Dire Warnings About The Euro

Mario Draghi (Al Jazeera Video)

President of the European Central Bank (ECB), Mario Draghi, has told the European Parliament that “downside risks” to the eurozone economic outlook have increased.

He also said that temporary measures by the ECB, such as buying up government debt, would be limited.

Meanwhile, the Bank of England governor said banks should brace themselves to withstand the “extraordinarily serious and threatening” economic situation. Sir Mervyn King said the Bank of England itself was making “contingency plans” in case of a eurozone break-up.

Anchor Lisa Mullins speaks with Jacob Kirkegaard, a fellow at the The Peterson Institute for International Economics.

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LISA MULLINS: I’m Lisa Mullins, and this is The World. The clock is ticking on efforts to save the European currency, the Euro. According to European Union Economic Commissioner Olli Rehn, the Euro debt crisis must be fixed by the end of next week. He says failure to restore confidence in the Euro by then would lead to a gradual disintegration of Europe’s financial unity, which in turn could create a global economic slump. Now, some say that Rehn is crying wolf, but some people are taking the warning seriously. Today, for example, the governor of the Bank of England warned British banks to prepare for the worst. Jacob Kirkegaard is a research fellow with The Peterson Institute for International Economics. Jacob, what would the worst look like?

JACOB KIRKEGAARD: Well, I think the impact on all banks in the countries that were to be forced to abandon the Euro would be absolutely catastrophic, because they would be faced with immediate deposit runs, et cetera, so it would lead to a collapse of these banks.

MULLINS: How about businesses?

KIRKEGAARD: Well, businesses I think would be suffering from the same kind of thing we saw here in the United States immediately after Lehman Brothers. They would have no access to their money in the banks. They would suffer from immediate liquidity crunches. They would have no cash at hand, and they would probably not be able to pay their workers without access to that cash. So it would mean essentially sort of an economic cardio arrest to the entire economy.

MULLINS: Which would then spin out to impact jobs?

KIRKEGAARD: Oh, absolutely. They’ll be an enormous amount of layoff. This would lead to an absolutely devastating economic collapse in the real economy, and I think we would throughout the Euro area be looking at something that would be approaching the 1930s.

MULLINS: How about outside the Euro area, impact on consumers, the rest of the world especially here in the U.S.?

KIRKEGAARD: Well, I think, you know, the U.S. in such a scenario, in such a cataclysmic scenario, there’s no doubt that the U.S. financial system would be very severely impact, because of one, that there is a number of large cross ownership. We have a lot of European banks operating at a significant scale here in the United States, not leased on Wall Street. So U.S. banks would suffer very, very significant losses, which then would, you know, sort of put us back to the situation we were in in late 2008, where we had our last financial crisis. And that, of course, had a lot of other, a similar type of impact on the real economy in the United States; lots of layoffs, lots of business closures, and a very significant slump in economic activity.

MULLINS: Okay. So, Jacob, the reason we’re playing out this scenario over potential collapse of the Euro is because the European Union Economic Commissioner is warning of this. It sounds like you’re not biting your nails. How come?

KIRKEGAARD: No, I mean, I think Olli Rehn is correct that these next week or ten days are crucial, because finally, we’ve gotten to the point in the European crisis where it has become severe enough. And, I mean, we are sort of standing right at the edge of the abyss here. It’s finally come to the point where political leaders, because of the risk of this terrible scenario that we just talked about, are finally beginning to seriously contemplate what is the long-term political answer in Europe to this. And that’s what we’re gonna see at the U Summit at the end of next week where, in my opinion, we are going to see the launch of a process that leads to more integration in Europe, essentially the beginning of the construction of a fiscal union in the Euro area to compliment the existing monetary union, that will entail that countries that use the Euro are going to hand over a lot more of their sovereignty to the Euro area as a whole. Countries do not hand over their sovereignty because they think it’s fun. They do it only when they have a gun to their head, and right now we are at the point where European leaders have a gun to their head, but I take quite a lot of comfort in that they realize how severe the situation is, and they have this opportunity to avoid it, and I think they will take it next week. So, no, I’m not panicking at all.

MULLINS: Jacob Kirkegaard, glad you’re an optimist.

KIRKEGAARD: Thank you.

MULLINS: Thanks a lot. Jacob Kirkegaard is a research fellow with The Peterson Institute for International Economics. Thanks again.

KIRKEGAARD: My pleasure.

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