Quo Vadis Europe? Scenarios and thoughts on the future of the Euro-zone
European leaders are meeting yet again to find out how to overcome the debt problems. Many paths forward can be imagined but they all entail risks.
Seen as a whole, Euro-zone issues are small compared to the US, UK and Japan. A major problem is the big differences within the Euro-zone which is not counterbalanced by a federal state or cross-border solidarity.
European leaders at their current Brussels summit are pursuing parts of the “Just fix the banks” strategy but more needs to be done. Essentially, it is matter of integrate or disintegrate. The odds are still stacked for more integration but the political landscape is very changeable.
In this presentation we present a few possible ways forward:
The “Just fix the banks” way: Loose monetary policy, bank recapitalisation and banking union and deposit scheme.
The Merkel way: Austerity and structural reforms
The Full Monti way: True fiscal union with all it entails including political union.
The (seemingly) easy way: Inflation, capital restrictions and financial repression.
Back to the 1970s: Max fiscal policy and monetary policy, inflation pickup and hopes of long-term prudence.
Needless to say, this list is not exhaustive nor are the scenarios mutually exclusive.
Most of the scenarios imply low growth, somewhat higher (or markedly higher) interest rates whereas the effect on the common currency is mixed.