Greece’s fiscal crisis may improve the euro’s long-run viability if it forces nations using the currency to deepen their fiscal integration, according to Craig Wright, Royal Bank of Canada’s chief economist.
Wright, speaking at a conference organized by Euromoney in Toronto yesterday, said the 16-nation euro region lacks the stabilization mechanisms found in Canada’s federation, where poorer provinces can absorb economic shocks because of transfer payments from wealthier jurisdictions.
“You don’t have that flexibility” in the euro region, Wright said. “Maybe this crisis is actually helping the sustainability” of the euro “because you’re starting to see some of these fiscal arrangements, with what’s going on with Greece.”
Moody’s Investors Service cut its rating on Greek debt one level to A3 today as Prime Minister George Papandreou’s government began a second day of talks with euro-region and International Monetary Fund officials on a 45 billion-euro ($60 billion) aid package. Greece’s bonds plunged, driving two-year yields above 11 percent, as data showed the nation’s 2009 budget deficit was larger than previously forecast and investors grew concerned the government will cut or delay its debt payments.
Wright said it’s likely that the chances of the euro falling apart within five years are less than 5 percent. The euro has led to deeper financial markets in the region, lowering the cost of capital for borrowers and boosting investment and living standards, Wright said.
That benefit “doesn’t mean the euro is going to be strong anytime soon,” he said. “It’s going to continue to be a challenged economy, and alongside of that, a challenged currency.”
The euro weakened for a sixth straight day against the U.S. dollar. Concern about Greece and public finances in other euro-region nations have made the currency the worst performer this year among its 16 most-traded counterparts tracked by Bloomberg.
Royal Bank is Canada’s biggest lender.