1. Freddy Van den Spiegel Chief Economist SAVING THE EURO – at what price? Austrian Marshall Plan Foundation Austrian Central bank Vienna, October 21, 2010.

2. October 21, 2010 | 2 1. Imagine EU without Euro: is/was it worthwhile?

3. October 21, 2010 | 3 1. Imagine EU without Euro: is/was it worthwhile? The difficult situation before the Euro.

4. October 21, 2010 | 4 The European Currency Snake

5. October 21, 2010 | 5 Ins & Outs –1979: eight original participants: France, Germany, Italy, Beligum, Denmark, Ireland, Luxembourg and the Netherlands. –1989: Spain as new member –1990: UK as new member –1992: Portugal as new member. –16 September 1992: UK withdraws –17 September 1992: Italy withdraws The European Monetary System 1979-1993

6. October 21, 2010 | 6 ERM : the impossible triangle. Fixed exchange rates Currency board or Common currency Floating rates Freedom of capital movements Monetary policy autonomy Capital controls

7. October 21, 2010 | 7 The difficult situation before the Euro. The positive effects. Inflation converging, low and stable. 1. Imagine EU without Euro: is/was it worthwhile?

8. October 21, 2010 | 8

9. October 21, 2010 | 9 The difficult situation before the Euro. The positive effects. Inflation converging, low and stable. Budget deficits down despite weak discipline of SGP. 1. Imagine EU without Euro: is/was it worthwhile?

10. October 21, 2010 | 10

11. October 21, 2010 | 11 The difficult situation before the Euro. The positive effects. Inflation converging, low and stable. Budget deficits down despite weak discipline of SGP. Cost of capital down. 1. Imagine EU without Euro: is/was it worthwhile?

12. October 21, 2010 | 12

13. October 21, 2010 | 13

14. October 21, 2010 | 14 The difficult situation before the Euro. The positive effects. Inflation converging, low and stable. Budget deficits down despite weak discipline of SGP. Cost of capital down. Macro economic stability. 1. Imagine EU without Euro: is/was it worthwhile?

15. October 21, 2010 | 15 The difficult situation before the Euro. The positive effects. Inflation converging, low and stable. Budget deficits down despite weak discipline of SGP. Cost of capital down. Macro economic stability. Helping the internal market? Statistics are not easy to interpret. 1. Imagine EU without Euro: is/was it worthwhile?

16. October 21, 2010 | 16

17. October 21, 2010 | 17 The difficult situation before the Euro. The positive effects. Inflation converging, low and stable. Budget deficits down despite weak discipline of SGP. Cost of capital down. Macro economic stability. Helping the internal market? Statistics are not easy to interpret. Increasing role as reserve currency. 1. Imagine EU without Euro: is/was it worthwhile?

18. October 21, 2010 | 18 Since the introduction of the euro, the euro’s share rose from 18% to 27%, while the share of the USD declined from 71% to 62%

19. October 21, 2010 | 19 The difficult situation before the Euro. The positive effects. Inflation converging, low and stable. Budget deficits down despite weak discipline of SGP. Cost of capital down. Macro economic stability. Helping the internal market? Statistics are not easy to interpret. Increasing role as reserve currency. Increasing role in international trade. 1. Imagine EU without Euro: is/was it worthwhile?

20. October 21, 2010 | 20 The euro share as a settlement/invoicing currency in extra-euro area exports of goods of selected euro area countries (as a percentage of the total)

21. October 21, 2010 | 21 The difficult situation before the Euro. The positive effects. The failures and disappointments. Growth below target. 1. Imagine EU without Euro: is/was it worthwhile?

22. October 21, 2010 | 22

23. October 21, 2010 | 23 The difficult situation before the Euro. The positive effects. The failures and disappointments. Growth below target. Diverging competitiveness. 1. Imagine EU without Euro: is/was it worthwhile?

24. October 21, 2010 | 24

25. October 21, 2010 | 25 The difficult situation before the Euro. The positive effects. The failures and disappointments. Growth below target. Diverging competitiveness. Lack of discipline. 1. Imagine EU without Euro: is/was it worthwhile?

26. October 21, 2010 | 26

27. October 21, 2010 | 27 The difficult situation before the Euro. The positive effects. The failures and disappointments. Growth below target. Diverging competitiveness. Lack of discipline. 1. Imagine EU without Euro: is/was it worthwhile? ON BALANCE: A RATHER SATISFACTORY EXPERIENCE BUT WEAK SPOTS.

28. October 21, 2010 | 28 1.Imagine EU without Euro: is/was it worthwhile? 2.The crisis as a catalyst for trouble.

29. October 21, 2010 | 29 Not a normal crisis: a worldwide regime switch. 2. The crisis as a catalyst for trouble.

30. October 21, 2010 | 30 Not a normal crisis: a worldwide regime switch. Three consecutive shocks on major pillars of the Western system. The financial system. 2. The crisis as a catalyst for trouble.

31. October 21, 2010 | 31

32. October 21, 2010 | 32

33. October 21, 2010 | 33 Not a normal crisis: a worldwide regime switch. Three consecutive shocks on major pillars of the Western system. The financial system. The economy. 2. The crisis as a catalyst for trouble.

34. October 21, 2010 | 34

35. October 21, 2010 | 35 Not a normal crisis: a worldwide regime switch. Three consecutive shocks on major pillars of the Western system. The financial system. The economy. The governments and sovereign risk. 2. The crisis as a catalyst for trouble.

36. October 21, 2010 | 36

37. October 21, 2010 | 37

38. October 21, 2010 | 38 Not a normal crisis: a worldwide regime switch. Three consecutive shocks on major pillars of the Western system. The financial system. The economy. The governments and sovereign risk. 2. The crisis as a catalyst for trouble. EVERY WESTERN ECONOMY SUFFERS IN A DIFFERENT WAY... DIVERGENCE IS NATURAL. NOT THE RIGHT BENCHMARK FOR FINAL JUDGEMENT ….. BUT LESSONS HAVE TO BE LEARNED.

39. October 21, 2010 | 39 1.Imagine EU without Euro: is/was it worthwhile? 2.The crisis as a catalyst for trouble. 3.The Eurosystem in stress: a story of 3 (or 4 or 5 …) little pigs.

40. October 21, 2010 | 40 A question of finding the right balance. It is silly to build a house, so strong, for a storm that will never come. It is irresponsible to build a house, so weak, that it will collapse with the first breeze. The remarkable speed of deterioration of winners into massacre. 3. The Eurosystem in stress: a story of 3 (or 4 or 5 …) little pigs.

41. October 21, 2010 | 41 Eurozone GDP (%YoY, average 2001-09) Source: Capital Economics

42. October 21, 2010 | 42 A question of finding the right balance. The fatal combinations for Greece. Current account / ULC. 3. The Eurosystem in stress: a story of 3 (or 4 or 5 …) little pigs.

43. October 21, 2010 | 43

44. October 21, 2010 | 44 A question of finding the right balance. The fatal combinations for Greece. Current account / ULC. Government deficit / debt. 3. The Eurosystem in stress: a story of 3 (or 4 or 5 …) little pigs.

45. October 21, 2010 | 45

46. October 21, 2010 | 46 A question of finding the right balance. The fatal combinations for Greece. Current account / ULC. Government deficit / debt. Consumption driven growth. 3. The Eurosystem in stress: a story of 3 (or 4 or 5 …) little pigs.

47. October 21, 2010 | 47

48. October 21, 2010 | 48 A question of finding the right balance. The fatal combinations for Greece. Current account / ULC. Government deficit / debt. Consumption driven growth. “managed” statistics. 3. The Eurosystem in stress: a story of 3 (or 4 or 5 …) little pigs.

49. October 21, 2010 | 49 Flawed statistics: Greece revised its budget deficit from 3.7% to 12.7% of GDP in the course of 6 months (april 2009 – october 2009)

50. October 21, 2010 | 50 A question of finding the right balance. The fatal combinations for Greece. The fatal combinations for Ireland. Importance of financial sector. 3. The Eurosystem in stress: a story of 3 (or 4 or 5 …) little pigs.

51. October 21, 2010 | 51

52. October 21, 2010 | 52 A question of finding the right balance. The fatal combinations for Greece. The fatal combinations for Ireland. Importance of financial sector. Household debt. 3. The Eurosystem in stress: a story of 3 (or 4 or 5 …) little pigs.

53. October 21, 2010 | 53

54. October 21, 2010 | 54 A question of finding the right balance. The fatal combinations for Greece. The fatal combinations for Ireland. Importance of financial sector. Household debt. Current account / ULC. 3. The Eurosystem in stress: a story of 3 (or 4 or 5 …) little pigs.

55. October 21, 2010 | 55

56. October 21, 2010 | 56 A question of finding the right balance. The fatal combinations for Greece. The fatal combinations for Ireland. The fatal combination for Portugal. Current account / ULC 3. The Eurosystem in stress: a story of 3 (or 4 or 5 …) little pigs.

57. October 21, 2010 | 57

58. October 21, 2010 | 58 A question of finding the right balance. The fatal combinations for Greece. The fatal combinations for Ireland. The fatal combination for Portugal. Current account / ULC High household debt 3. The Eurosystem in stress: a story of 3 (or 4 or 5 …) little pigs.

59. October 21, 2010 | 59

60. October 21, 2010 | 60 A question of finding the right balance. The fatal combinations for Greece. The fatal combinations for Ireland. The fatal combination for Portugal. The fatal combination for Spain. Current account / ULC 3. The Eurosystem in stress: a story of 3 (or 4 or 5 …) little pigs.

61. October 21, 2010 | 61

62. October 21, 2010 | 62 A question of finding the right balance. The fatal combinations for Greece. The fatal combinations for Ireland. The fatal combination for Portugal. The fatal combination for Spain. Current account / ULC Housing / construction bubble 3. The Eurosystem in stress: a story of 3 (or 4 or 5 …) little pigs.

63. October 21, 2010 | 63

64. October 21, 2010 | 64

65. October 21, 2010 | 65 A question of finding the right balance. The fatal combinations for Greece. The fatal combinations for Ireland. The fatal combination for Portugal. The fatal combination for Spain. 3. The Eurosystem in stress: a story of 3 (or 4 or 5 …) little pigs. FOUR DIFFERENT STORIES BUT SOME COMMON ELEMENTS.

66. October 21, 2010 | 66 The combined score card for the Euro Members. 3. The Eurosystem in stress: a story of 3 (or 4 or 5 …) little pigs.

67. October 21, 2010 | 67 1.Imagine EU without Euro: is/was it worthwhile? 2.The crisis as a catalyst for trouble. 3.The Eurosystem in stress: a story of 3 (or 4 or 5 …) little pigs. 4.The Eurosystem reaction (cfr banking crisis).

68. October 21, 2010 | 68 Crisis resolution Emergency fund to help MS in trouble (for some time). Severe conditionality for MS in trouble. Crisis prevention Work on the design of the Euro system: More discipline. Broader set of stability parameters (Prepare an orderly exit mechanism?) SEEMS TO BE THE RIGHT AGENDA. COMPETITIVENESS IS MOST SENSITIVE AND CRITICAL ISSUE. 4. The Eurosystem reaction (cfr banking crisis)

69. October 21, 2010 | 69 1.Imagine EU without Euro: is/was it worthwhile? 2.The crisis as a catalyst for trouble. 3.The Eurosystem in stress: a story of 3 (or 4 or 5 …) little pigs. 4.The Eurosystem reaction (cfr banking crisis). 5.National Austerity programs: will they work?

70. October 21, 2010 | 70 -Focused on government budget. 5. National austerity measures: will they work?

71. October 21, 2010 | 71 The efforts to be made: Remark: Irish Government budget deficit will hit 32% of GDP in 2010 because of rescuing its banking sector. This is a one-off measure.

72. October 21, 2010 | 72 -Focused on government budget. -Expected impact on growth. 5. National austerity measures: will they work?

73. October 21, 2010 | 73

74. October 21, 2010 | 74 -Focused on government budget. -Expected impact on growth. -Mixed results until now: -Government deficits on target. 5. National austerity measures: will they work?

75. October 21, 2010 | 75 Central government budget deficit (% of GDP) Source: Capital Economics

76. October 21, 2010 | 76 -Focused on government budget. -Expected impact on growth. -Mixed results until now: -Government deficits on target. -Growth implosion as expected especially for Greece. 5. National austerity measures: will they work?

77. October 21, 2010 | 77

78. October 21, 2010 | 78 -Focused on government budget. -Expected impact on growth. -Mixed results until now: -Government deficits on target. -Growth implosion as expected for Greece. -Current account problematic for all: the fundamental competitiveness challenge. 5. National austerity measures: will they work?

79. October 21, 2010 | 79

80. October 21, 2010 | 80 -Focused on government budget. -Expected impact on growth. -Mixed results until now: -Government deficits on target. -Growth implosion as expected for Greece. -Current account problematic for all: the fundamental competitiveness challenge. CONCLUSION: THE JURY IS STILL OUT BUT HAS TWO MORE YEARS TO CONSIDER. 5. National austerity measures: will they work?

81. October 21, 2010 | 81 1.Imagine EU without Euro: is/was it worthwhile? 2.The crisis as a catalyst for trouble. 3.The Eurosystem in stress: a story of 3 (or 4 or 5 …) little pigs. 4.The Eurosystem reaction (cfr banking crisis). 5.National austerity measures: will they work? 6.Conclusion.

82. October 21, 2010 | 82 Euro was and remains valuable for Europe. Chaos and stress are “normal” in this severe crisis: MS suffer in different ways. The political reaction to the crisis is fine but unfortunately precious time had been lost. Working on the design of the future Eurosystem is essential. Proposals must be convincing: more supra national controls. Stability rules and competitiveness unclear and probably most sensitive issues. Other challenges ahead for EU in the new world: how to position EU / EURO? (currency wars and other policies) 6. CONCLUSION

83. Thank you.