Twenty Years of the German Euro Are More than Enough

The European single currency system has come under unprecedented strain during the past three years and there is little reason to assume that this will diminish, in any significant way, in the near future. This article briefly explores the background to the current eurozone crisis before outlining a number of potential solutions. Specifically, we discuss how the credit crunch induced recession of 2008 triggered the problems within the eurozone regarding sovereign debt, looking at the issues of spill-over and free-rider effects, together with the implementation of EMU fiscal rules. The analysis is then extended by outlining a series of potential remedies. This consists of a critical evaluation of solutions that the EU has already instigated (i.e. moral persuasion, financial relief measures and debt default), together with a series of alternative propositions (i.e. fiscal federalism and a European Clearing Union) and even the collapse of the euro.

DIW Economic Bulletin, 2014

The crisis in the European currency area is not yet over. Although the situation in the financial markets is currently relatively calm, the economic crisis appears to be bottoming out in most countries. Nevertheless, there are still fundamental design flaws in the Monetary Union. If these are not fully addressed, it will only be a matter of time before a new crisis hits, and a partial or complete breakup of the Monetary Union cannot be ruled out. The economic consequences would be devastating‚ not least for Germany. To ensure the survival of the European Monetary Union, fundamental reform is required in three problem areas: the financial markets, public finances, and the real economy. In order to give the Monetary Union a stable foundation, all problem areas must be tackled equally; otherwise, due to interactions between these fields, success in one area might be canceled out by a flare-up of the crisis elsewhere. The present article outlines the elements of such a strategy for the ...

Monetary Policy and Central Banking, 2012

This paper investigates why Europe fared particularly poorly in the global economic crisis that began in August 2007. It questions the self-portrait of Europe as the victim of external shocks, pushed off track by reckless policies pursued elsewhere. It argues instead that Europe had not only contributed handsomely to the buildup of global imbalances since the 1990s and experienced their implosive unwinding as an internal crisis from the beginning, but that it had also nourished its own homemade intra-Euroland and intra-EU imbalances, the simultaneous implosion of which has further aggravated Europe's predicament. To keep its own house in order in the future, Euroland must shun the outdated "stability oriented" policy wisdom inherited from Germany's mercantilist past and Bundesbank mythology. Steps toward a fiscal union to back the euro are also warranted.

Tijdschrift voor Politieke Economie 21(4), 4-25, 1999

The paper considers what lessons can be learnt from the launch and first 6 months of formal operation of the euro. On balance, the early performance has been creditable. The very fact that a broad, inclusive Euro Area took shape on January 1, 1999, confounded many sceptics. Payments and settlement systems have performed well. Monetary policy in the Euro Area has been conjuncturally appropriate. The ‘weakness’ of the euro since it launch has been a major boon to the Euro Area. Cyclical non-synchronisation among the membersof the euro area, while a fact, is a non-issue, because even autonomous national monetary policies with flexible exchange rates cannot dampen, let alone eliminate, normal national business cycle fluctuations. The paper outlines a new approach to optimal currency areas, emphasising temporary nominal rigidities, international financial integration and a view of flexible exchange rates as a source of shocks and instability rather than as effective shock absorbers or adjustment mechanisms for fundamental shocks originating elsewhere. The only low mark on the euro score sheet reflects the lack of openness and transparency and, because of that, the inadequate accountability of the European Central Bank.

China-USA Business Review, 2016

This paper deals with the stability of the euro since its inception and the structural weaknesses in the allocation of responsibility for monetary and fiscal policy in particular. Recent events reflect those weaknesses and, as a result, the survival of the euro zone in its current configuration is threatened. This paper examines the stability of the euro zone by focusing on interest rates [more specifically, the risk premia in the various troubled European Monetary Union (EMU) countries] and their determinants, and the stability of these premia which affect the price of government bonds. The conclusion is that the bond markets are quite unstable and that the instability was caused by budget profligacy. This paper looks at the entire period since the inception of the euro which covers the financial crisis of 2008 and beyond and asks whether moral hazard and the free rider problems in fiscal policy and the markets for sovereign debt have contributed to the current crisis. This includes examining the determinants of the risk premiums in the various countries making up the EMU, focussing on variables that are in the Maastricht Treaty charter such as budget deficits, cumulative debt in relation to GDP, rates of inflation, and monetary variables. The conclusion is inescapable: One cannot run a country or a union with 19 finance ministers where many have set aside the convergence criteria, and with a monetary policy that accommodates the extreme needs of some members instead of dealing decisively with serious structural problems that EU and the EMU especially, face. This paper examines the economic relationships in the troubled countries of the EMU in order to draw some lessons for policy makers.

Survival, 2009

Journal of Business & Economic Policy, 2017

The present paper highlights the imbalances that have characterized the Eurozone during the crisis. The contribution focuses on the issue of current account imbalances and the factors that caused them. It also examines the banking union as an important step toward a better management of the Eurozone financial imbalances. Furthermore, the paper discusses and assesses the policies, especially monetary policy,implemented in the Eurozone, stressing the limits of the strategy pursued by the European authorities. The main purpose of the paper is to point out possible solutions in order to correct the imbalances and discuss changes in Eurozone policies. The present paper highlights the imbalances that have characterized the Eurozone during its long crisis. Thecontribution focuses on the issue of current account imbalances andthe factors that caused them. It also examines the banking union as an important step toward a better management of the Eurozone financial imbalances.Furthermore, the paper discusses and assesses the policies, especially monetary policy, implemented in the Eurozone, stressing the limits of the strategy pursued by the European authorities.The main purpose of the paper is to point out possible solutions in order to correct the imbalances and discuss changes in Eurozone policies. The ultimate goal is to have a more balanced and integrated Eurozone which is able to pursue stability, less divergence and political credibility. 2.Policies, institutional flaws and the crisis in the Eurozone Before the crisis, the governance in the Eurozone was based on a fiscal policywhich remained at national level, although constrained by the Growth and Stability Pact. At the same time, national authorities were deprived of the exchange-rate instrument and national discretion over last resort lending for macroeconomic management. The ECB was and still is an independentEU official institution, in charge of handling the single currency and the monetary policy with the narrow remit of ensuring price stability 1. Consequently, monetary policy has resulted to be independent from fiscal policy.In addition, the ECB did not monitor the banking sector, since bank regulation and resolution, as well as the regulation of financial markets, were left to national governments. Although in the years before the crisis the increasing integration of Eurozone financial markets determined a growth in capital flows and banking − an increase that undermined the ability of some member states to backstop their national banking system −, there was no strategy in terms of harmonization of rules and surveillance of the financial sector in the EMU (Schilirò, 2017). The EMU lacked a developed surveillance framework to track and correct the imbalances in financial markets, sovereign debts, and competitiveness (European Commission, 2017). Thus, the stabilizers that existed at the national level prior to the start of EMU were stripped away from member states without being transposed at the monetary union level. This left the member states unable to deal with the coming national disturbances (De Grauwe, 2013). At the same time, financial deepening reached a certain level within the monetary union, due the concurrent progress of financial integration and financial sector growth, and it left the Eurozone facing a policy trilemma. 1 Article 127(1) of TFEU.

Journal of Macroeconomics, 2014

The euro was expected to catalyse 'ever deeper union' among its member states. Instead, the euro has been captured by bad financial habits of old and has put the euro north and south in fierce neonationalist confrontation with each other. The currency union is now at the crossroads between either getting stuck in the mud of an ever deeper joint liability community bound to continual decline or a reset of the euro and realignment of the Eurosystem based on a return to the no-bailout rule and national responsibility for national debt.

2013

The adoption of the euro as a common currency in 17 of the 27 member states of the European Union was achieved in a process that did not strictly observe the recommendations of the economic theory of an optimal monetary area. The elimination of exchange rates before the establishment of European Monetary Union represented the renunciation of an automatic macroeconomic stabilization mechanism and generated major commercial and financial imbalances between the countries in the Eurozone. The emergence of the financial crisis in 2008 combined with the lack of mobility of the labor at European level and the lack of fiscal reforms in the less competitive countries led to the current situation of the unsustainable public debts. The measures envisaged with the purpose to address this crisis are different in terms of level of assistance the competitive countries have to give to the others, the duration and value of wealth transfers that should be made between the states and the limit from wh...