BdF- Europe: a financial crisis, not a monetary one

Speech by Christian Noyer, Governor of Banque de France
Tokyo – Singapour - November 28-30th 2011

"The situation in Europe and the world has significantly worsened over the past few weeks. Market stress has intensified. Bond markets in the euro area are not functioning normally. Economies outside the euro area are feeling the effects of increased uncertainty, lower growth prospects and capital repatriation. In these conditions, it is important to clarify the mechanisms at work and identify the underlying causes. I will also discuss possible policy responses, from a Eurosystem perspective.

The true nature of the crisis

I will start with a paradox. Looking at fundamentals, the euro area today seems in a position of strength when compared to other developed economies. Growth has been stronger than in the UK and Japan since 2007. External accounts are in balance. Even the fiscal position is favorable. On aggregate, the euro area deficit (at 4% of GDP) is the smallest of all, less than half of that in the US, Japan or the UK. This remains true even for some peripheral countries. For instance, the Spanish fiscal deficit, at 6.1% of GDP, is much smaller than that in the US, the UK and Japan. Total gross public debt, at 67% of GDP, is amongst the lowest in the OECD..."

...

"I believe that virtue will eventually be rewarded. In the next decade, markets and lenders will trust those currencies that, whatever the circumstances, are managed with one overriding priority: preserving price stability and the intrinsic value of the currency unit. On this fundamental basis, we can look at the future of the euro with strong and realistic optimism. I see the recent decision by the Swiss central bank to peg the CHF to the euro as a confirmation of this statement."

Source: http://www.banque-france.fr/gb/instit/telechar/discours/2011/Europe-a-financial-crisis-not-a-monetary-one-28-11-2011.pdf