Milken Institute
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It's all Greek to me
By: Milken Institute
May 04, 2011
Euro Zone panelists - representing the U.K., Italy and Germany - had an animated debate at the 2011 Global Conference about the economic and social outlook for the region.

Former Northern Rock CEO Adam Applegarth identified four key concerns:

* The Euro Zone represents 17 different countries with 17 different political agendas. Its response to a crisis is "always too slow." It was caught flat-footed on Greece a year ago.
* Fixed exchange rates covering more than one economy tend not to work. The Euro Zone needs "complete linkage" through fiscal and political policy as well.
* Raising banks' capital and liquidity requirements too quickly is dangerous. If banks must have more on their balance sheets, they'll tighten lending. When fewer firms can borrow, it will drive up unemployment and drive down tax revenue.
* Providing extremely expensive loans with penalty rates of interest is not sustainable in the medium and long-term. The first austerity package will fail, then the second, and so on. Ireland seems to be caught in a spiral.

Connolly Insight's Bernard Connolly also saw dangers. Germany is the only country with "deep pockets" in the Euro Zone. Once you create a credit bubble where Germany pays out, he continued, it will pay and pay. Germany is insisting on a strategy of austerity plus lending. It will simply prolong the recession, which, combined with deflation, will result in default. This will cost German banks much more than just restructuring now.

Applegarth focused on the social risks. With the austerity packages being applied across the Euro Zone, pensions will go down, and retirement ages will go up, as will unemployment. With 24-hour news reporting, he predicted, any unrest will be seen across every screen in the region - resulting in contagion.

Bettina von Oesterreich, formerly of Hypo Real Estate, provided a much-needed dose of optimism. She pointed to the successes that Europe has shown in environmental and social fields as proof that it's possible to coordinate fiscally as well. The last couple of months have brought strong signals that leaders are committed to managing the current crisis. And Germany has shown itself to be a strong and reliable partner in recent discussions. She doesn't see an alternative to Germany partnering with other Euro Zone members. "My glass is half full," said Von Oesterreich. "We're sitting in the same boat here."

For more predictions about the future of the Euro Zone - the good and the bad - watch the video.