“Is the Euro toast?” was the topic of discussion at last night’s Center for the Study of Europe’s cafe lecture series.
Over a bottle of Perrier, political science professor Wade Jacoby and assistant professor of economics Richard Evans discussed the future of the euro, the official currency of the eurozone. This has been a hot topic for discussion in recent months as many countries across Europe are suffering from the worldwide economic crisis.
Countries in the eurozone belong to the European Union. Jacoby described the EU by saying it “generates a larger market, with fewer barriers to trade inside, fewer transaction costs that allow them to benefit more.”
To give listeners an idea of the state of the countries’ economies, Evans explained the way to measure debt is with the debt to income ratio. It is the percentage of a country’s income that goes toward paying off their debts. Greece’s debt to income ratio is 142 percent; Italy’s is 119 percent. This could be compared to the United States’ ratio of 62 percent, with the average debt default percentage sitting at 69 percent.
Evans and Richards determined that in a sense, the euro is toast. The euro today is not the same euro it was 18, or even six, months ago. Despite it not being the same euro as in the past, they predict it will make it through the current debt crisis.
Both professors agreed many countries will default, meaning they will not be able to pay their debts. The question now is how will the eurozone handle the defaults. Jacoby said there are a number of possibilities. For one, Greece could devalue its currency (meaning lowers prices for the products of domestic producers abroad). However, he said this was not an option because they share their currency with other countries so Greece gives up the right to devalue its currency. Inflation was also off the table for the same reason. He said the reality is that Greece will either have to deflate, meaning it will need to start spending less, or default. Austere reform has already upset many Greek citizens, evident in the riots that took place there.
With those options available, both agreed Greece will default. The problem is when this happens, someone will have to pay the bill. Jacoby’s prediction is that Germany or France will pick up the tab for Greece because they hold their debt. That is the more favorable option, as opposed to the Greek citizens taking the brunt of the blame.
What the repercussions of default will be for the governments of other countries in the union the two did not know for certain. But they did say the U.S. might experience benefits from the European fiscal crisis.
“It has sent a lot of investment dollars to the United States,which has lowered our interest rates and stimulated investment and spending here,” Evans said.