20th Anniversary Insights
The Eurozone sovereign debt crisis and the future of the Euro. CERGE-EI experts weigh in.
The aim of the new CERGE-EI Insights series is to provide critical information that you won't find anywhere else drawn from 20 years of CERGE-EI's unique expertise as a top-quality Western research institution based in Eastern Europe. CERGE-EI Insights are freely downloadable from the CERGE-EI website.
2. Brown, Alan. November 2011. “Debt Dynamics and the Euro.” (Details) (Download)
1. Mates, Neven. November 2011. “Currency Splits: When a Monetary Union Falls Apart—The Experience of the Former Yugoslavia in 1990–92.” (Details) (Download)
Alan Brown: “Debt Dynamics and the Euro”
>> Download the complete document <<
The crisis of confidence over government debt, evidenced on one side of the Atlantic by Standard & Poor's downgrade of the US government to AA+, and on the other by the continuing eurozone crisis threatening to engulf Italy and Spain, has taken a long time coming. Yet at the heart of the problem lies a build-up in debt levels in Western countries which goes back decades. So why now? It is always impossible to predict which straw will break the camel's back, or which grain of sand will cause the avalanche. Japan (downgraded to AA- in January, 2011) is still able to borrow at close to 1% while carrying a Debt/GDP level well above 200%.
This article attempts to look in general at the question of why markets have been so spooked by US and European debt levels even though they are very substantially lower than Japan's. Subsequently, I focus on the special issues affecting the eurozone. There are obvious substantial differences among the US, Europe, and Japan, but one common factor lies at the heart of today's market turmoil: investor fears have been expressed in the equity markets, not in the currency or debt markets. After all, at the time of writing, in spite of government debt concerns, 10-year yields in the US, Germany, Japan and the UK are all at, or near, year-to-date lows. Finally, I consider the options and consequences for a country such as Greece to leave the eurozone.
Neven Mates: “Currency Splits: When a Monetary Union Falls Apart”
>> Download the complete document <<
With the eurozone grappling with a sovereign debt crisis, the risk of partial or total dissolution is no longer negligible. Policy makers can benefit from examining the experience of previous cases of disintegrating monetary unions. This information can help in deciding on whether to persist in keeping the euro zone alive at any cost, as well as in finding ways to make it less disruptive should dissolution become unavoidable.
The most interesting recent cases are the three socialist federations that disintegrated in the early 1990s: the Soviet Union, Czechoslovakia and Yugoslavia. Of less interest are older cases from when monetary unions were formed and dissolved within an overall framework of the gold standard.
In 1991-92, Neven Mates was deeply involved in helping newly independent Croatia successfully survive splitting from the Yugloslav Dinar and introduce its own currency. From 1992-2009 he was former IMF Mission Chief for Russia, Belarus, Romania and Albania, and currently serves as Chief Advisor to the Governor of the Croatian National Bank.
