Euro Troubles Continue

Chancellor Angela Merkel has told Germany’s parliament that the UK will remain a strong EU partner, despite its decision not to sign up to an EU summit deal prompted by debt crises in several eurozone countries, and is intended to tighten rules to prevent member states running up further debts in future.

Meanwhile, the euro fell further against other major currencies as fears continue over the eurozone’s future. The European currency fell below $1.30 for the first time since January 12.

Anchor Marco Werman speaks with Jacob Kirkegaard of the Peterson Institute for International Economics in Washington.

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Marco Werman: I’m Marco Werman, this is The World. Europe just can’t seem to convince the doubters. Financial observers remain skeptical about the deal European leaders struck last week to boost confidence in the Euro, and that worries investors everywhere. They fear that continued uncertainty in Europe could drag the entire global economy down. Those concerns were apparent today, as stock markets dipped again from Wall Street to Shanghai. Jacob Kirkegaard is a research fellow at the Peterson Institute for International Economics in Washington. Jacob, everyone seemed pretty happy last Friday when the EU announced a deal on the Euro. What’s the big issue now, what’s changed?

Jacob Kirkegaard: Well I think the big issue really is sort of implementation risk. Yes, the EU agreed, or at least 26 of them agreed, to do some in the long term, very far reaching things with respect to this new fiscal compact that they agreed on. But the real issue now is how are we actually going to implement this? Are national parliaments going to all sign up? Do we need referendas in places like Ireland? Do countries need to change their constitutions, and how do we do that? There’s just a lot of uncertainty about that and I think this is what markets understandably are reacting to.

Werman: But some critics have said the deal is essentially a blank sheet of paper. What specifically about implementation makes it kind of toothless right now?

Kirkegaard: Well because it is in a sense a blank sheet of paper. It is some fairly broad rules about structural deficits as well as a new implementation mechanism for fiscal sanctions within the euro area. But again, there’s a lot of uncertainty, for instance, about what are the institutions that are actually going to enforce this? Because this is related to the problem about the UK not joining the agreement, because it means that the legal framework will have to be a new treaty, sort of outside the existing EU treaty. And the existing EU treaty is what the European commission as well as the European Court of Justice operates under, and it’s not really clear what the relationship between those institutions and this new inter-governmental treaty will be. So no, there is essentially uncertainty all around.

Werman: I mean given how impossible it all seems to close a circuit on this EU agreement from last Friday it doesn’t bode very well for the economy in 2012, not in Europe, nor around the world.

Kirkegaard: I dont think that there’s any doubt that because of all of this uncertainty, that the Euro area is going to experience at least a relatively shallow downturn in the beginning of 2012. It may already have entered a recession in the fourth quarter of this year. I don’t personally though believe that we are facing another complete collapse of the European economy like what you saw in 2009 when GDP contracted 4-5%, I don’t think that’s in the cards. But you’re right, I mean this over-bearing uncertainty about the outlook is going to spill over beyond the borders of the Euro area to the UK, to the more global economy more broadly. So yes, this is certainly going to be a drag on the global economy as a whole throughout 2012.

Werman: Jacob Kirkegaard with the Peterson Institute in Washington. Thank you very much.

Kirkegaard: My pleasure.

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