Euro Benefits, Costs and Risks

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Euro Benefits, Costs and Risks

• Juraj Karpi
• www.INESS.sk
• karpis_at_iness.sk

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Topics

• EU and Euro
• Benefits as NBS sees them
• Risks and costs as I see them
• Is there an alternative?

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I know that

• Slovakia agreed before entering EU to adopt Euro
  in the future
• We dont have an official opt-out option as
  Denmark or UK have or de facto opt out (after
  NO in 2003 referendum) of Sweden
• The majority of Slovaks support Euro
• So the question is not IF but WHEN

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50 years of EU, two different views about future
direction

• Centralization
• There should follow deeper integration
• one constitution, one currency, common foreign
  policy, common defense, harmonized taxes, central
  governement.
• Goal European Super-state

• Competition
• EU should only grant freedom of movement of
• people
• goods
• services
• capital
• Goal free trade and cooperation in Europe

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Benefits of Euro according to NBS

• Direct (immediate)
• Abolishing exchange rate risks 0,02 GDP
• Lower costs of capital
• Lower transaction costs - 0,36 GDP
• Transparency of prices
• Indirect (long-term)
• Higher volume of international trade (allows
  deeper specialization)
• Increased direct investments
• Faster growth, higher living standards
• I would add
• PR for Slovakia its a good sign that Slovakia
  is ABLE to adopt Euro
• Hard limits for irresponsible politicians
  Maastricht leash

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Costs and risks according to NBS

• One time expenses for currency change 0,3 to 0,8
  GDP
• Loss of some bank profits and temporary higher
  costs of banks
• Loss of independent monetary policy as a tool for
  stabilizing economy
• Probably slightly higher inflation rate
• NBS
• Benefits are much higher than costs gt
• Euro ASAP

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Problems

• Euro is a political construct, has not its own
  history and is not a choice of consumers
• Currency change is a complicated process and it
  is impossible to quantify its effect with
  precision
• Factors that we can quantify (or we think that we
  can) are not necessarily more important than
  factors that we are not able to quantify
• Costs and benefits can be reasonably used only
  when we talk about individuals not about nation.
  Costs and benefits are not evenly distributed.
  Some people will bear costs, other benefits.

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Is Euro a Condition for Strong Economic
Growth?Real Growth of GDP

• Euro Area Countries

• Noneuro Area Countries

• F France, G Germany, I-Italy

• S-Sweden, UK United Kingdom, D - Denmark

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Costs and Risks as I see them

• Heavy wallets!

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Costs and Risks as I see them

• Lack of real convergence therefore inflationary
  pressures depreciation of savings
• Monetary policy not suited for Slovak Business
  Cycle
• Centralization all eggs in one ECB basket, less
  currency competition and flight opportunities
• Arbitrariness in setting final exchange rate -
  impact on wealth of Slovak citizens
• The biggest countries ignore Stability pact
  therefore in the future we might bear the risks
  of costly pension systems of the biggest euroarea
  countries (ITA, DE, FR)

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Euro is in the long term inflationary

• Hindering of currency competition which forced
  national central banks to behave responsibly or
  else flight to other currencies
• Probable future pressure on expansive monetary
  policy to cover deficits of costly social systems
  of biggest euro areal countries
• Euro makes fiscal free riding possible
• Easier coordination in monetary expansion between
  world CBs

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Stability pact does anyone care?

• The biggest countries of euroarea ignore the
  Stability pacts criteria
• Greece entered the euro-area with the help of
  phony statistics

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Problems Ahead

• Fiscal deficits as a of GDP in the largest
  euro-countries

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Where is the Convergence?Price level and GDP
per capita in Slovakia as of EU average GDP
per capita Relative Price level
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In 27 months 20
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Which means

• Convergence of price levels only by the way of
  absolute price increases
• Higher inflation
• Negative real interest rates
• Devaluation of citizens SKK savings

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Example of Slovenia will we follow?
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Loss of control over monetary policy

• Does they know (executive board ECB) what
  currency we need?
• Control in the hands of people, on which Slovak
  wont have any influence
• No feedback probability that you meet Mr.
  Trichet in the streets of your town is by
  magnitude lower than the probability that you
  meet Mr. Sramko
• We will have to accept monetary policy of ECB
  which will be dictated by the needs of biggest
  countries do we need lower interest rates when
  we grow double digit a year? (base rate 4.25
  vs. 4,0)

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Is there an alternative?

• Let them compete ! Parallel circulation
  legalize the use of other currencies in Slovakia
  as a legal tender (EUR, USD, SFR others) and let
  the people choose
• - exchange risk eliminated, lower transaction
  costs

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Conclusion

• Euro as a tool for further political integration,
  moves control further from citizen it is a way
  of centralization
• Lack of real convergence risk of higher
  inflation and saving devaluation
• The biggest countries dont fulfill the
  Maastricht criteria inflationary risks in the
  future
• Loss of control over monetary matters
• Therefore we should wait or not enter at all.

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Thank You

• www.INESS.sk
• karpis_at_iness.sk