Thursday, March 15, 2012



Markets believe a fracturing of the euro has a material probability. Investors understand that any country with funding problems leaving the euro would do so to Enlacetake advantage of converting credit risk into inflation risk – which is easier to manage. A fracturing allows monetisation and at least a potential route to improving competitiveness with less unrest. There are also costs to such a severe turn of events:

• High inflation in any country is costly.

• For Europe and the rest of the world the cost could also be large – not least legal uncertainty about financial contracts in euro; other countries within the eurozone coming under increased pressure; and a weakening of the status of the euro as a global currency.

These issues are very complex and, as a consequence of the monetary union, quite unique to Europe. Policies consistent with a growth strategy and including a proper cleaning up of bank balance sheets, recapitalisation and separation are critical to solving this crisis while maintaining the euro intact. The interim role of the ECB and the EFSF/ESM provides time, but that time needs to be used for thorough structural reform.

Adrian Blundell-Wignall is the Special Advisor to the OECD Secretary General on Financial Markets and Deputy Director of the Directorate for Financial and Enterprise Affairs (DAF)

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