May 21, 2015

Europe’s single currency is very likely to survive its present crisis yet that will leave formidable economic challenges lying ahead, a top Federal Reserve policy maker has said.

Stanley Fischer, the vice-chairman of the Fed’s Board of Governors, told a conference in Portugal that the odds were on the euro area enduring in essentially its present form, while cautioning that the outcome of the Greek crisis was still uncertain.

Europe had produced the monetary leadership that it needed in the dark hours of the crisis but major questions remained unresolved. One of these was the need to put in place a fiscal framework to compliment the monetary union and banking union.

“The decision to use the single currency to drive the European project forward was a risky one, and at some stage or probably in several stages, it will be necessary to put the missing fiscal framework into place,” he said.

In the longer run, he added, the union would not last without bringing prosperity to all its members. That meant addressing the challenge of low productivity growth — something that afflicts the developed world.

The EU still faced the possibility of major difficulties associated with the Greek crisis and the potential for a British exit from the EU, Mr Fischer noted.

The turmoil in the euro area has dogged discussions among US economic policy makers in recent years, amid concerns that outbreaks of financial turbulence there risked derailing America’s fragile recovery.

The upheaval in Greece is just the latest example. In the Fed’s most recent meeting, held on April 28-29, participants pointed to the fiscal and financial problems of Greece as a continued risk to the global economic outlook, alongside worries about the Chinese slowdown.

Mr Fischer quoted EU founding father Jean Monnet in arguing that the history of Europe would be “forged in crises”. The responses by the European Central Bank in recent years, plus the creation of a Banking Union, were examples of this principle in action, he argued.

He cited the pledge by ECB president Mario Draghi in the dark days of 2012 to do “whatever it takes” to save the euro as a key step that largely, but not totally, erased the scepticism over the viability of the monetary union.

Mr Fischer added that the decision by the ECB to embark on quantitative easing this year had proved that the central bank has the ability to implement monetary policy when rates are near zero.

“All that has been done so far makes it very likely that EMU — the Economic and Monetary Union — will survive this crisis,” Mr Fischer said.

However he added: “In the longer run, EMU will not survive unless it also brings prosperity to its members. That means that the most important challenge of the future will require an increase in productivity growth in Europe — and that is a challenge that faces the entire developed world.”