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Eurozone Still Fragile Because of Debt
Past Events
Escaping from Quantitative Easing like landing a jet fighter on a moving aircraft carrier in a storm, says ex-finance minister

The Eurozone remains extremely fragile because of dangerously high debt to GDP ratios, the former British Chancellor of the Exchequer, Lord Lamont of Lerwick, told an audience of policy analysts and opinion formers at the first major conference staged by the Danube Institute. In a keynote speech at Budapest’s Sofitel Hotel on 14th December, Lord Lamont said that on balance he was inclined to the view that the Eurozone would muddle through, although there were many hazards to overcome.

Lord Lamont said that one cause for present concern was that at least two contributors to the European Stability Mechanism – Spain and Italy – might themselves seek bail-outs from the fund. In these circumstances, the problem could only be overcome if the other contributors agreed to give more. This would be strongly resisted. In the circumstances it was difficult to see how the existing problems could be overcome without a full banking union.

ECB Mario Draghi’s promise to do everything necessary to save the euro which was taken to mean that he would buy up bonds had been a master stroke in that it stabilized markets without the ECB having so far purchased a single bond. The Western response to the 2008 crisis through the introduction of policies of Quantitative Easing had been the right one; the alternative, that of allowing market forces to achieve the necessary adjustments would have had catastrophic consequences through the impact on asset prices. However, it should be recognized that that QE had gone far longer and had cost vastly more than anyone had anticipated although the US economic recovery was proving modest in relation to previous recoveries. He took the view that the US Federal Blank had blinked at its September meeting when it failed to signal the policy would be scaled down and he remained concerned about the inflationary consequences of continuing the approach until unemployment had fallen further.

“Withdrawing from this policy is going to be like landing a jet fighter on a moving aircraft carrier in a storm, a task that requires great skill and timing.”

It was possible to discern both reasons for pessimism and optimism in the present situation. The former included the fragility of the Eurozone and the need to reduce public debt; the latter included the continuing strength of the US economy and the strong desire of the Asian peoples to raise themselves from poverty.

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