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Über dieses Buch

Despite the success of policymakers and the European Central Bank in calming down financial markets since the summer of 2012, European leaders are still facing formidable challenges in making the single currency work in a complex environment. This book starts with a review of the necessary elements of a currency union and highlights the reasons why the system has run into its present troubles. It points to important policy recommendations to be drawn from a structural analysis of the currency union, achievements and failures of the currency union and ways to improve fiscal sustainability and arrive at stable macroeconomic performance for the union. It highlights the importance and the effectiveness of structural reforms that have to accompany fiscal consolidation and discusses the appropriate tools of crisis management and why a restructuring of the Eurozone is not the right step. Based on these considerations, a long-term target picture for the Eurozone as a part of the EU is outlined, providing a valuable contribution to a hopefully intense public debate in the coming years.



1. Introduction: Managing Complexity

Despite the impressive rebound seen on European financial markets following Mario Draghi’s famous speech in late July 2012, European leaders still face formidable challenges. The restoration of some confidence on financial markets should not conceal the long-term challenges to make the European Monetary Union function better in future and to make it more resilient to shocks. Despite somewhat weaker headwinds for government borrowing, the situation remains highly complex. Fiscal sustainability has not been restored in a number of countries as the consolidation of fiscal deficits is being hampered by recession or very weak growth. Some reforms to restore economic competitiveness have been enacted, but more needs to be done. As unemployment has risen markedly in most countries and even exceeds 25 % in Spain and Greece, any changes in labour regulations or social security entitlements will continue to provoke demonstrations on the street and will support the more radical political movements in the countries concerned. Beside these problems in their respective home countries, EU leaders also need to restore confidence in the capability of the EU and the EMU to take the necessary steps to prevent such crises from re-occurring. Cohesion in the Union of 27 countries seems at risk. National interests are diverging and the UK is even discussing an exit. In the eurozone, the countries that are expected to foot the bill or at least assume the fiscal risks of their partners are in confrontation with those countries receiving support and, sometimes loudly, sometimes quietly, calling for more solidarity. There are big differences in political views concerning the right balance between austerity and growth: How much bitter medicine in terms of public savings or wage restraint is necessary to become healthy again? And how much burden will the taxpayers take without intervening against European integration? Given this complexity, it is not surprising that the polarity of views is increasing and that the whole euro project has been called into question.

Michael Heise

2. The Path to European Monetary Union

Since the irrevocable fixing of exchange rates of eleven European countries on the 1st of January 1999, the euro has become the official currency for 330 million people and the GDP of today’s 17-country eurozone adds up to almost EUR 9.5 trillion (2012), ranking second behind the United States. As a project of monetary integration, the euro is without historical precedent. Its governance is complex and unique. Its evolution is embedded in the history of Europe. While many early proposals for a common European currency were fuelled by the idea of political unity, the first concrete steps towards the Monetary Union actually had the economic objective to limit exchange rate fluctuations and to stabilize monetary relations. This became all the more important after the end of the fixed exchange rate system of Bretton Woods and the large swings of the US dollar on exchange markets. This chapter examines very briefly how the idea of a single currency was born and what steps led to today’s euro.

Michael Heise

3. The Evolution of the Debt Crisis

The sovereign debt crisis in the eurozone is often seen as a direct consequence of the global financial crisis commencing with the meltdown of the subprime mortgage market in the United States in 2008 and 2009. Obviously, the financial crisis put strain on public budgets. The necessary recapitalisation of banks, the loss of tax revenue and higher spending due to the Great Recession in 2009 as well as public stimulus programmes tore large holes in government finances and aggravated the debt problems that were already sizeable before the crisis. But this is only part of the story. For a full picture of the origins of the eurozone debt crisis one has to go back in time.

Michael Heise

4. Economic Impact of the Euro—Who Benefits?

The most important success of the euro—a means of transaction for over 330 million people—is that it has been a stable currency in terms of low inflation and a predominantly high external value. It became attractive as an international currency and ranks second behind the US dollar. Its aura of stability has prompted many neighbouring countries to link their currencies to the euro. The impact of the euro on growth within the union and for the individual member states is more difficult to assess. Until 2008 the euro obviously accelerated growth in countries like Spain, Greece and Ireland. Since 2009, however, much of their surge in growth has been surrendered again. It is impossible to say whether growth would have been stronger or weaker over the whole period without the euro. Germany, which was in a period of consolidation and reform in the first decade of the euro, presumably benefited in terms of growth. Protection was provided by a large currency area to preserve competitiveness. Other EMU countries now embroiled in the debt crisis appear to have become the losers of the euro. However, we should not misinterpret a crisis snapshot as the final word.

Michael Heise

5. Re-assessing the Criteria for an Optimum Currency Area in Europe

The recent turmoil in the eurozone seems to confirm the view that the heterogeneous group of EMU countries is anything but an optimum currency area

optimum currency area

. Some have found that most other arbitrary country groupings would have made a better currency union than the eurozone—e.g. a reconstruction of the Ottoman empire around 1800 or alternatively all countries that begin with the letter M (Cembalest 2012).

Michael Heise

6. What Went Wrong with Public Debt and Macroeconomic Stabilization?

The fiscal developments in the past 12 years underscore the need for institutional rules to discipline fiscal policies. Markets provided abundant funding even for countries like Greece or Portugal that had evident fiscal sustainability problems. Also, many years of deficits above 3 % in Italy did not scare the markets. As argued above, an explanation for the complacency of markets may have been the scepticism that the no-bailout clause of the Maastricht treaty would actually be applied in times of crisis. With the setup of big rescue funds in May 2010 this view was actually confirmed. But the situation and the market perception completely changed with the approaching Greek default that hit private investors, as described in Chap.


. Of course, this came far too late to have any pre-emptive effect on policy decisions.

Michael Heise

7. Policy Conclusions

It has been repeated many times, and rightly so, that the euro debt crisis is first and foremost a crisis of confidence (Heinen 2012). Obviously, when market participants doubt whether indebted countries can actually service their debt in the long run, prices for these government bonds go down and interest rates rise. Higher borrowing costs then actually exacerbate the problem of fiscal consolidation and economic decline due to higher corporate borrowing costs. Public opinion in highly indebted countries tends to blame markets—that cause the “spread”—for the economic woes.Criticising the potentially myopic and exaggerated views of markets may be tempting and even justified in some circumstances, but it leads nowhere. Spreads are not instruments of economic policy but they reflect market expectations and uncertainties about the dynamics of public debt. The only way to lower market spreads is to convince investors that the debt is under control. It took some time in the present crisis until policymakers embraced this view. In its early phase, say around mid-2009, many governments were still in denial,blaming financial markets for misperceptions and short-termism.But in the course of time, as many economies continued to weaken,it became clearer and clearer that market doubts about debt sustainability were not unfounded.

Michael Heise

8. Aligning Crisis Management and Long-Term Reform Incentives

The paragraphs above sketched out a normative and positive long-term target picture for the European Monetary Union. It assumes that the individual countries have incentives to continue with national reforms and consolidation measures. And it assumes that investors will regain some confidence in the economic perspective of the eurozone. These assumptions hinge crucially on how the crisis management is conducted and how long-term investment conditions are set. Many political reservations concerning monetary unification reflect the concern that the big bailouts—be it through the rescue funds, the ECB or newly created transfer mechanisms—may erode the incentives for national governments to see through painful reforms and rather to rely on the assistance of the community. The following paragraphs try to draw some lessons on crisis management and how to deal with the mutualisation of government debt.

Michael Heise

9. A Final Word

Much has been said about the economics of integration and monetary union. Overall, the achievements in terms of reducing fiscal deficits and rebalancing the economies in the eurozone have been impressive. Neither the United States

United States

of America

nor the UK

United Kingdom

has seen similar developments in terms of deficit reduction or external rebalancing in recent years. The crisis has triggered major changes in wage costs and the framework of social security and labour markets. This will further strengthen the Union in the years to come.

Michael Heise


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