.

“These issues are a manifestation of a deeper problem of divergent levels of competitiveness. The underlying assumption of a monetary union is that competitiveness will remain constant, ie. the internal real exchange rates will be unchanged.”

In the past ten years the peripheral countries had lost competitiveness to varying degrees, in the case of Greece by about 30%.

There was no internal mechanism to prevent this and in fact the single currency allowed for automatic and continuous financing of these divergent trends at low rates of interest.

Marcus said Italy’s problem was not only fiscal in nature.

“Italy is after all running a primary surplus. In the absence of an exchange rate adjustment mechanism, the only way to adjust is through an internal devaluation, implying falling nominal and real wages and fiscal austerity.

“This is the classic expenditure reduction case under fixed exchange rates. The inability to change the nominal exchange rate imposes severe adjustment costs.”

While exchange rate flexibility would ease the burden of adjustment, countries that found themselves with appreciating currencies in response to developments elsewhere found it extremely uncomfortable as well, Marcus said.

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