26 October 2011

Fate of the Euro

Last Thursday, the Business School (in conjunction with FINSIA and the Capital Markets CRC) was fortunate enough to host a lunchtime presentation by international financial markets regulation expert John Eatwell.

In what was a fascinating lecture, John spoke about the link between the 2008 GFC and the current European sovereign debt crisis before addressing the key question facing governments and economists alike: will the Euro survive? His first real message was that the banks at the heart of this crisis are actually so large that they dwarf not only the economies in which they’re based, but also the governments presiding over those economies. They are, as the popular mantra indicates, too big to fail. He highlighted two of the most problematic banks - UBS and Credit Suisse – who are 376% and 218% larger than the total Swiss economy respectively. It’s a similar story in France, with BNP Paribas, Credit Agricole and Societe Generale combining to be 237% larger than national GDP. These figures highlight the necessity of a coordinated global effort when these institutions get into trouble.

Despite current fears, John feels very strongly that the Euro will indeed survive. Quite simply, Germany and France have too much of a vested interest for failure to be an option. However, he does foresee the possibility of a growing divide between politicians and their disaffected constituents, who will probably be quite outraged at the prospect of their money being used to bail out Greece and other similarly problematic member countries.

He believes that the long-term viability of the Euro requires a strong central bank, an effective treasury function, a mechanism to transfer wealth from the prosperous to the poor, a stopgap all-union employment provider and easy migration. Currently, only the first of these conditions is met (in the form of the European Central Bank), and in order for the currency to survive, the other functions must be developed. This will require more centrally coordinated action within the region and while it’s a move that will lead to a diluting of state powers, it’s a concession that will be vital in keeping the Euro going.

Author: Professor Michael McKenzie - Chair of Discipline of Finance at the University of Sydney Business School

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