Posts Tagged ‘Europe#8217;


World economy: 3 risks that hardly anyone talks about

Written on August 20, 2012 by Dirk Hopfl in IE News

IE Focus | By Ignacio de la Torre, Professor at IE Business School

The threat of a new recession in the US, the drop in the price of raw materials, and decisions taken by the ECB, might just bring about a turnaround in the world economy.

The traveler Javier Reverte once commented how when he set out on a trip to places he did not know he made a mental provision for scams, so that when a taxi driver overcharged him he didn’t get angry, given that he had already factored the “surcharge” into his provision. Now that we are over the hurdle of the recent European summit, in which for the first time political leaders adopted that old market practice of affording a false sense of happiness by means of pre-martyrdom (i.e. by lowering expectations and then subsequently announcing measures that are not quite that bad), it’s time to shed some light on other sources of basic risk for the world economy, so that we can set up our own mental provisions.  Given that I have always criticized market players for only seeing black swans in the economy, in spite of the fact that the majority of swans are white, I am going to talk about three risks – one negative, one ambivalent, and one positive, because they are the type of risks that will allow us to think that things are not really quite so bad if they do actually happen. Read more…


What if … Spain leaves the Euro!

Written on August 6, 2012 by Dirk Hopfl in IE News

IE Focus | By Patricia Gabaldón, Professor at IE Business School

The hypothetical decision to bring back the peseta would not address the real problems currently dragging Spain down, namely its level of competitiveness. All it would do is put off the inevitable, and meantime we have a lot to lose.

As with any kind of decision we have to make in our lives, before embarking on a definitive path we have to consider the pros and cons of the different options and compare the costs and benefits of an alternative economic environment. The option of leaving the euro and returning to our respective currencies, which seemed all but impossible just a few months ago, is now quite feasible. Many alternatives have been broached in economic circles, but let’s take another look at what the single currency actually gives us, and what it would mean for Spain if it were to leave the monetary union.

The main advantage of forming part of a monetary union is the resulting free trade among member countries. The simple idea of sharing the same currency reduces the level of uncertainty surrounding transactions by removing transaction costs for traders. The fundamental premise of the free movement of goods, services, people and capital (although in reality it has not proved quite as efficient as it looked on paper) plays a key role in economic growth driven by trade. The idea of unemployment offset by the need for workers in another part of the EU is difficult to implement but not impossible, and provides an enormous advantage for EU citizens as well as member countries.

The second big advantage of belonging to the Union is clearly the monetary stability it has provided over the last twenty years, because we should not forget that during this time we have enjoyed particularly low rates of interest and inflation under the management of the European Central Bank, which would have been very difficult to achieve with any other travel companions. This has had some very positive effects on Spain, particularly the rise in business investment and the entry of foreign capital investment. Moreover, the principle of EU solidarity has meant that the transfer of funds – structural, social, agricultural, etc., has strengthened social and economic structures and raised Spaniards’ standard of living. All this plus the growth of the Spanish economy on a global scale. Since Spain joined the EEC in 1986, its economy has been modernized and the number of workers and businesses have increased, along with living standards. The downside is that along the way we have lost control of our monetary policy along with the ability to use the exchange rate as a economic policy tool, and our fiscal policies have been subject to spending limits, which may have hindered our growth rate in the years leading up to the crisis.

The return to the peseta would afford greater flexibility to implement competitive devaluations that would adjust currency values to the real situation of our economy. Devaluation would make us more competitive vis-a-vis other countries, placing us in a more advantageous position to effect a probable increase in productivity and bring down unemployment levels. Nevertheless, having our own currency would almost certainly have a negative effect on Spanish trade, given that it would impose the uncertainty of exchange rate fluctuations on cross-border transactions, coupled with a return of all the costs associated with trading in a different currency. If we take this same line of analysis further, we can also see that an increase in country risk would probably result in higher rates of interest, which would have a negative effect both on investors and anyone who has debts that are subject to variable rates of interest. And the fact that Spain would no longer be subject to the strict inflation controls imposed by the ECB would mean that possible external pressures on the currency would more than likely increase the rate of inflation. All this without taking into account a possible flight of capital out of Spain resulting from a lack of confidence in the new currency, or in the process that led to it.

And yet even if this currency control were effective and efficient, it would merely mask the solution to the real problem. The possibility of competitive devaluation is interesting in such an uncertain environment and amid sporadic attacks on the currency of a country, but in our case rather than solving the very real problems of competitiveness, it would simply defer them. The euro has given us much and has brought about deep-rooted change in Spain, but there are still many flanks that need attacking, and although this may not be the environment in which to do it, we cannot just close our eyes and pretend that the problems do not exist. The solution, as has been stated repeatedly in recent times, is more Europe not less. It’s time to look toward the objective, not go back to square one.


By Fernando Fernandez, professor at IE Business School

Forget about short cuts and soft measures: Europe’s problem is that it has lost the market’s confidence, and in order to get it back it will have to take some hard measures.It’s a well worn phrase which is why I have permitted myself a certain amount of poetic license, because it seems to go perfectly with the confusion that is rife among markets and analysts following recent events. The feeling of insecurity is such that we are desperately seeking a lifeline to cling to. Someone is always up for the job of throwing said lifeline and public opinion seems to have honed in on two specific groups: governments comprised of technocrats and the European Central Bank (ECB). The former are expected to bring the required level of sanity and the ECB is supposed to start buying up debt with no thought for expenses. But once again it’s the wrong diagnosis.

The European Commission, according to its vice president Olli Rehn, has decided that the key lies in restoring confidence in fiscal sustainability and the financial system, and in speeding up reforms that stimulate growth potential. Hence we have to change our tune or we have to take notice of the Commission, but either way we should not be looking for short cuts.

The European problem is a simple one. Investors have lost confidence in the Euro, not just in Italy. Let’s not confuse the symptoms of this particular illness. They have done it for a series of institutional reasons – the well-known design faults of the Monetary Union – and mistakes made in the way the crisis has been managed. In my opinion they include two particularly big mistakes. The first was to declare that European sovereign debt is restructurable – albeit only Greek debt, but who on earth believes that at this stage – without having the necessary financial resources or legal instruments to effect an immediate exchange, and the second was to punish banks for their sovereign debt holdings without having the necessary resources to fill the hole created. Both decisions have had consequences that were impossible to recover from in the short-term: they have made sovereign debt a credit asset, a financial instrument that competes with emerging debt, and have eroded the credibility of the European banking system, which has been forced to divest its sovereign debt.  Read more…


Take your seat… Why the Euro is here to stay!

Written on December 13, 2011 by Dirk Hopfl in IE News

By Rolf Strom-Olsen, Director of Studies and Professor at IE University

Articles and media reports predicting the imminent demise of the Euro have become so commonplace over the last months that I suspect the next release of Microsoft Word will include it as a new document template: blank page, letter, CV, “Euro is doomed” article. A quick search on Google for the exact phrase “the euro is doomed” produces so many results (over 65,000), that I cannot even be bothered to look for variants. Pundits and politicians, bloggers and journalists, have all climbed aboard the euro-is-doomed train and cannot wait to tell us all about the destination which is envisioned, variously, as end-of-Euro land, end-of-Europe-itself land, global-financial-Armageddon land (for the real enthusiasts), etc….

Muh. Send us a postcard when you arrive.

That is a postcard I don’t expect to receive. Why not? Simply put because the so-called euro crisis is the product of a narrative gone wild. It has swept up otherwise sober-minded people and produced a wave of incessant hysterical shrieking, fulfilling that deep lizard-brain desire to really enjoy a catastrophe.

Except that catastrophe is largely an artefact of a market-, media- and punditry-driven narrative, increasingly divorced from the underlying reality of what is going on.

What we are really looking at is a sovereign debt crisis rephrased into a “euro-is-doomed” narrative. How sustainable is that? About as sustainable as Greek borrowing patterns. Read more…


IE Focus || The IMF wants to be a Hedge Fund

Written on November 16, 2011 by Dirk Hopfl in Academics

IE Focus | By Fernando Fernandez, professor at IE Business School

The IMF’s absurd proposal to buy debt from threatened European countries like Spain or Italy would have made it into a hedge fund, and it would have been developing countries that paid the price.Ever since the Mexico peso crisis resulted in the so called tequila effect in the early nineties, the International Monetary Fund has been trying to find the formula to prevent financial contagion. To be more specific, it has been searching for the way to stop financial market dynamics from unfairly impacting countries that have no serious solvency problems, but which will end up having them if they fall out of favor with investors, who then pull out en masse causing spiraling debt differentials coupled with a credit crunch. But what it has not done so far is to suggest that it should serve as a highly speculative investment fund that would intervene directly in the debt market, stockpiling the currencies of countries under threat. This is exactly what Portugal’s Antonio Borges, the inexperienced head of the European Department, proposed. The suggestion was only on the table for the space of a few hours, because it was such a ridiculous idea, so out of synch with the nature and functions of the IMF, that he had to withdraw it before the end of the day. Read more…


Welcome, Spain, to the Euro

Written on September 16, 2010 by Dirk Hopfl in Academics

IE Focus | By Gayle Allard, Professor at IE Business School

After just 8 years of circulation the Euro has the dark side that Spain didn’t want to see when it took over from the weakened peseta. What we need now is real improvement in levels of competitiveness.We thought we knew what the Euro was about when we launched it in 2002. We started to spend those new coins and notes with an almost patriotic meaning for pro-Europeans. We went through the “rounding-up” stage, but anyway we were enthusiastic about the new currency and what it meant for Spain and Europe.

And the initial years of the euro brought the benefits we anticipated. Interest rates fell to the lowest ever levels. Trade increased, foreign investment reached new highs and Spain went through a golden era of growth and rapid increases in income. We should almost be forgiven for thinking that belonging to the Euro held only advantages. But we were wrong.

From the beginning, the euro was not ´pretty´ notes, but rather the final abandonment of two fundamental tools that had helped the member states balance out their economies: interest rates and exchange rates. Read more…

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