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

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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

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Universal response: print some money, which is ok as part of the measures…

Avots: www.karikatura.lv

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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

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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

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Europe: it surely does not look nice, but is it really that bad?

7

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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

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Latvia: the fastest growing EU economy for three quarters running… do we need all this “euro stuff”?

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Latvia: what are the benefits from joining the euro?

11

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Latvia and the euro: what are the options?

12

Avots: www.karikatura.lv

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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!

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