Causes of the Euro Crisis
European Network Academy (ENA)
of Social Movements
Miguel Otero-Iglesias, ATTAC Spain
Freiburg, 10 August 2011
(Working Slides)
Few Notes on Optimum Currency Areas
 The Old Robert Mundell (1961)
 Pessimistic view on Currency Unions
 The problem of dealing with shifts in demand, so called
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asymmetric shocks without exchange rate movements
For this you need:
1) Flexible wages
2) Mobility of Labour
3) Insurance mechanisms
 A) Centralised Budget (public insurance)
 B) Highly developed capital markets (private insurance)
Few Notes on Optimum Currency Areas
 The New Robert Mundell (1973)
 After the collapse of the Bretton Woods System in 1971
 Monetary Union is more efficient to cope with temporary
asymmetric shocks than national moneys with exchange rate
risk. (The important thing is integrated capital markets).
 In the Flexible Dollar System, huge exchange rate
movements can actually cause asymmetric shocks, MU acts as
protection.
 Since the Werner Report (1970), Europe has tried to fixed
exchange rates (snake in the tunnel, European exchange rate
mechanism (ERM) pegged to the ECU.
The Political Side of the Story
 1970s: High inflation and high unemployment (stagflation)
 Bundesbank gains great reputation for keeping inflation under
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control
This despite the ‘dollar weapon’ used by the US
ERM becomes de facto a D-Mark zone, Germany increases its
influence and power in the 1980s
Weaker countries try to regain competiveness through
devaluations: last experience 1992 devaluations, collapse of the
ERM
France accepts German reunification only if Germany agrees to
form a monetary union
Germany sees some advantages: more protection against ‘dollar
weapon’ and elimination of competitive devaluations
Different theoretical approaches on EMU
 The ‘Monetarist School’: let’s start with MU and then we
will achieve economic converge and OCA (French position)
 The ‘Economic School: First we need economic convergence
and OCA and then we can create MU (German position)
 Introduction of Convergence Criteria:
 Inflation needs to be kept under control
 Debt levels: 3% budget deficit, 60% gross government debt to
GDP
 Inclusion in the ERM
 Convergence in the interest rates
 German position:You cannot have MU without political
union, and political union is more than institutions
Orthodox understanding of the
nature of money
 Money has three main functions:
 Unit of Account
 Medium of Exchange
 Store of Value
 Ortodhox/metallist view: medium of exchange function is
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preponderant… (Ex. cigarettes in a concentration camp)
Hetherodox/nominalist view: the unit of account function is crucial
(you cannot have money without a political authority behind it)
Bankers/investors favour the first, political economists point to the
latter (especially in times of crisis and uncertainty)
History: Constant struggle between bondholders (creditors) and
Governments (debtors)
Current EMU gives power to the bondholders and reduces power of the
states
The Creation of an Orphan Currency
“The Euro, probably more than any other currency, represents
the mutual confidence at the heart of our community. It is
the first currency that has not only severed its link to gold,
but also its link to the nation state”
Wim Duisenberg, President European Central Bank, 2002
 EMU was created with a fully independent central bank
 And on top of this the ECB was not given the lender-of-last
resort function (the no bail-out clause)
 The idea was to avoid political interference in the managing
of the currency
 This has created an appreciation bias in the euro
Euro-Dollar Exchange Rate
European Bond Spreads
European Bond Spreads (II)
High indebtedness in the Periphery
Great Imbalances in the Current
Account Balance
Public indebtedness has been constant
The problem has been mostly private debt
House prices rocketed
Inflation Levels in the EZ 1999-2007
The real exchange rate differs
Loss of competiveness in the periphery
But this is also the case in the US…
The Real Causes of the Crisis
 The Appreciation Bias of the Euro = loss of competitiveness in the
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periphery
Huge imbalances between surplus countries (Germany, Holland,
Finland) and deficit countries (Spain, Portugal, Italy)
Real Estate bubbles, especially in Spain and Ireland
Lack of macroeconomic coordination
Lack of supervision in the levels of private debt, and asset bubbles
Lack of a centralised budget to overcome asymmetric shocks
Lack of a pan-European debt market (Eurobonds)
Lack of a lender of last resort
Lack of jurisdiction on derivative markets and credit rating
agencies
Conclusion
 Monetary Union is flawed without political union behind it
 There needs to be more macroeconomic cooperation to
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avoid internal imbalances
Germany needs to stimulate internal demand
EZ periphery needs to be more productive and
competitive
The EZ needs to create a ministry of finance
The creation of eurobonds is also necessary
Apart from price stability there needs to be a growth
strategy, especially for the periphery
The EZ needs to tackle the appreciation bias of the euro