Euro Zone

5 Key excerpts on "Euro Zone"

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  eBook - ePub

  Routledge Handbook of the Economics of European Integration

  • Harald Badinger, Volker Nitsch, Harald Badinger, Volker Nitsch(Authors)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  2 The history of european economic and monetary union Harold James DOI: 10.4324/9781315796918-3 1 Introduction Europe’s move to monetary integration with a common currency (the euro) is a quite unique process, and is often held up as a model for monetary cooperation in other parts of the world: in the Gulf region, where there are periodic discussions of monetary unification, as well as in Asia and Latin America, where movements towards greater monetary integration also have some support but encounter a plethora of difficulties. Nevertheless, at the latest by the financial crisis of 2007–8, it became clear that there were substantial design flaws in the concept of the Economic and Monetary Union (EMU). As Patrick Honohan put it: “release 1.0 of the euro was under-designed, and robust only to moderate shocks.” (Honohan 2012) There has always been an ambiguity in the story of monetary integration: was it designed primarily to deal with a technical issue – alternatively formulated as exchange rate volatility as a barrier to trade and thus to greater economic integration, or else as a quest for price stability – or was it part of a grand political plan, in which money was used to tie the European knot? Jacques Rueff (1950), France’s major mid-century thinker about money, coined a phrase that was subsequently often erroneously linked to Jean Monnet: “L’Europe se fera par la monnaie ou ne se fera pas.” In the 1960s, a theory of optimum currency areas was developed by US-based economists (Mundell 1961, McKinnon 1963, Kenen 1969): although they continued to be influential figures in the European debate, their theories were irrelevant to the final push to monetary integration in the 1990s. The states that signed up to economic union had different expectations and hopes: some saw it as a way of building credibility and thus of reducing borrowing costs, while others focused on the constitutionalization of a stable monetary regime

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  The Future of Global Currency

  The Euro Versus the Dollar

  • Benjamin J. Cohen(Author)
  • 2012(Publication Date)
  • Routledge

    (Publisher)

  The fundamental problem for EMU is the mismatch between the domain of its currency and the jurisdictions of its member governments. The euro is a currency without a country—the product of an international agreement, not the expression of a single sovereign power. Its success, therefore, is critically dependent on the continued cooperation of EMU’s member states, which can hardly be guaranteed for all time. Should it be any wonder, then, that outsiders might hesitate to commit themselves to the currency’s future?

  Monetary unions among sovereign states have existed before, of course, without major disruption. In the contemporary era one thinks of the East Caribbean Currency Area or the CFA franc zone in Africa. But these have all involved relatively small developing countries with no aspiration to major currency status. EMU, by contrast, encompasses some of the largest economies on the face of the earth and has never hidden its grand global ambitions. Unfortunately, Europe’s divisions have never been hidden, either. For that reason, prospects for the euro’s international role were poor even before enlargement. Enlargement of the Euro Zone’s membership will simply make them even poorer.

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  6 The euro in a global context

  Challenges and capacities DOI: 10.4324/9780203833803-9

  The birth of the euro in 1999 was expected to create a new power in international monetary relations. Even without the participation of Britain and some other European Union (EU) members, the euro area would constitute one of the largest economic units in the world, rivaling even the United States in terms of output and share of foreign trade. Consequences for the geopolitics of finance promised to be momentous. Europe’s Economic and Monetary Union (EMU) would become a major player on the monetary stage. Europe’s new money, building on the widespread popularity of Germany’s old Deutschmark (DM), would pose a serious threat to the predominance of America’s greenback as an international currency.

  A decade later, how have matters turned out? The purpose of this essay is to evaluate the experience of the euro area to date in a broad global context. The central question is: How has the creation of the euro affected the power of participating states to cope with external challenges?

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  The European Union in Crisis

  • Desmond Dinan, Neill Nugent, William E. Paterson(Authors)
  • 2017(Publication Date)
  • Bloomsbury Academic

    (Publisher)

  Scholars of European integration and the actors who forged the early Union were attentive to the challenge of economic divergence in Europe, particularly the Mezzogiorno (the impoverished south of Italy), in the original EU of six member states. That challenge came to the fore as the iterative process of enlargement brought a north-western, Mediterranean and eastern periphery into the Union, beginning with the first enlargement in 1973. In fact, all enlargements, with the exception of the European Free Trade Association (EFTA) enlargement of the mid-1990s, were characterized by new member states whose level of economic development was below that of the core. It was for this reason that the Union developed cohesion policy and a set of related policy instruments.

  The objective of this chapter is to analyse the emergence within the eurozone during the financial and economic crisis of divergence between a eurozone core and periphery. The crisis has been experienced in very different ways depending on whether a state is part of the northern core or the periphery. The second objective of the chapter is to explore the political consequences of this for democratic politics in the eurozone and the wider EU. Finally, the chapter assesses why the politics of redistribution are so difficult in the eurozone and the wider Union. The chapter begins with an overview of the eurozone design as fashioned by the Maastricht Treaty.

  Economic and Monetary Union: A Deliberate Blind Spot

  The achievement of a single currency was for a long time regarded as the ‘holy grail’ of European integration because of its likely impact on the wider dynamic of integration. It was a symbol of a high level of economic integration that would in its wake necessitate deeper political integration. The 1970 Werner Plan set out to map the various elements that would be essential to a complete economic and monetary union: the minimum that should be carried out (Werner, 1970: 9). It pointed out that differences in economic structure would impact on the achievement of an economic equilibrium within the currency zone and flagged that ‘financial measures of compensation’ would alleviate the problems and that ‘regional and structural policies’ would no longer be exclusively within the remit of the member states (Werner, 1970: 11). The 1977 MacDougall Report advocated a much larger EU budget than was the case – a budget of at least 5 per cent of GDP. The 1988 Delors Report on Economic and Monetary Union was explicit in its assertion that the process of integration had been uneven and that ‘[greater]convergence of economic performance is needed

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  The €uro and the Dollar in a Globalized Economy

  • Pedro Gomis-Porqueras, Joaquín Roy(Authors)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  One of the critical arguments against the common currency in Europe referred to the danger of undermining a potentially optimal policy mix due to (1) the ceiling of fiscal deficits by the Stability and Growth Pact and (2) the transfer of monetary policy from the national to the supranational level (see Herr and Hübner 2006). I share this argument but contend that this description of the policy mix is incomplete. As the example of the United States demonstrated, a successful policy mix not only comprises mutual supportive combination of fiscal and monetary policy but also an accommodating exchange rate policy. The launch of the euro not only produced the one-size-fits-all problem in the arena of monetary policy but also the one-rate fits-all problem of the common exchange rate. The same exchange rate towards the US dollar for all eurozone economies creates regional imbalances expressed by current account deficits and surpluses for the member states of the eurozone. Portugal’s current account deficit as a share of GDP, for example, is slightly higher than the current account share of the United States. Spain’s deficit also is coming close to 6 per cent of its GDP. Italy and Greece are two more economies with severe deficits. The overall current account surplus of the eurozone is mainly backed by the enormous surplus of Germany. The same exchange rate for all member economies of the eurozone does not fit their different interactions with the global economy (ECB 2006).

  Figure 4.8     News Frequency

  The highly uneven distribution of deficits and surpluses in the group of eurozone economies demonstrates some uneasiness with the one-rate-fits-all situation generated by the common currency. It could be argued that this distribution provides a further argument for an active exchange rate strategy by the ECB. Such an argument, however, assumes that there is sensitivity to and, more important, institutional room for exchange rate policies at all on the side of the ECB. Given the institutional architecture of the euro and its interpretation by the representatives of the ECB, it seems that there is not ample space for an adequate exchange rate policy in the ECB. Nominally, monetary policy-making is based on two pillars. The first pillar (ECB 1999: 47) argues that “inflation is ultimately a monetary phenomenon …To signal the prominent role it has assigned to money, the Governing Council has announced a quantitative reference value for monetary growth as one pillar of the overall stability-oriented strategy”. The second pillar is more opaque: “In parallel with the analysis of monetary growth in relation to the reference value, a broadly based assessment of the outlook for price developments and risks to price stability in the euro area will play a major role in the Eurosystem’s strategy. This assessment will be made using a wide range of economic indicators” (ECB 1999: 49). One of the many indicators is the exchange rate. Unlike the practice in the United States, not to mention the highly politicized currency strategies of China and Japan, the designers of the ECB were not overly eager to introduce a discretionary exchange rate policy.6

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  International Economic Integration

  Limits and Prospects

  • Miroslav Jovanovic(Author)
  • 2006(Publication Date)
  • Routledge

    (Publisher)

  If a country fails one (or, perhaps, two conditions), but if it makes good progress on these issues, it may be let into the EMU. If the Council is not able to decide about the beginning of the third stage, the Maastricht Treaty stipulates that it would begin on 1 January 1999 for the countries which fulfil the necessary conditions for the EMU. These countries would irrevocably fix their exchange rates and the ECU would subsequently replace the national currencies under the name of the euro. This will unleash the full potential of the genuine single market in the EU. The ECB would follow its primary commitment of price stability and, consequently, set interest rates and conduct foreign-exchange operations. In addition, the ECB would support economic growth and employment. The ECB would report regularly to the EU finance ministers (meetings of the ECOFIN which would issue broad economic-policy guidelines) and to the European Parliament. In any case, the implementation of the five criteria for the third stage of the EMU, if implemented strictly, would have a deflationary effect on the economy of the EU.

  In the rush to meet the Maastricht criteria for the third stage of the EMU, governments introduced additional (temporary) taxes, took on austerity measures and, consequently, restrained flexibility of fiscal policy. The consequences were numerous industrial actions, as well as high taxation, an obstacle to employment.

  In any case, as officially declared, the planned schedule for the introduction of the euro is expected to observe the following timetable:

  •  February 1996: start of the banknote competition

  •  December 1996: winning design selected

  •  Mid-1998: start of printing

  •  January 1999: scheduled start of EMU (stage three); one-for-one conversion of the ECU for the euro; irrevocable fixation of the rate of exchange of the currencies in the EMU

  •  Mid-2001: currency delivered to EMU central banks

  •  January 2002: notes and coins enter circulation alongside national currencies which will no longer be legal tender six months after the introduction of the euro

  •  July 2002: the euro is the only legal tender in the EMU countries

  The objective of the Stability Pact, reached in December 1996 in Dublin, is keeping any EMU on track. Germany wanted to have automatic fines for any EMU country that has a budget deficit of over 3 per cent. However, France argued that sanctions for excessive borrowing of member states must be a political matter. The final agreement was that the Council of Ministers (excluding the country being hit) can penalize the country with a fine of up to 0.5 per cent of its GDP. The countries are excepted from fines if their economies shrink by over 2 per cent.

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