XXI. The Birth and Crisis of the Euro
XXI.1 Euro – political or economic
project?
Some history
• Post-war reconstruction and European integration
– Joint control over basic startegic commodities (ESCS),
agricultural production (CAP), strategic R&D (Euroatom) and
liberalization and common (later internal) market (EHS)
– European social model
– European institutional structures
• Economic success, political legitimacy
• Circle of European politicians and intellectuals with
clear goal, determined already during WWI
– Federative state with pan-European legislative, judiciary and
executive powers
– Common currency was a political goal
Way to EMU
• Haag summitt (1969): Werner report
– Neither common currency, neither European Central Bank
• Break-up of B-W system 1971, European exchange rates
management (Snake), EMS a ECU (1979)
– EMR, parity grid, mandatory intervention, D-Mark supremacy
– Economic and political reality in Europe (competitive
devaluations) and globally (Plaza Agreement 1985, see L…)
• Strong pro-federal political personalities (Jacques Delors as EC
Chairman since 1986)
 Hanover summit 1988: road map to EMU – Delors Report
• Clear-cut strategy, common currency still just one of the alternatives
Political trigger: German unification 1990
• Concerns about economic power of unified Germany
– DEM and Bundesbank will become decisive European
currency and central monetary institution
• Other EU countries, notably France: pressure on
Germany to speed up the introduction of Euro
• A political trade-off: support for German unification
traded for German support to Euro
– Economists, bankers and bureaucrats then simply had to find
a solution
– Problem: countries in question did not fulfill the necessary
conditions for the efficiency of common currency (not
optimal currency are, OCA)
Solution- concept
• Limitation: “impossible trinity“
• Three condition for internal market
– Free capital flows
– Stable exchange rates
– Stable price level
• Theory: on national level, only two policy tools can be pursued at
once
– Capital mobility is a definitional characteristic of internal market, so either
policy, ensuing price stability (i.e. monetary policy) or policy, stabilizing ExR,
had to be transferred on federal, European level
• Recent difficult experience (1970s and 1980s): ExR volatility plus
political will to create EMU:
– ExR policy: irreversible fix  Euro
– Pan-European monetary policy  ECB
Solution- convergence
• OCA  similarity of economic (real and
structural), but also cultural, historical a
political characteristics of the countries in
question
– In 1990, it was clear that this will not be fulfilled in
expected time horizon
• Instead, nominal criteria substitute the real
convergence – inflation, deficit, debt, interest
– Maastricht criteria
Solution- required policies
• Creation of ECB
• Stability and growth pact and Excessive debt
procedure (SGP, EDP)
– Out of original Maastricht criteria, two
remained: 3% deficit/GDP, 60% debt/GDP
• Long-term policies at EMU level, steering
the member countries towards real and
structural convergence
Decisions
• 1.7.1990: fully liberalized capital flows
• December 1991: Maastricht summit
• 1.1. 1994: start of European Monetary Institute
(predecessor of ECB)
• 1.1.1999: ECB assumes control over European
monetary policy
• 1.1.2002: termination of national currencies
• Superficially, nominal convergence successful
– Survival of EMS 1992 crisis, but problem of creative
accounting
– On the background of development and problems of
whole EU (enlargement, institutional build-up, slow
falling behind other important regions in the world, etc.)
XXI.2 Euro at Ten (2009)
Birthday in the shadow of the crisis
• Transition 1999 - 2002
– Technically perfect
– Population identified with Euro
• ECB – top central bank of the world
• SGP problem: breached by larger countries (D,F) in 2003 and
adjusted
• Start of 2009: very optimistic assessment of first 10 years (despite
the global crisis), but also admitting the problems
– Fiscal coordination as substitution for OCA
– Information asymmetry
– “Deficit bias” and free rider problem
– How to interpret 3% deficit/GDP required ratio?
Euro GDP growth, avg 1999-07
per capita comparable with US
3.0
%
2.5
2.0
1.5
1.0
0.5
0.0
HDP
HDP p.c.
Euro
US
UK
JPN
Variance of growth rates
standard deviations (%): EU 15, US states
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1995
1996
1997
1998
1999
EU 15
•Zdroj: Eurostat, US BEA
2000
2001
2002
2003
2004
2005
2006
2007
50 států Unie & D.C.
•Obr. 3
Euro 1998-07
stable growth and inflation
HICP, EU12
25.0
20.0
15.0
10.0
5.0
0.0
1991
1993
AT
1995
BE
DE
1997
ES
1999
FI
FR
2001
GR
2003
IE
IT
2005
LU
2007
NL
PT
HICP, EU 12 vs. US regions
standard deviations
EDP, EU12
10.0
5.0
0.0
-5.0
-10.0
-15.0
-20.0
AT
BE
DE
ES
FI
FR
1990
GR
1998
IE
2007
IT
LU
NL
PT
Hidden risks – tricky nominal criteria
• Exceptional period 2003 - 2007
– EMU performed well under good economic
conditions
• Since the fall of Lehman Brothers
–
–
–
–
Most sever recession since WWII
Asymmetric shocks for some countries
Divergence instead of convergence
Problem of nominal criteria
• Vulnerability of peripheral economies: GR, E,
P, IRL
Government expenditures: 2000 vs. 2008
SGP not respected
public finance deficits, % HDP
5
0
-5
-10
-15
2000
2001
2002
F
2003
D
2004
GR
2005
IRL
2006
I
2007
P
2008
E
2009
Unit labor costs
Germany vs. peripheral countries
140
135
130
125
120
115
110
105
100
95
Mar-
Nov-
Jul-
Mar-
Nov-
Jul-
Mar-
Nov-
Jul-
Mar-
Nov-
Jul-
Mar-
Nov-
Jul-
00
00
01
02
02
03
04
04
05
06
06
07
08
08
09
D SA
E SWDA
GR SWDA
IRL NSA
P SA
Unit labor costs
other countries
140
135
130
125
120
115
110
105
100
95
Mar-
Nov-
Jul-
Mar-
Nov-
Jul-
Mar-
Nov-
Jul-
Mar-
Nov-
Jul-
Mar-
Nov-
Jul-
00
00
01
02
02
03
04
04
05
06
06
07
08
08
09
A SWDA
B SWDA
DK SWDA
D SA
F SWDA
I SA
E SWDA
GR SWDA
IRL NSA
P SA
REER a government expenditure: E
REER and government expenditures:
D
BoP deficits
Germany vs. peripheral countries
10.0
5.0
0.0
-5.0
-10.0
-15.0
1995
1996
1997
1998
1999
2000
D
2001
E
2002
GR
2003
IRL
2004
2005
P
2006
2007
2008
2009
Loss of share on export markets
Germany vs. peripheral countries
110
100
90
80
70
2000
2001
2002
2003
2004
D
E
P
2005
GR
2006
2007
2008
Net investment position
Germany vs. peripheral countries
30
20
10
0
-10
-20
-30
-40
-50
-60
-70
-80
-90
-100
P
E
GR
2000
IRL
2008
D
Difficult generalization, but …
• Peripheral countries: common macroeconomic
characteristic
• Peripheral countries: extremely vulnerable to the
effect of the crisis
• Peripheral countries: „home-made“ asymmetric
shocks
– GR: creative accounting, public sector profligacy
– IRL, E: price bubbles in real estate sector, impact on
unsustainable debt of private banks (and different
impact on the real economy)
– P: large, over-ambitious infrastructure projects,
general profligacy everywhere
Is the Euro project successful?
• Did Euro help to overcome the lasting economic
problems of EU?
– No, Europe is still lagging behind in competitiveness
and productivity
• Related question: did Euro support positive
economic effect of the integration process?
– Period 2002-2007 too short to judge
– Euro help to more trade and faster growth
– Euro as reserve currency, macroeconomic stability
Is Euro efficient common currency?
• Was Euro able to shelter ALL member countries
against internal and external shocks?
– Till the Greek crisis the answer was yes.
– Different view today
• Could Euro contribute to the crisis of peripheral
countries?
– Common low interest rate – cheap debt financing
– Transfers (and SGP violation by decisive countries)
provided a psychological effect that undermined fiscal
discipline
– Very slow REAL convergence (even divergence)
Does Euro have a perspective?
• May 2010 GR, September 2010 IRL, April 2011 P: debt
unsustainable, need of external support (EMU, IMF)
• Three possible scenarios:
– Onward loss of confidence by markets, unwillingness to
provide enough financial support from strong EMU
countries (D), break-up
– Market confidence restored, growth, decrease of
indebtedness
– “Muddling through“ – the most probable option: managed
bankruptcy of some peripheral countries, emergence of
slowly growing South, increasing gap with dynamic North,
but political will is going to keep Euro project alive
Conclusions
• This is not Euro zone crisis
– It is a crisis of some EMU countries …
– … and it is a crisis of a political dimension of the
European integration
• Basic lesson: efficient Euro = deeper
federalization
• Not realistic in foreseeable time
• Euro was a premature project …
• … but will survive
Literature to LXXI
• de Grauwe (2005), P., Economics of Monetary Union.
Oxford University Press.
• European Commission (1990), One Money, One Market,
European Economy, 44.
• Issing, O. (2008), The Birth of Euro. CUP, Cambridge.
• McKinnon, R. (1963), Optimum Currency Areas, American
Economic Review 53 (717-725).
• Pissani-Fery, J., Posen, A., eds. (2009), The Euro at Ten: The
Next Global Currency? Peterson Institute for International
Economics and Breughel, Washington.
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political or economic project?