AIX-EN-PROVENCE, France -(Dow Jones)- Policymakers in Reykjavik are closely watching the unfolding of the Greek debt crisis, for its outcome will be a key element of Iceland's decision to join the euro, the head of the country's central bank, Sedlabanki said, as he urged the currency bloc to improve its economic governance.
"The outcome of the Greek crisis will affect the attractiveness of being a member of the euro area," Mar Gudmundsson told Dow Jones Newswires in an interview here late Friday. "A monetary union needs much more economic integration, some elements of common economic and fiscal policy and a common financial stability framework. One needs to match an economic union with the monetary union for it to work," he added.
The European Union and Iceland began talks in earnest June 27 over Iceland's bid to join the 27-nation bloc. Iceland applied to join the EU in July 2009, while the country was still suffering from the global financial crisis that hit it especially hard.
The well-known long-standing issue between Iceland and the EU is the fishing industry. But privately, EU diplomats have warned in recent months that Iceland was wavering on its commitment to join the Union as its economy starts growing again--by 2.2% this year, according to the International Monetary Fund--for the first time since the crisis.
The sovereign-debt crisis roiling the monetary union could make the 320,000- people nation even more cautious about adopting the euro, outweighing advantages stemming from a less-volatile currency environment.
"Being a member of the euro-area would result in a more stable economy," Gudmundsson said. But, on the other hand, "There are design failures in both the EU and the euro zone, and they were revealed by the crisis," he said.
Gudmundsson's outlook was fairly optimistic, but he admitted that a high amount of uncertainty hangs on the future. A disaster, he said, can't be ruled out, yet.
"Right now it looks to me more likely that the euro area will pull through," he said. "But there are always probabilities in both directions. Anything could happen. If you make mistake after mistake after mistake, you can end up with a very bad outcome," he added.
Many have pointed to Iceland's successful recovery to argue that the Greek government should ditch a multiyear austerity plan to pay back its debt, which is now 1.6 times its gross domestic product, and leave the euro altogether. But from the south of France, where he was attending a yearly conference organized by French think tank Cercle des Economistes, Gudmundsson warned Greece that going back to the drachma won't solve the country's problems. What the government in Athens should do is go ahead with reforms, and not be tempted by the thought that devaluation would be an easier way out.
"If a small country leaves the euro area, the question is: Will it be a crisis for that country or for the euro area?" he asked. "Greece has a lot of debt denominated in euros. If it quit the euro, it would get no relief."
The devaluation of the krona, which lost 50% of its value in nominal terms after the collapse of the country's three largest banks, Kaupthing Bank, Glitnir and Landsbanki, boosted the island's economy, but the significant overshooting in devaluation created inflationary tensions.
"The currency is part of the solution, but also part of the problem," he said, suggesting that, as it happened for Iceland three years ago, financial markets are being too hard on Athens. "If history is any kind of judge, yes, markets are overpricing risk on Greece now," he said.
By Gabriele Parussini, Dow Jones Newswires
Source: www.nasdaq.com
No comments:
Post a Comment