Analysts cast doubt on the euro’s future

Tim Wallace
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NOMURA analysts have cast doubt on the possibility of achieving Eurozone stability, despite Mario Monti’s appointment as Italian Prime Minister, which is meant to bring hope to the embattled currency union.

The bank’s economists studied the incentives guiding the actions of the European Central Bank (ECB) and member states, and concluded that member states have strong incentives not to behave in the manner the ECB would like.

If the ECB is hawkish on inflation, it risks damaging weak countries’ economies in the short run, warns analyst Kevin Gaynor.

Yet if it is dovish, individual governments can benefit from a loose monetary policy and stave off unpopular reforms, risking long term damage.

Whatever it does, the ECB risks damaging its reputation and harming member states.

One solution, Gaynor argues, is to bring in the IMF to remove fiscal independence from countries, allowing the ECB to run a loose monetary policy while firm reforms are put in place.

Alternatively, the ECB could take more control of each national central bank’s foreign currency and gold reserves to make “bad” behaviour and possible withdrawal from the Eurozone less palatable.

In Italy’s case, a semi-independent technocratic government is being created. The unelected Monti was made into a senator last week by President Georgio Napolitano, before his appointment as Prime Minister last night.

Monti, who has a reputation as a tough Eurozone insider, is in the process of putting together a small government of “expert” ministers, expected to be announced today.

Napolitano hopes Monti will gain sufficient support in parliament to push through the required fiscal and economic reforms that could save the country from a deeper crisis.

German chancellor Angela Merkel, too, backs this approach to driving through reforms.

“I hope that confidence in Italy is restored, which is crucial for a return to calm throughout the Eurozone,” she said.