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Pissarides: Reform the euro or “give it up”

13 December, 2013

Christoforos Pissarides, Nobel laureate economist and head of the National Economy Council of Cyprus said that the situation in the eurozone has become very unsatisfactory and that the single currency should either be rescued by rapidly making it more growth and employment friendly or be dismantled.


“If we don’t make the reforms, we might as well give up,” Professor Pissarides said in a speech at the London School of Economics.
He elaborated by saying that the eurozone has reached a point where unless the necessary reforms are made in order to encourage growth and job creation, “there is no point in just dealing with each problem in an ad hoc way and think we have succeeded because we managed to keep (the eurozone) alive for a few more months and not taking the important decisions needed.” At the end of his lecture he said that he would prefer the euro to be rescued than be dismantled – “but who knows?” he added.
Delivering his inaugural lecture as the first Regius Professor of Economics at the LSE he admitted a reversal of opinion about the benefits of the single currency with regard to the member countries of the south. He admitted that “not only politicians but economists got it wrong as well.”
As he explained, “we didn’t think that freezing exchange rates would hurt the south, but of course it has proved wrong,” adding that it is impossible to have one policy that fits all in the eurozone.
The 65-year old economist, the co-recipient of the 2010 Nobel Memorial Prize in Economic Sciences, warned about the risk of creating a lost generation of educated young people, who find jobs hard to come by. He then outlined what needs to be done to bring Europe “back to pre-eminence”.
He stressed that for the eurozone to succeed there have to be transfers of funds from the richest countries, something that, as he pointed, is unacceptable to the countries of the north. The Cypriot economist asked for changes in both monetary and fiscal policy, criticising the emphasis given on austerity and fiscal balances over structural reforms in countries such as Greece.
“Wage reductions don’t work, aggregate demand collapses completely and debt to GDP ratio increases,” he noted.
He warned that austerity has essentially created a two-tier Europe: Germany and other northern countries, and the “Club Med” southern countries. As he commented, European voices talking about profound integration sound like they come from a parallel universe, when the North-South divide has grown wider.
Prof. Pissarides described the current split between fiscal and monetary policy as untenable. He explained that under present arrangements, national governments need to recapitalise their banks and insure their deposits. This involves fiscal spending and build-up of debt. He concluded that poor bank supervision can lead to a deteriorating fiscal balance.
He made special reference to the need to speed up plans to turn the European Central Bank into a supervisory authority. Such a single supervisory authority should have the power to dissolve banks when necessary, recapitalise them and insure their deposits.
The Nobel laureate also suggested that at least some central supervision of individual countries’ fiscal finances is needed. He pointed out that while the European Commission does some, it would be more credible if it was done by an independent body – a Brussels-based “fiscal policy council”. He also attributed particular emphasis to the need for Europe to pursue more coordinated investment policies.