Europe Needs a Two-Speed Euro: Economist

The euro has fundamental flaws, with no room for flexibility and Europe needs to move towards a political union as the euro cannot survive in its current format, Dr Gerard Lyons, chief economist at Standard Chartered told CNBC on Friday at the World Economic Forum in Davos.

UK Prime Minister David Cameron told Davos delegates on Thursday that the euro zone lacked all the “features that are common to all successful currency unions”. Lyons said the question was not whether Greece leaves, "the question is whether anyone else is forced to leave.”

“European policy makers and politicians are very slow,” Lyons, who actively campaigned for the UK to stay out of the euro zone, told CNBC.

“They haven’t been comprehensive or fast enough for the market…They’re talking regionally but they’re acting nationally. They say the right things, but then they don’t actually do it.”

Last fall, financial markets were expecting a so-called Big Bazooka aid program that along with some help from the IMF would have been able to ease concerns over the sovereign debt situation in Europe.

But the scale of the effort came up short of the two to three billions that were needed, Lyons said. Instead, European leaders only managed to agree on a disappointing package which was unable to reassure investors. 

“The good news, if there is good news, is that the Europe Central Bank has really helped the situation by pumping in liquidity,” Lyons said, adding that it was “about time, and time is a very scarce and valuable commodity. “

Lyons said the euro left no room for manoeuver for heavily-indebted countries.

“If Greece was to have its own currency now, it would have to devalue by 40 percent. Spain would have to devalue by 25 percent, even France would have to devalue by 15 percent,” he said. “They don’t have their own currency, so the only way they can make out for that loss of competitiveness, is squeezing their economies hard leading to rising unemployment.”

The need for a stronger economic integration within the euro zone and the necessity for peripheral countries to have more monetary flexibility was a Catch-22 that European leaders did not seem able to solve, he said.

“Europe needs a two-speed euro,” Lyons said, “you don’t have any room for flexibility, any room for manoeuver and that’s why here at Davos, one of the big worries that people have is that this European problem is going to run.”

“If you use Davos as a barometer,” Lyons said, “a year ago, no one would have put their hand up — or a very few — to a straw poll as to whether anyone would leave the euro. I was at a private meeting yesterday involving some policy makers it should be said and half the people put their hand up when asked if they thought someone would leave.”