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Thursday, 17 October 2013

Who said what on the euro?

The euro and Nobel prizes

The contemporaneous award of the Economics Nobel prize to Eugen Fama and Robert Shiller, who have reached quite opposite conclusions on the ability of financial market to always generate prices consistent with economic fundamentals, has, in some quarters, raised doubts about the wisdom of those who decide the Nobel prizes. These doubts are at least late and probably wrong.
At least late, because there has been quite a tradition over the years to attribute the Nobel prize to economists of opposed schools, sharing it ecumenically between those who extoll the virtues of the market and those who express doubts about its ability to always achieve "optimal" solutions. If you want to put it a bit in a vulgar fashion, the Nobel prize has been attributed in alternation to right wing and left wing economists. The novelty this year is just that this has been done in the same year instead of in a sequence. The doubts are probably wrong, because they seem to be based on the assumption that Economics is as hard a science as, say, physics, in which it would not make sense to talk about right wing and left wing physicists. The fact is that Economics does not have (as yet?) the same hardness of a natural science and therefore different, even opposing, ideas are not to be blamed but rather to be accepted and possibly even welcomed. You would surely disapprove the idea of requiring only one view in politics: the dialectic between left and right, between innovation and conservation is a fundamental component of democracy. To some extent this applies also to that not so hard science which is Economics.

This long introduction justifies looking at what different economists have said about the € during the crisis. This will serve three purposes: first, assessing whose forecasts were more on the mark; second, measuring how divided forecasts were; third, seeing who is quick and honest enough in recognising a false forecast.

The demise of the € is nigh.

Willem Buiter, 16 November 2011, “I think we have maybe a few months -- it could be weeks, it could be days -- before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy which would be a financial catastrophe dragging down the European banking system and North America with it. So they have to act now.” Bloomberg interview;

Willem Buiter, 21 March 2012, “The Greek sovereign is by no means on a sustainable path so they will have to restructure again. (Greece will need another bailout) possibly before the end of the year or, certainly no later than sometime next year. The risks that Portugal will have to restructure are very high, probably sometime next year. I would also consider Ireland to be at serious risk. Spain is the country that I am currently the most worried about” Bloomberg interview;

Willem Buiter, 26 July 2012, “We now believe the probability that Greece will leave EMU in the next 12-18 months is about 90%, up from our previous 50-75% estimate, and believe the most likely date is in the next 2-3 quarters. As before, for the sake of argument, we assume that “Grexit” occurs on 1 January 2013, but we stress this is an assumption rather than a forecast of the precise date. Even with the Spanish bank bailout, we continue to expect that both Spain and Italy are likely to enter some form of Troika bailout for the sovereign by the end of 2012.” Citigroup report;

Nouriel Roubini, 25 January 2012, "The eurozone is a slow-motion train wreck. Countries – and not just Greece – are insolvent. I think Greece will leave the eurozone in the next 12 months, and Portugal after. (…)There is a 50pc chance that the eurozone will break up in the next three to five years”.  Statements at the 2012 World Economic Forum;

Nouriel Roubini, 9 May 2012, “It's a slow motion train wreck in the sense the eurozone is not going to collapse in the next six months or 12 months. But Greece is not going to be the only country that has to restructure. I think it's going to happen in Portugal, in Cyprus most likely in Ireland, and eventually to even Italy and Spain, two or three years down the line. I think by next year at the latest Greece is going to exit the Eurozone. I’m worried about Spain, but as I say, it's going to be slow motion. By the end of the year, they're going to lose market access and require a troika bailout, that’s going to keep them out of the market for a year or two. Maybe after two years you have a restructuring of the debt and eventually even Spain could exit the EZ but that’s not something that's going to happen in 12 months. That’s why I think of it as being a slow motion process to unravel over the next few years.” , CNBC interview;

Pavan Wadhwa, 6 March 2012, “(Related to Portugal’s plans to come to the market with long term debt in September 2013.) That’s not going to be possible (…) The Portuguese 10-year yield is near 15 percent. No one goes to the market at that level. Once your yields go above 8 percent, there’s no turning back.” Bloomberg interview;

Martin Feldstein, 14 July 2011, “Greece is going to default despite all the talk, despite the liquidity package (...) Eventually, we will see a default in Greece, we probably will see a default in Portugal and Ireland. I hope we’re not going to see one in Spain or Italy”. Bloomberg interview;

Martin Feldstein, 23 May 2012, “Greece will leave, will leave probably soon”. Foreign Affairs Focus interview;

Paul Krugman, 17 May 2012, “Suddenly, it has become easy to see how the euro — that grand, flawed experiment in monetary union without political union — could come apart at the seams. We’re not talking about a distant prospect, either. Things could fall apart with stunning speed, in a matter of months, not years.”  New York Times column—Apocalypse fairly soon;

Capital Economics, 16 Jan 2012, ”The euro-zone is slipping into a recession which we expect to be deep and prolonged and to result in the break-up of the single currency area (…) One or more countries will leave by end 2012” Capital Economics, Global Macroeconomic Outlook;

John Paulson, 15 February 2012, “Greece may default by the end of March, triggering the breakup of the euro” Bloomberg news;

Kenneth Rogoff, 28 October 2011,“ I don’t think there’s any doubt that we’ll see more defaults beyond Greece.(…) The interesting question is will all the countries in the euro still be in the euro? My answer to that is no (…) It’s pretty darn clear the euro does not work, that it’s not a stable equilibrium.” Bloomberg interview.

The € will survive the crisis.

Barry Eichengreen, 2 May 2010, “So is the euro doomed? If one country leaves the Eurozone by reintroducing its national currency, will others follow? Will the entire enterprise collapse? The answer is no. The decision to join the Eurozone is effectively irreversible. However attractive the rhetoric of defection is for populist politicians, exit is effectively impossible”, VoxEU column-- The euro: love it or leave it?;

Barry Eichengreen, 28 December 2012 “There may be a logic to Greece leaving, but the mechanics are too disruptive for both Greece and its neighbors”  Reuters;

Paul Volcker, 16 November 2011, “(on Europe’s debt crisis) I think it’s a soluble problem, but they are solving it inch-by-inch instead [of] a general dramatic solution.” INSEAD Knowledge interview;

Alessandro Leipold, 6 June 2013, “The potential for accidents de parcours remains high, as vividly illustrated by the case of Cyprus in March 2013. To be sure, there has been considerable progress in the euro area’s crisis management framework since the early days of 2010 – most notably with the creation of a permanent euro area crisis resolution mechanism in the form of the ESM.” Lisbon Council-- Lessons from Three Years of Euro-Area Crisis Fighting, Issue 14/2013;

Fred Bergsten and Funk Kirkegaard, "Only two things seem certain in this crisis: that the euro will survive and emerge stronger from the crisis and that, given the fundamental differences between Europe and America, the euro area fiscal and political union will not look anything like the American one. Fortunately, it does not need to." The Coming Resolution of the European Crisis: An Update, Peterson Institute, June 2012;

Francesco Papadia and Carlos de Sousa “One is tempted to link the improved assessment by the market to the progress in dealing with the crisis ....
In this positive interpretation, the market is gradually switching back from a “bad” to a “good” equilibrium, recognizing that its assessment was too negative and that the euro area is doing, admittedly with its unexciting style and timing, what is needed to gradually get out of the crisis with a stronger monetary union than the one that came out from Maastricht”.  Bruegel Blog, December 2012.

Second thoughts, or about intellectual honesty.

Willem Buiter, 22 March 2013 “(Greece exiting the euro area) has not happened indeed and I hope it stays that way. It was a prediction, not a wish. I still think we are not out of the woods. It is clear that Greece will not be pushed out of the Eurozone. (…) I think I underestimated the ability of the Greeks to hang together and to keep a government despite all that divides them. The fact that the Europeans did stopped pushing helped as well, of course.” , Bloomberg interview;

I do not dare saying, as Soros recently said, that: "The euro crisis is now over" [1] . In addition, some forecasters of the demise of the € did not put a date for it or thought that it would only take place over a medium term horizon. So they could still be right. I leave it in any case to the readers to decide whether the first group of forecasts or the second was more accurate.

[***] Research assistance was provided by Mădălina Norocea.

[1] The Future of Europe: Remarks delivered at the Global Economic Symposium, Kiel, Germany, October 01, 2013


  1. I think you are misinterpreting and misrepresenting the views of Buiter.

    Nov 2011: "So they have to act now." explicitly points that the decision-makers had not much time left, and the ECB responded with the LTRO, which carried the sovereigns couple of months before deterioration set in again.

    Six months later things were looking very bleak, and Draghi brought out the heavy guns ("whatever it takes" and OMT).

    By pointing out that things were on the brink and something had to be done or the euro would have been lost does not count in my opinion as a bad track record.

    Inverserly, it could also be postulated that the ECB thought that the euro was on the brink when it launched the two measures :)

  2. Many thanks for your comment.

    I did not misinterpret and even less misrepresent the views of Buiter, as I just quoted what he wrote. In any case in the last quote I reported, Buiter recognized his forecast was not right, showing both intellectual honesty and the ability to change minds when facts change, which is a rare virtue.

    Best regards,
    Francesco Papadia