Tuesday that the return of inflation to emerging markets will help countries in the euro zone to restore lost competitiveness.
“Because of the inflationary pressure in some of their many export markets in the emerging world, euro area countries are more likely to regain price competitiveness now than other crisis-hit countries were in the past” Bini Smaghi said in a speech in Hong Kong.
His argument is a retort to those who claim that Greece, Ireland and Portugal will not avoid default because they can΄t regain competitiveness by devaluing against their main trading partners in the Eurozone.
Bini Smaghi added that there is no post-war example of a government in an industrialised economy restructuring its debt.
“For a euro area sovereign to seek to restructure its debt would be a huge leap into the unknown. This aspect is frequently omitted by financial analysts in their newsletters or by commentators or academics in their short op-eds”, he stated.
Bini Smaghi stressed that the strength of contagion across financial institutions and markets is potentially more significant within the euro area today than was the case in Asia in the 1990s, given the much greater depth and intensity of financial and economic integration in Europe.
"This means that the potential for spillovers and a systemic areawide crisis is much higher and has to be factored into the policy responses," Bini Smaghi said.
He also commented that the financial tensions led to a disruption of domestic financial intermediation, with severe consequences for both private and public financing.
“In Greece, the banks – which were reasonably strong in a ‘stand-alone’ sense – were undone by revelations about the weakness of public finances”, he added.
source: CAPITAL
