Is the ‘EURO’ a Defunct Currency?
Constantinos Alexiou2012
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Abstract
In this paper we provide a brief discourse on the theory of optimum currency areas to serve as a basis for constructive criticism of the conceptual framework of the eurozone. With particular reference to the Greek economic crisis, we argue that the very architecture of the EU experiment involving the single currency was inherently flawed from the outset in so
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A. Artner - P. Róna: Euros(c)eptic - The Theory of the Optimum Currency Area and the Practice of the Euro
2012
The article examines whether the euro crisis can be entirely attributed to factors such as regulatory failure or fiscal indiscipline, as opposed to the mechanisms built into the euro itself. It concludes that the euro contains a built-in bias that would result in the divergence of the path taken by the developed members on the one hand and the less developed ones on the other. The original the optimum currency area („OCA”) theory appears to have been valid, and the departure from it, as embodied in the Maastricht Treaty, amounted to an unjustified departure in light of the experience of the five weak countries of the eurozone (PIIGS). These experiences have proved that after the introduction of the common currency overcoming significant differences in initial conditions seems quite difficult. Only the countries having international companies with very strong positions on the world markets could take advantages of the euro, and the disadvantages resulting from the deterioration in competitiveness were left to the weaker ones. This also implies that the advantages for the stronger countries to the extent actually experienced were enhanced by the competitiveness of the weaker ones.
Euros(c)eptic - The Theory of the Optimum Currency Area and the Practice of the Euro
The article examines whether the euro crisis can be entirely attributed to factors such as regulatory failure or fiscal indiscipline, as opposed to the mechanisms built into the euro itself. It concludes that the euro contains a built-in bias that would result in the divergence of the path taken by the developed members on the one hand and the less developed ones on the other. The original the optimum currency area ('OCA') theory appears to have been valid, and the departure from it, as embodied in the Maastricht Treaty, amounted to an unjustified departure in light of the experience of the five weak countries of the eurozone (PIIGS). These experiences have proved that after the introduction of the common currency overcoming significant differences in initial conditions seems quite difficult. Only the countries having international companies with very strong positions on the world markets could take advantages of the euro, and the disadvantages resulting from the deteriorati...
The eurozone as a flawed currency area
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.
Title : Representation of “ EURO ” monograph Subtitle : “ How common currency threatens the future of Europe ”
2017
During 2016, "Akademska knjiga" from Novi Sad (edited by NUMMUS) published in the Serbian language this important work of the world-renowned economist J. Stiglitz. The scope of this monograph is over 380 pages, excellently structured in four special parts of equal volume, largely interdependent regarding treated issues (with a foreword, afterword and an index of terms and guidelines, as well as many bibliography items expressed in more than 200 footnotes, citations and explanations. The first part entitled "European crisis" (29-108) is very comprehensive because it introduces the reader into the issue of the crisis caused by earthquakes in the eurozone. It consists of three related, turbulent chapters: 1) The European crisis, 2) Euro expectations and reality, and 3) The sad effect of Europe. The author states that the global financial crisis of 2008 seamlessly turned into a European crisis. It is caused by events that present symptoms, not causes, of deeper problems in the eurozone structure: interest rates rose on government bonds of Greece and some other eurozone countries and some other countries could not get access to finance in any possible way. Although many factors contributed to the troubles of Europe, the basic error is only one: the creation of a common currency, the euro or more specifically, the creation of a common currency without creating a set of institutions that would enable authorities to the area as diverse as Europe to function effectively with one single currency. The second part entitled "The upside from the beginning" (109-202), also consists of three chapters: 1) Can a common currency succeed at all? 2) Euro: split system, 3) Monetary Policy and the European Central Bank; The second part of the book (from 4 to 6 chapter) reviews the necessary conditions for a successful monetary union, what Europe has actually done and how the discrepancy between what should have been done and what has been done has led to the failure of the euro, to the crisis that followed soon after its creation, and to a fork, where the rich get richer and the poor get poorer-which further complicates the success of a single currency system. The third part entitled "The wrong Policies" (203-266) consists of two chapters: 1) Crisis measures: how Troika politics deteriorated imperfect structure of the eurozone and guaranteed a depression, and 2) Structural reforms that deepened the failure; This part of the book (chapters 7 and 8), describe in detail how the eurozone reacted to the crisis and how those countries "came for help" with programs that actually deepened and prolonged the consequences. The fourth part entitled "What next?" (267-352), consists of four chapters: 1) Creation of a functional eurozone, 2) Is the amicable divorce possible?, 3) To flexible euro, 4) What next ... This part (9 to 12 chapter) explains what can be done to restore prosperity to Europe. A key hypothesis of this author is that the eurozone cannot survive because it was wrongly placed in the very beginning. Thus, he argues that the single currency in the region with enormous economic and political differences cannot easily succeed. In fact he argues that the single currency requires a fixed exchange rate between the member states and a uniform interest rate. Besides, the rules must be sufficiently
Euros(c)epsis - The theory of the optimum currency area and the history of the Euro
2012
The examines whether the euro crisis can be entirely attributed to factors such as regulatory failure or fiscal indiscipline, as opposed to the mechanisms built into the euro itself. It concludes that the euro contains a built-in bias that would result in the divergence of the path taken by the developed members on the one hand and the less developed ones on the other. The original the optimum currency area („OCA”) theory appears to have been valid, and the departure from it, as embodied in the Maastricht Treaty, amounted to an unjustified departure in light of the experience of the five weak countries of the eurozone (PIIGS). These experiences have proved that after the introduction of the common currency overcoming significant differences in initial conditions seems quite difficult. Only the countries having international companies with very strong positions on the world markets could take advantages of the euro, and the disadvantages resulting from the deterioration in competitiv...
Euro zone debt crisis: theory of optimal currency area
2015
Creation of a monetary union, carries along certain costs and benefits. Benefits of monetary union mainly stem from reducing transaction costs and eliminating exchange-rate uncertainty. On the other side, a country that joins a currency union, therefore gives up the opportunity to select a monetary policy, that it regards as optimal for its own circumstances. In this paper we explain the criteria of optimum currency area (OCA): degree of trade, similarity of business cycles, degree of labor and capital mobility and system of risk sharing. Viewed through the prism of these criteria, EMU is currently far from being an optimal currency area, especially in fulfillment criteria of labor mobility and fiscal integration. The aim of the paper is to highlight certain shortcomings of the EMU, such as its vulnerability to asymmetric shocks and its inability to act as predicted by the theory of optimum currency areas. Furthermore, we explain the reasons behind the difficulties that the euro are...
The Euro and the Dollar in the Crisis and Beyond
Countries in a monetary union may, over time, turn their union into an optimal currency area, even if it wasn’t one before, through the benefits of a shared currency, as Jeffrey A. Frankel and Andrew K. Rose (1998) and Paul De Grauwe and Francesco Paolo Mongelli (2005) argued. On balance, conference participants agreed the euro’s first 10 years have proven a positive development, though the 2008–09 global recession refocused concerns about the euro’s role, its costs and, ultimately, whether it constitutes an optimal currency area.
The Euro as Common Money, not a Single Currency A Plea for a European Monetary Federalism
The euro crisis forces us to completely rethink European monetary policy. The European Central Bank’s policy of buying back sovereign debt does not address the real problem: it is only a way of propping up a system that has already failed. A structural response to the crisis would consist of giving states back the power to act, but in a way that would not destroy the monetary union. This paper suggest a way in which, while preserving the Eurozone, each state would put into circulation in its own territory a comple-mentary currency guaranteed by tax revenue and pegged to the euro, what we call a “fiscal currency”. This parallel currency would be a “popular” currency, issued as bills in small denominations and intended for day-to-day purchases. The euro would continue to be used for large transactions, transactions occurring at the European level, and for savings. The kind of monetary federalism we propose would end the private banking system’s monopoly on currency issuance. Alongside a common currency regulated by European monetary authorities, it would create complementary national currencies subject to individual governments. At the same time, it would offer a response to the current crisis, though its scope is not limited to the problems afflicting the Eurozone’s “peripheral” countries. More fundamentally, we affirm that a currency’s organizing principles must be consistent with a political community’s foundational values. In the case of the European Union, the goal is to transpose onto monetary policy the old maxim “unity in diversity” and to recognize monetary policy as a tool that must be available to a sovereign people to ensure its survival. A decentralized fiscal currency—whether it be national, re-gional, or local, as it is perfectly possible to envisage several levels of issuance, providing they are backed up by anticipated fiscal revenue—is first of all a form of short-term credit that is cheaper than credit offered by financial mar-kets. But its goals could also be more ambitious: it can be designed as a full-fledged means of payments, a currency that permanently circulates through the local economy alongside the euro. To this end, it must be accepted by the population, and its implementation must be negotiated with the private sector. To do so, the government must actively build trust in the new currency and ensure its convertibility into euros. The third goal of a fiscal currency is to force states to pursue more responsible fiscal and financial policies. When a supe-rior federal currency exists, a state issuing its own means of payment has every interest in maintaining its value: inflationary policies would reduce the value of its own future revenue and undermine its credibility and thus viability by increasing its dependence on federal authorities. The need for internal convertibility and the defense of euro parity distinguishes our proposal from other ideas that have been recently advanced in the European debate, notably relating to the crisis in Greece, where a parallel currency would be devalued as soon as it was established. Creating a parallel fiscal currency and defending its parity are challenging but feasible political actions, as several international political experiments indicate. Ultimately, it is an attempt to reform public governance in the midst of a crisis of confidence in the usual procedures of neoliberal “good governance.” Its success depends on the capacity of issuing authorities to win the trust of their populations: a fiscal currency issued by a state or local government must be seen as legitimate as the euro itself.
The euro – whence it came, where it goes
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.
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The paper surveys the development of the Optimal Currency Area theory and the Economic and Monetary Union. After closely examining how Robert Mundell arrived at the former theoretical framework and its further elaboration by several economists, the paper draws the attempts at European economic and monetary unification. Based on the report One Market, One Money (1990), the author concludes that the economists of the European Commission did not follow the OCA theory, but used several contemporary monetary and macroeconomic findings to construct the theoretical framework behind the EMU. INFLATION 2022 - CIRCUMSTANCES, CHALLENGES, IMPACT - 9th annual Monetary and Economic Scientific Conference, UNWE Monetary Research Center Conference Papers ISSN 2534-9600
The Eurozone: Piecemeal Approach to an Optimum Currency Area
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Soon after the establishment of the Eurozone it became obvious that the structural differences between member states would not abate, as expected, but rather gradually widen. Although part of the problem can be attributed to the enlargement process, it also relates to asymmetric effects of the common currency and to diverging economic policies. This paper discusses the literature which associates the economic characteristics of EMU with arguments of the optimum currency area (OCA) theory and asks for missing capstones that would meliorate EMU to eventually resemble an OCA. As potential candidates for such building blocks, some sort of fiscal union and lender of last resort may qualify, drawing on the experiences of other currency unions and federal states. The financial and debt crisis has revealed that the endogenous forces within a currency union may be too slow to absorb the shocks originating from the crisis. For a currency union to survive in such a situation it is all the more important that the OCA criteria are met and/or that complementary institutions are in place. However, as actual developments in the Eurozone reveal, the political process of approaching an OCA is piecemeal rather than comprehensive and prompt.
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The article offers a reassessment of the optimal currency area in the European Union and elaborates on the prospects for its expansion in the modern economic conditions. The assessment builds on the example of Central and Eastern European countries that have joined the euro zone in the recent years. The aim of the study is to compare the performance of the euro-zone countries with that of the non-euro-zone countries in order to determine whether the implementation of the common currency and centralized monetary policy helps to protect national economies from external shocks (balance-of-payments crises) better than keeping national currencies and pursuing independent monetary policy. This would, in turn, help to determine whether the optimum currency area in the European Union is still in existence today and whether it has potential to expand and generate benefits for its future members. The findings of the study prove that the euro zone remains to be an optimum currency area in the given borders with a potential for further expansion.
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OPTIMUM CURRENCY AREA THEORY AND EMU: LESSONS FROM THE EURO CRISIS
OPTIMUM CURRENCY AREA THEORY AND EMU: LESSONS FROM THE EURO CRISIS, 2016
The theoretical literature on monetary integration has been traditionally dominated by the theory of optimum currency areas (OCA). This analysis has its origins in a debate, during the 1960s, between Mundell, McKinnon and Kenen about the criteria which delineate the optimal domain of a currency area. Between the 1980s and early-1990s the traditional OCA theory was gradually modified in line with new theoretical developments. This new phase led to a “new” OCA theory with very different policy implications compared with the traditional approach. The Treaty of Maastricht symbolized the triumph of the new OCA paradigm. The euro crisis has, instead, represented the revenge of the traditional approach. This paper traces how the optimum currency area theory has evolved over time and uses the OCA theory as a framework within which the Eurozone’s governance, crisis and future are examined. Evidence presented in this paper suggests that the Economic and Monetary Union (EMU) has had asymmetric effects on its member States while it lacks of adequate instruments to deal with them. The fact that the EMU did not constitute an OCA, according to the traditional paradigm, contributed to the crisis of the euro area. The paper leads to the conclusion that, without the introduction of supranational adjustment mechanisms, the Eurozone will not survive its own imperfections.
The Lessons from the Euro Experience
Austral: Brazilian Journal of Strategy and International Relations, 2012
embarked on the penultimate step in this progression. But only half of it-a monetary union without a fiscal union. The Euro-crisis has now called that achievement into question and, in the process, undermined the authority of those espousing a European route towards closer integration, both for themselves as well as for other nations. As a convinced federalist, myself, I would not recommend abandoning the European example altogether, but if there is a lesson to be learned from this sorry episode, it is this: "if you are going to do it, do not do it this way". This article examines the European experience with economic and monetary union from three perspectives-the design, the implementation and the management of the euro-before exploring the implications of the current crisis.
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Essay on the single European currency – the Euro
In order to discuss the structural weaknesses of the European Monetary Union (EMU) since the introduction of the Euro, we will first elaborate the underlying theoretical con-cept of an Optimum Currency Area (OCA) developed by Mundell (1961). According to Mundell (1961) and Eichengreen (1991, p.2) “an OCA, is an economic unit composed of regions or countries, affected symmetrically by disturbances, and be-tween which labour and other factors of production flow freely.” From this definition one can derive several preconditions, which have to be met by a region, in order to in-troduce a common currency for multiple countries, such as the now 17 member-states of the EMU. First, an OCA demands a high degree of labour and capital mobility within the area be-yond national boundaries, as well as common employment conditions and policies (Mundell, 1961, p.661). This requires integrated financial and labour markets throughout the region, in order to reach optimal capital allocation (Kotil et al., 2009, p.31). Second, member-states should have relatively synchronized business cycles, with similar economic structures and conditions (Frankel and Rose, 1998, p.1011; Mundell, 1961, p.660). Third, a status of balanced trading among the member-states should be main-tained, since intra-regional trade deficits cannot be adjusted for by changes in relative currency values. Hence, this would lead to instability of the currency (Mundell, 1961, p.660). Last, a multi-national OCA requires the transfer of monetary and fiscal authority from the individual countries to a supra-national currency area-level (Mundell, 1961, p.664). Overall, a single currency is beneficial for states with homogenous economic conditions and equal levels of mutual trading activities, since transaction and uncer-tainty costs are reduced (Frankel and Rose, 1998, p.1009).
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