1

The Eurozone Crisis: Causes and Solutions

Klaas KnotPresident, De Nederlandsche Bank

Asia Society, Hongkong15 October 2012

2

The eurozone and the global economy

95%

5%

Population

RoW euro area

81%19%

GDP

RoW euro area

86%

14%

Trade in Goods

RoW euro area

77%23%

Bonds, equities and bank assets

RoW euro area

3

European debt crisis

0

5

10

15

20

25

jan-11 jul-11 jan-12 jul-12

Spain Ireland Portugal Italy

2-year government bond yields Percent

4

Some convergence prior to the crisis...Cumulative growth differentials with Germany

80

100

120

140

160

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Ireland

Greece

Spain

Italy

Netherlands

Portugal

5

…but with borrowed money…

Average annual growth rate of credit to private sector: 2000-2011

0

2

4

6

8

10

12

14

16

DE NL IT PT IR SP GR

6

…and accompanied by inflation…

Cumulative differentials compared to EMU total : 2000-2007

-6

-4

-2

0

2

4

6

8

10

12

DE IT NL PT SP IR GR

7

…reflecting wage developments

8

Current account balancepercent of GDP

-20

-15

-10

-5

0

5

10

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Netherlands Germany Italy Ireland Spain Portugal Greece

9

Governments went back to old habits

-18

-15

-12

-9

-6

-3

0

3

1992 1995 1998 2001 2004 2007 2010

Greece Italy Portugal

Start EMU

Budget deficits (% Gdp)

Improvements in the run-up to EMU

but relapse after admission

10

“On/off”market discipline

0

2

4

6

8

10

12

14

16

18

20

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Germany Greece IrelandItaly Portugal SpainNetherlands

Start EMU

11

A stable design of EMU

• Strengthening growth potential and competitiveness

• Politically independent enforcement of the fiscal rules, guarding the debt ceiling of 60%

• European supervision, resolution and DGS

• Eurobonds as the capstone of EMU?