Latvia is standing tall this summer after receiving the go-ahead to join the Eurozone in January 2014. It has met all economic criteria and will become the zone's 18th member.
The big question now is, with its domestic GDP at 5.6 percent, why would Latvia want to join a recession? Viewed from abroad, it would seem, the Eurozone doesn't have such a bright future. Not so, say many economists in northern Europe.
The euro actually is the device holding the continent together and, despite reports predicting the Eurozone's demise, European Central Bank officials see signs of improvement.
"Recently we have seen some signs of progress in the Euro area and, more specifically, in the so-called program countries," ECB executive-board member Jorg Asmussen says.
"There has been a marked reduction in spreads. Bank-debt funding conditions have improved, and banks' dependence on central banks' liquidity intermediation is decreasing. We have observed significant improvement in the process of correcting serious imbalances."
Nearly one year after the ECB's radical announcement that it would buy government bonds of heavily indebted Eurozone countries in an effort to drive down yields, financial markets have calmed down.
This Outright Monetary Transactions program was the latest ECB weapon, on top of other rescue programs such as the European Financial Stability Facility and the European Stability Mechanism, which are meant to restore confidence in the euro.
It has been extremely effective in bringing down Eurozone bond yields, although it never had been used before. "We set up the program with the specific purpose of eliminating redenomination risks, or risks stemming from concerns about a breakup of the Eurozone and the reintroduction of national currencies in some parts," Asmussen says.
Critics charge that the OMT program violates the bailout clause of the European Union's Maastricht Treaty by financing deficits in other European states. In Germany critics complain that the OMT challenges the constitutional authority of the German Parliament by spending German taxpayers' money.
Prominent critics include Economics Minister Philipp Rosler and Jens Weidmann, president of the Deutsche Bundesbank, Germany's central bank and the largest shareholder in the ECB. Weidmann filed suit in 2012 with the German Constitutional Court to force a decision on the bond-buying plan.
Although the German high court has no jurisdiction in E.U. affairs, which are the responsibility of the Court of Justice in Luxembourg, the suit could call into question Berlin's future role in the Eurozone and further roil financial markets.
The high court is not expected to rule before German national elections in September. So far most bailout support for troubled Eurozone countries has come from the financial markets, with collateral guarantees provided by individual E.U. countries, the European Commission and the International Monetary Fund.
The permanent Eurozone fund, the European Stability Mechanism, has an authorized capital of 700 billion euros, of which 80 billion is paid-in capital. Because of its economic might, Germany is required to post 27 percent of the total, or 21.6 billion euros in paid-in capital.
Heavily indebted countries in southern Europe are in deep recession, and lenders in Brussels, Frankfurt and Washington are at odds over how to stimulate economic growth in these states.
Asmussen rejects deficit spending to boost growth, and insists on restructuring and belt-tightening."The best way out is to reform our economies, make them more competitive," Asmussen says.
"There are no free lunches in economics, though the temptation to believe in them is always great. "We know that this can be painful," he continues, "but we have to face it ...
The higher the debt levels, and the more risky they are perceived by markets, the more resources will have to be diverted to service the debt, at the expense of productive investments and future generations."
There is some light at the end of the tunnel. The combination of austerity and the OMT is beginning to stabilize the finances of Eurozone countries once thought to be beyond repair. "In Greece a major step has been the recapitalization of the four major banks in the country, which is expected to be completed by mid-June," Asmussen says.
"This, coupled with measures aimed at orderly resolution of nonviable banks while preserving depositors' confidence, have contributed to the consolidation and further stabilization of the Greek banking system." Cyprus remains a weak spot, he admits.
"Risks, however, remain high in the short term," Asmussen says, "and firm further steps have to be taken to complete the financial-sector reform and rebuild confidence in the banking system of the country."
Financial professionals long have pushed the idea of issuing Eurobonds to harmonize debt throughout the Eurozone, but German leaders see such a move only as an option of last resort. Asmussen likewise believes that Eurobonds are premature.
"I personally think much more needs to be achieved in the process of integration before we could seriously consider it," he says. "In a full-fledged fiscal union, a joint-debt issuance is a natural instrument, but it comes with joint control over expenditure and revenues.
At this stage we need to focus all our energies on establishing a fully functional banking union." If the German Constitutional Court strikes down the government's support of the OMT program, volatility could return to bond markets.
If that were to happen, Eurobonds might be a viable replacement. The question then is whether countries such as Latvia and Lithuania, with GDP rates of 5.6 and 3.7 percent respectively, would still want to join the Eurozone. The short answer is yes, because healthy economies profit from membership.
economictimes.indiatimes.com
The big question now is, with its domestic GDP at 5.6 percent, why would Latvia want to join a recession? Viewed from abroad, it would seem, the Eurozone doesn't have such a bright future. Not so, say many economists in northern Europe.
The euro actually is the device holding the continent together and, despite reports predicting the Eurozone's demise, European Central Bank officials see signs of improvement.
"Recently we have seen some signs of progress in the Euro area and, more specifically, in the so-called program countries," ECB executive-board member Jorg Asmussen says.
"There has been a marked reduction in spreads. Bank-debt funding conditions have improved, and banks' dependence on central banks' liquidity intermediation is decreasing. We have observed significant improvement in the process of correcting serious imbalances."
Nearly one year after the ECB's radical announcement that it would buy government bonds of heavily indebted Eurozone countries in an effort to drive down yields, financial markets have calmed down.
This Outright Monetary Transactions program was the latest ECB weapon, on top of other rescue programs such as the European Financial Stability Facility and the European Stability Mechanism, which are meant to restore confidence in the euro.
It has been extremely effective in bringing down Eurozone bond yields, although it never had been used before. "We set up the program with the specific purpose of eliminating redenomination risks, or risks stemming from concerns about a breakup of the Eurozone and the reintroduction of national currencies in some parts," Asmussen says.
Critics charge that the OMT program violates the bailout clause of the European Union's Maastricht Treaty by financing deficits in other European states. In Germany critics complain that the OMT challenges the constitutional authority of the German Parliament by spending German taxpayers' money.
Prominent critics include Economics Minister Philipp Rosler and Jens Weidmann, president of the Deutsche Bundesbank, Germany's central bank and the largest shareholder in the ECB. Weidmann filed suit in 2012 with the German Constitutional Court to force a decision on the bond-buying plan.
Although the German high court has no jurisdiction in E.U. affairs, which are the responsibility of the Court of Justice in Luxembourg, the suit could call into question Berlin's future role in the Eurozone and further roil financial markets.
The high court is not expected to rule before German national elections in September. So far most bailout support for troubled Eurozone countries has come from the financial markets, with collateral guarantees provided by individual E.U. countries, the European Commission and the International Monetary Fund.
The permanent Eurozone fund, the European Stability Mechanism, has an authorized capital of 700 billion euros, of which 80 billion is paid-in capital. Because of its economic might, Germany is required to post 27 percent of the total, or 21.6 billion euros in paid-in capital.
Heavily indebted countries in southern Europe are in deep recession, and lenders in Brussels, Frankfurt and Washington are at odds over how to stimulate economic growth in these states.
Asmussen rejects deficit spending to boost growth, and insists on restructuring and belt-tightening."The best way out is to reform our economies, make them more competitive," Asmussen says.
"There are no free lunches in economics, though the temptation to believe in them is always great. "We know that this can be painful," he continues, "but we have to face it ...
The higher the debt levels, and the more risky they are perceived by markets, the more resources will have to be diverted to service the debt, at the expense of productive investments and future generations."
There is some light at the end of the tunnel. The combination of austerity and the OMT is beginning to stabilize the finances of Eurozone countries once thought to be beyond repair. "In Greece a major step has been the recapitalization of the four major banks in the country, which is expected to be completed by mid-June," Asmussen says.
"This, coupled with measures aimed at orderly resolution of nonviable banks while preserving depositors' confidence, have contributed to the consolidation and further stabilization of the Greek banking system." Cyprus remains a weak spot, he admits.
"Risks, however, remain high in the short term," Asmussen says, "and firm further steps have to be taken to complete the financial-sector reform and rebuild confidence in the banking system of the country."
Financial professionals long have pushed the idea of issuing Eurobonds to harmonize debt throughout the Eurozone, but German leaders see such a move only as an option of last resort. Asmussen likewise believes that Eurobonds are premature.
"I personally think much more needs to be achieved in the process of integration before we could seriously consider it," he says. "In a full-fledged fiscal union, a joint-debt issuance is a natural instrument, but it comes with joint control over expenditure and revenues.
At this stage we need to focus all our energies on establishing a fully functional banking union." If the German Constitutional Court strikes down the government's support of the OMT program, volatility could return to bond markets.
If that were to happen, Eurobonds might be a viable replacement. The question then is whether countries such as Latvia and Lithuania, with GDP rates of 5.6 and 3.7 percent respectively, would still want to join the Eurozone. The short answer is yes, because healthy economies profit from membership.
economictimes.indiatimes.com
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