Euro Area

[Furunculus]

The crisis has nothing to do with the euro.

No serious economist said the dropping the euro would solve the problems.

truly?

i ask because these chaps:

Roger Bootle is Managing Director of the independent consultancy, Capital Economics,
which he founded in 1999. Employing 90 people in London, Toronto and Singapore, it
has about 1,400 institutional clients worldwide.
Appointments include: Specialist Adviser to the House of Commons Treasury Committee,
Economic Adviser to Deloitte, member of the Chancellor’s panel of Independent Economic
Advisers, Visiting Professor at Manchester Business School, Group Chief Economist at HSBC
and Lecturer in Economics at St Anne’s College, Oxford. Roger studied at Oxford University,
gaining a B.A. in PPE and a B. Phil in Economics. He has written many articles and five
books. His latest book The Trouble with Markets contains a new chapter based on the
prize-winning entry and is available from July 5th as a new ebook.

Julian Jessop is the Chief Global Economist and Director. He was previously Senior
International Economist at Standard Chartered Bank, held senior economist positions
at HSBC and the Japanese bank Nikko, and worked as an Economic Adviser at the UK
Treasury. He has two degrees in Economics from Cambridge University.

Andrew Kenningham is Senior Global Economist. He was previously Deputy Chief
Economist in the Foreign and Commonwealth Office and before that covered Emerging
Europe, Middle East and Africa for Merrill Lynch’s fixed income business. He has
degrees in Economics and Economic History from Manchester University and the LSE.

Jonathan Loynes is the Chief European Economist and Director, and has responsibility
for the euro-zone and the rest of Western Europe. He joined Capital Economics in
2000 from HSBC, where he was Chief UK Economist. Jonathan studied Economics and
Finance at Bath and Southampton universities.

Ben May is European Economist with focus on Italy, Spain, Ireland, Greece and
Scandinavia. Ben previously worked in the Monetary Analysis area of the Bank of
England, where amongst other things he worked on the euro-zone. He has degrees in
Economics from the University of Bristol and University College London.

Jennifer McKeown is Senior European Economist with a particular focus on the ECB
and the German, French and Swiss economies. She previously worked at the Bank of
England where she was a Euro-zone Economist. Jennifer has degrees in Economics from
University College London and the University of East Anglia.

Mark Pragnell is Head of Commissioned Projects with responsibility for bespoke
economic research for clients. He was previously in local government and, before that,
managing director of economics consultancy, CEBR. He has also held senior strategy
roles at Consumers’ Association and Railtrack plc. Mark read PPE at Oxford University.

would beg to differ:

The predicament of the euro-zone is both financial and economic.

The financial element centres on debt. Several countries have public debt burdens which
are unsustainable. In some cases, private debt is also overwhelming. Meanwhile, excessive
debt in the public and/or private sectors threatens the stability of the banking system.

The economic problem is that whereas monetary union was supposed to
bring convergence, in several members costs and prices continued to rise rapidly
relative to other members of the union, and indeed the outside world, thereby
causing a loss of competitiveness. This resulted in large current account deficits
and the build-up of substantial net international indebtedness. Often it is the same
countries that suffer acutely from both the financial and economic problems.

As a result of poor competitiveness and/or the burden of excessive debt,
several members of the euro-zone suffer from a chronic shortage of aggregate
demand, which results in high levels of unemployment. This worsens the debt
position of both the private and public sectors, thereby weakening the position
of the banks. Meanwhile, other countries enjoy current account surpluses, often
accompanied by more favourable debt positions in both the public and private
sectors. Moreover, the favourable position of the surplus countries is partly the
direct result of the weaker members’ loss of competitiveness.

Clearly, the financial and economic aspects of the crisis are closely inter-twined.

Full adjustment for the euro-zone and the establishment of stability for both the
member countries and the rest of the world requires that both these problems
be addressed.

Our analysis concludes that the economically optimal reconfiguration of the
euro-zone would be the retention of a core northern euro-zone incorporating
Germany, Austria, the Netherlands, Finland and Belgium. These countries have
converged and they have compatible economic structures. They come close to
being an ‘optimal currency area’. France’s economic credentials for membership
of this group are less clear but, in reality, it appears likely that political
considerations would dictate that it was also a member.