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Full integration key to stable eurozone

Baron Guy Quaden, honorary governor of the National Bank of Belgium and member of the board of directors of Byblos Bank and Byblos Bank Europe. (The Daily Star/HO)

BEIRUT: European economic recovery is on track but the eurozone countries need to push for deeper political integration to stabilize their economies once and for all, the former governor of the Belgian central bank told The Daily Star Monday.

Guy Quaden, who now serves as an honorary governor of the Belgian central bank and a board member of Lebanon’s Byblos Bank, said the crisis was not a result of a weakness in the European currency, but rather in the framework governing the monetary union.

“The exchange rates of the euro vis-a-vis the U.S. dollar has been always between 1.2 and 1.5 [dollar/euro) in the last five to six years, well above its inception rate,” Quaden told The Daily Star from Byblos’ headquarters in Beirut’s Ashrafieh neighborhood.

“The euro is a strong currency, and there was always confidence in it. But the problem was the solidity of the eurozone, and that some countries wanted to leave it,” he added.

But any call to exit the monetary union is not economically sustainable for any of the members, Quaden argued. “For economically weaker countries, Greece for instance, it is not an option because reintroducing a national currency would mean a strong currency devaluation, dramatic inflation, impoverishing the population and a persistent distrust from lenders,” he said.

It is also not an option for countries doing much better, he added.

“Strong economies like Germany would face the opposite if they exit the eurozone,” he explained.

“A national currency would strongly appreciate, doing dramatic damage to competitiveness of such an economy.”

Asked whether Europe could see the light at the end of the tunnel, Quaden said tensions within the eurozone has started to calm down and recovery was gaining steam.

This has become apparent by comparing yields of troubled countries bond’s to those of Germany’s bonds, which are generally considered risk-free due to the country’s strong finances.

The spreads between the two have significantly diminished since they reached their peak last summer, Quaden said.

A series of measures taken by European institutions has helped restore confidence.

The European Central Bank’s announcement of unlimited commitment to intervene by buying sovereign bonds when needed was one major step to reassure markets, Quaden said.

Additionally, the agreement on a new fiscal treaty, the European Fiscal Compact, which made fiscal discipline stricter, was also a major development in addition to the decision by the European Commission to transfer banking control to the ECB by next year.

Austerity measures implemented in troubled economies are also seen in a very positive light by Quaden, who is confident that such moves, if well-planned, will not backfire on European economies.

“Fiscal discipline is unavoidable but it should be intelligent. The quality and durability of the adjustments are as important as the speed of the adjustments,” he said.

The monetary union, in spite of being the biggest in history, remains an incomplete structure that needs to be completed, Quaden said.

“It is the biggest monetary union but it is not the first in history. Usually when you have a monetary union, you have at the same time a political union,” he explained.

“I do not say that Europe needs a system that copies American federalism, but we have to find our own version,” Quaden said.

“A final solution, a fundamental one, has to mean more integration in all aspects; fiscal, monetary and political,” he added.

 
A version of this article appeared in the print edition of The Daily Star on February 26, 2013, on page 5.

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