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The reports of my death have been greatly exaggerated /Mark Twain/
… or why is the euro still alive and should Latvia join the EMU?
Mārtiņš Kazāks, PhDDeputy Group Chief EconomistChief Economist in Latvia Swedbank November 28, 2012
2© Swedbank
Global Economy: subpar growth, stagnation, recession… well, it looks like a sick and shaky man…
Quarterly GDP growth in euro zone, s.a. (%)
-3.0
-1.5
0.0
1.5
2006 2007 2008 2009 2010 2011 2012Source: Eurostat
GDP annual growth, %
-15
-10
-5
0
5
10
15
2006 2007 2008 2009 2010 2011 2012
China Sweden
USA Russia
Germany Eurozone
UK
3© Swedbank
Europe: … well, more like a sick and beaten man with low self esteem put in an intensive care ward…
Purchasing manager's index in manufacturing
30
35
40
45
50
55
60
65
70
2007 2008 2009 2010 2011 2012
China Sweden
USA Russia
Germany Eurozone
UK
Source: Reuters EcoWin
above 50 denotes expansion
4© Swedbank
Universal response: print some money, which is ok as part of the measures…
Avots: www.karikatura.lv
5© Swedbank
Europe: monetary policy transmission mechanism is broken and money printing has a very limited effect…
Stress and financial system
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2007 2008 2009 2010 2011 2012
0
200
400
600
800
1000
ECB refinancing rate
TED spread
ECB deposit facility, bn EUR (rs)
Source: Reuters Ecowin
6© Swedbank
Europe: ample liquidity has some quite predictable but not that positive side effects…
6
Government 10-yr bonds yield, pp
-2
0
2
4
6
8
2008 2009 2010 2011 2012
Germany, EUR Sw eden, SEK
Italy, EUR Spain, EUR
Source: Reuters
Government 2-yr bonds yield, pp
-2
0
2
4
6
8
2008 2009 2010 2011 2012
Germany, EUR Sw eden, SEK
Italy, EUR Spain, EUR
Source: Reuters
7© Swedbank
Europe: it surely does not look nice, but is it really that bad?
7
8© Swedbank
Europe: much has been done indeed, but the house is surely not complete and lots more still needs to be done…
8
For instance,
• Into what will the EU evolve and what will be the role of the EMU?
– Banking union… single supervisor, single resolution, deposit guarantees?
– Integrated budgetary framework… more Europe with less money?
– Integrated economic policy… what does it really mean?
– Democratic legitimacy and accountability… yes, we do need that!
• What will be the financial cost of all this?
• What will be the political cost of all this?
9© Swedbank
Europe: financial markets are worried about the risk of default, not that much about the exit…
9
10© Swedbank
Latvia: the fastest growing EU economy for three quarters running… do we need all this “euro stuff”?
11© Swedbank
Latvia: what are the benefits from joining the euro?
11
12© Swedbank
Latvia and the euro: what are the options?
12
Avots: www.karikatura.lv
13© Swedbank 13
Euro 2014: not a windfall hefty pension but a valuable opportunity which would be a shame to waste
Avots: www.karikatura.lv
14© Swedbank
Latvia: it seems we will be able to meet the criteria…
14
15© Swedbank
Thank you!
Global economic outlook, Global economy monthly newsletters, etc.:
http://www.swedbank-research.com/english/archive.csp
To subscribe to our research:http://www.swedbank-research.com/latvian/subscribe.csp
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