The University of Kent, Canterbury, Kent, CT2 7NZ, T +44 (0)1227 764000
Euro project 'is at crossroads'
Professor Miguel Leon-Ledesma, European economics expert at the University of Kent, comments on the prospects for the single currency.
He said: 'The euro project is at a crossroads and it won't be long before we see some sort of resolution for good or bad. There are two relevant questions to pose at this stage: is saving the euro project a good thing? And, if so, are we taking the right steps?
'The answer to the first is positive. The cost of dismantling the euro can be much larger than the cost of creating it. An abrupt exit of countries like Greece may lead to a bank-run, bringing monetary instability, rising costs, and ending in hyperinflation (and hyperinflation always brings about political instability of the worst sort).
'The answer to the second is negative. The new fiscal compact asking for dramatic short-term budget cuts is self-defeating and not credible. It is already proving to excessively harm weak economies, and could lead to waning political support for the euro. Budget discipline and re-thinking the role of the state are absolutely crucial in the medium-run, but this cannot be achieved without consensus.
'From 2009 to the end of this year, Greece's economy may shrink by close to 20%. This is a very heavy burden for people to bear, and presents an unlikely scenario to achieve any results on the fiscal side. Germany has benefitted from the euro and the consumption boom in other European countries during the expansion. The German financial system has thus lent vast amounts to what are now weak economies.
For these reasons, the pain of a full blown crisis would harm Germany and they have to be responsive. A mild German fiscal expansion, through tax cuts and laxer terms to achieve fiscal balance, would be beneficial for all. There is, of course, no magical formula. We live in a world of pure uncertainty. But taking the radical route is not a prudent way of dealing with these situations.'
Miguel Leon-Ledesma is Professor of Economics within the School of Economics at the University of Kent. He is a regular consultant for the European Central Bank and has also been a consultant to the Asian Development Bank.
Story published at 10:29am 24 May 2012
Follow us on Twitter
For all the latest press releases and comment stories
Find out who else to follow by looking at @UniKent's lists