• 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

• 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

• 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)

• 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

• 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

• 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

• 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.)

• 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?

%
3.0
2.5
2.0
1.5
1.0
0.5
0.0
per capita comparable with US
HDP
Euro US UK JPN
HDP p.c.

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 2000 2001 2002 2003 2004 2005 2006 2007
EU 15 50 států Unie & D.C.
•Zdroj: Eurostat, US BEA •Obr. 3

stable growth and inflation

25.0
20.0
15.0
10.0
5.0
0.0
1991
AT
1993
BE
1995
DE
1997
ES FI
1999
FR
2001
GR IE
2003
IT
2005
LU NL
2007
PT

standard deviations

10.0
5.0
0.0
-5.0
-10.0
-15.0
-20.0
AT BE DE ES FI FR GR
1990 1998 2007
IE IT LU NL PT

• 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

public finance deficits, % HDP
5
0
-5
-10
-15
2000 2001
F
2002
D
2003
GR
2004
IRL
2005
I
2006
P
2007
E
2008 2009

Germany vs. peripheral countries
140
135
130
125
120
115
110
105
100
95
Mar-
00
Nov-
00
Jul-
01
Mar-
02
Nov-
02
D SA
Jul-
03
Mar-
04
Nov-
04
E SWDA
Jul-
05
GR SWDA
Mar-
06
Nov-
06
IRL NSA
Jul-
07
Mar-
08
Nov-
08
P SA
Jul-
09

other countries
140
135
130
125
120
115
110
105
100
95
Mar-
00
Nov-
00
Jul-
01
Mar-
02
Nov-
02
A SWDA
I SA
Jul-
03
Mar-
04
Nov-
04
B SWDA
E SWDA
Jul-
05
DK SWDA
GR SWDA
Mar-
06
Nov-
06
D SA
IRL NSA
Jul-
07
Mar-
08
Nov-
08
F SWDA
P SA
Jul-
09

Germany vs. peripheral countries
10.0
5.0
0.0
-5.0
-10.0
-15.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
D E GR IRL P

110
Germany vs. peripheral countries
100
90
80
70
2000 2001 2002 2003 2004 2005
D E P GR
2006 2007 2008

30
20
10
0
-10
-20
-30
-40
-50
-60
-70
-80
-90
-100
Germany vs. peripheral countries
P E GR
2000 2008
IRL D

• 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

• 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

• 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)

• 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

• 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

• 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.