The Euro and the Crisis

Europe has not done well in the years since the 2008 crisis, with a double dip recession and a recovery far slower than that of the US from whence the crisis came. Among the key reasons for this dismal performance is the euro, or more precisely, the structure of the Eurozone, the institutions, rules, and regulations that were created to ensure growth and stability of a single currency amongst a diverse set of countries—and the failure to do some of the things (like the establishment of a common deposit insurance system) that should have been done. The paper describes how Europe created a divergent system, with increasing disparities between the richer and poorer countries, and the role of certain beliefs, prevalent at the time, but since questioned, about what makes for good economic performance.

EMU’s governance framework was incomplete at its inception. Its institutional fragilities allowed for the building up of competitiveness and fiscal disequilibria in some Member States during its first 10 years and left the Eurozone unprepared to cope with the sovereign debt crisis. While some of those weaknesses have been addressed in response to the crisis EMU’s governance framework remains incomplete to date and therefore vulnerable to adverse market and political-economy pressures. This chapter argues that EMU—or at least the membership of individual countries—will not be sustainable without national adjustment capacity and willingness to implement economic reforms. Those reforms are also a pre-condition for promoting sustainable growth and hence a credible crisis exit strategy. Although EMU’s resilience could still be guaranteed through other mechanisms in the absence of sufficient national adjustment capacity, notably a banking union with an orderly state bankruptcy regime, even if feasible it would mean a rather different model of European integration.

This chapter presents a structural–monetary reform to transform the euro into a factor of European integration rather than representing a straightjacket for member countries that are suffering from the crisis without any likelihood to resolve it. This requires transforming the European Central Bank to make it become a settlement institution for those national central banks that participate in the TARGET2 system, enabling those member countries that are suffering most from the crisis to reintroduce their own national currencies for their domestic payments. This will transform the euro into a truly international currency, thereby providing for both an orderly working euro-area payments system and the possibility to steer domestic interest rates policy with the aim of contributing to economic as well as financial stability. Such a structural–monetary reform will be instrumental in enhancing at both economic and institutional level the integration of euro-area countries, with a view to do justice to the original project of European union.

Euro area countries have exhibited modest convergence prior to the financial crisis, but have started to follow diverging paths thereafter. Such divergence has been examined from many angles, and diverse narratives of the crisis have developed. Surprisingly, the gradual transformation of economic structures of euro area countries over the last 15–20 years has instead received less attention. This chapter presents evidence of ongoing changes in the allocation of countries’ resources across sectors. Some of such changes even preceded the launch of the euro.

Growth in Southern European EU member states has been weak and is resulting in divergent growth paths relative to the richer EU countries. Convergence in terms of income levels requires more rapid growth in the economically weaker member states but it can succeed or fail depending on possessing necessary human capital and openness to trade levels, fundamental determinants of innovation and diffusion activities that drive productivity growth and thus long-run per capita income growth and convergence. We apply a thresholds regression approach to examine the growth and convergence process of 11 EU member states over the period 1960–2014 using human capital and openness to trade proxies as thresholds identification variables allowing us to determine specific policy implications for different human capital/trade regimes. Our findings confirm the existence of different regimes according to trade levels corresponding to different growth performances due to technological catch-up, external competitiveness, the weight of tradable goods, physical capital accumulation, government size and public debt.

This chapter investigates the dynamics of the world economy and the political constraints in 2016, and then discusses the effects of the Portuguese integration in the euro. As the financial crash and then the recession unfolded, the difficulties of the European peripheral economies were amplified by austerity measures leading to social and political unrest. Finally, the chapter reviews some of the debates on the alternative strategies and considers the conditions and difficulties for a negotiation on the reduction of the external debt and namely for an exit from the Eurozone.

The article analyses the political motivation that governed the different stages of the European monetary integration process, and in particular the set of circumstances that made possible the agreement realised in the Maastricht Treaty, which led to the creation of the European Monetary Union. It examines how, later, the European ideal gradually lost its gloss until we reached the current deep crisis.

Eight years after the outbreak of the financial crisis, while the United States have for several years emerged from recession, Europe, after a long recession whose only precedent is the 30s deflation, has barely recovered the level of GDP per capita that existed before the 2008 crisis.

The argument developed in this article is that this crisis is inherent to a monetary union which has failed to build the political institutions necessary for its functioning. Coordination through rules is not enough. Without an “economic government” able to set up a discretionary coordination of fiscal policy, the monetary union has been unable to implement a policy mix suitable for the whole euro area and let deflationary policies develop, pushing the whole of Europe into depression.

This paper takes a critical look at the Fiscal Compact as a key element of the future EU governance. It shows that the “Excessive Deficit Procedure (EDP)” is representing an Achilles heel of the fiscal pact. We put a finger in a wound that has been neglected up to now, probably because it has evaded daily politics analysis as a statistical-econometric issue: the “purposefully structured” data revisions in GDP and the government budget balance figures. The road to a sustainable “economic governance” of Europe can only work through fiscal federalism in conjunction with an incentive-compliant banking union. In that case, market-based interest rates provide a better incentive and sanction mechanism than the “Excessive Deficit Procedure” which is plagued by inherent manipulation leeway and political cycles but is decisive for the success of the Fiscal Compact. A further important omission of the Fiscal Compact is that it scarcely focuses on the relation between France’s lack of budget consolidation and the country’s shrinking international competitiveness—an economic relationship which is referred to based on the example of Greece.

This paper emphasizes the importance of differences in population sizes in a model of a monetary union under alternative scenaria of monetary and fiscal policy coordination. It goes beyond Casella (The American Economic Review 82(4):847–863, 1992) by allowing for coexistence of fiscal policy, national as well as union-wide, along with monetary policy. The paper also allows for inefficiencies in tax collection that serve as another difference across countries and for the possibility that tax and spending policy in the union are decided by means of different procedures. This is intended to explore the contrast between monetary policy outcomes determined by deliberations and voting in the ECB, given the fiscal policy stance, and national fiscal policy stance, given monetary policy. It examines what options this logic confers on smaller versus larger members of a currency union. It goes beyond both Casella (The American Economic Review 82(4):847–863, 1992) and Ioannides (The Cyprus Bail-in: Policy Lessons from the Cyprus Economic Crisis. World Scientific Imperial College Press, 2016) in examining the impact of market reforms and of various types of technological progress and explores their consequences for the sustainability of national public debt.

“Sovereign debt restructuring” is often viewed as a panacea, a kind of miraculous solution for over-indebted Member States. In this article it is argued that in a monetary union characterized by a single monetary policy and financial market integration, public debt restructuring should be seen as the last option to avoid default by a euro area Member State, namely when there is a strong case for unsustainability of government debt in the medium to long term. Public debt sustainability goes hand in hand with the Maastricht fiscal criteria, EMU’s Stability and Growth Pact and its revisions of 2005 and 2011, and with the EU Treaties, including the Fiscal Compact and the ESM Treaty. Restructuring public debt is at the antipodes of economic policy co-ordination and convergence of euro area Member States sharing a common currency. It represents a major failure of the decentralized economic governance system that underpins the single currency. Based on the exceptional nature of “public debt restructuring” and taking into account the foundations of European Economic and Monetary Union (EMU), this article analyses the legal conditions for public debt restructuring in the euro area, focusing also on its financial and economic consequences. It looks at both the institutional approach and the contractual approach for debt restructuring, setting aside unilateral debt relief as equivalent to redenomination to the former national currencies and to exiting the monetary union. Alternatives to government debt restructuring in the euro area are also flagged in the context of the ESM Treaty, seen as an embryo for a European Union Treasury and for EU joint issuance of public debt. References to the Banking Union in its triple dimension of a single rulebook and Single Supervisory Mechanism (SSM), Single Resolution Mechanism (SRM) and European Deposit Insurance Scheme (EDIS) and to the Eurosystem’s Outright Monetary Transactions (OMT) in secondary sovereign bond markets are also made to reinforce the exceptional nature of sovereign debt restructuring in EMU.

A succession of crises—the global financial and economic crisis (GFC) in 2008, the Great Recession of 2009 and the following Euro crisis—forced the economic policy to action. After the fiscal policy has used up its ammunition in the fight against the effects of the 2009 recession, monetary policy remained the only expansive player in the political arena. The European Central Bank (ECB) responded—like the other major central banks in the world—first with a zero interest rate policy, then by “quantitative easing”. However, the ECB acted in comparison with the Fed with some delay.

In the evaluation of the crisis management of the ECB must clearly state that it has missed its own inflation target of 2 %. However, it has been successful in reducing the high government bond yields after the famous “Whatever it takes” speech by ECB President Draghi in July 2012 and the subsequent announcement of the OMT (outright monetary transactions) programme.

Whether the quantitative easing program by the ECB in the years 2015/2017 with a view to achieving the primary objective, namely an inflation rate of 2 % will be successful is an open question. Simulations with the Global Economic Model of Oxford Economics indicate that the quantitative easing policy will achieve the inflation target but with a great delay. The impact on the real economy will not be as large as QE experiments in the USA. Other unintended effects—such as the formation of bubbles on the stock markets—are greater than the intended effects.

On 10 March 2016 the ECB took the historic decision to reduce the interest rate on the main refinancing operations of the Euro system by five basis points to 0 %. In line with this, it reduced the rate on the marginal lending facility to 0.25 % (previously 0.3 %) and the rate on permanent deposit facility by ten basis points, to −0.4 %. This opened a new phase of unconventional monetary policy use.

In this essay we will discuss the issue of the effectiveness versus the exhaustion of monetary policy followed by the ECB in response to the Eurozone effects of global economic and financial crisis.

We firstly discuss the nature and justifications for the use of unconventional policy measures in the context of the crisis developments. We concentrate, in particular, on two central issues to understand the limits of monetary policy effectiveness, the so-called liquidity trap and the endogeneity versus exogeneity issue of money creation.

Secondly, we provide some additional considerations on the relationship between the decreasing effectiveness of monetary policy and the increasing use of unconventional measures, seeking also to understand the differences between the stances of the ECB and the US Fed.

Finally, we discuss the contradictions between the fiscal and monetary policies stances as a booster factor in exhausting the effect of the monetary policy, and conclude by affirming the absolute need to reform the Euro system.

In this chapter, the author analyses the two main types of shock absorbers—private and governmental shock absorbers—that have been proposed after the 2007–2008 financial crisis, even though in some cases their theoretical origins are not new. As for private shock absorbers that imply the reinforcement of ‘market forces’ within the E(M)U, the author indicates certain measures that intend either to ensure the completion of the internal market or to address sectorial market fragmentation, as it is the case of the creation of the Banking Union. As for governmental shock absorbers, the author then distinguishes between macro stabilizing measures that can be implemented outside the EU’s budget (e.g. the creation of a new ‘Debt Agency’ or the institution of a new ‘European unemployment insurance scheme’) and those measures that can be adopted through the EU’s budget. In this latter case, within the current set of (tax) revenues and expenditures, the EU budget might evolve to embrace some stabilization properties, even if significant changes in the design of tax assignment criteria and of funds allocation rules should be required.

Given the various shortcomings of the current European monetary unification project, especially as shown by the international financial crisis which began in 2007–2008, various measures for its respective solution were successively proposed and implemented, including the establishment of a European banking union, which seemed not only necessary and urgent but also inadequate and unsatisfactory, in order to make the European Economic and Monetary Union solid and safe. Given all these reasons, “the puzzle is yet to be completed.”

In this paper, we examine possibilities and limitations of a potential European Unemployment Insurance in alleviating impact of both symmetric and asymmetric shocks on national budgets and workers’ welfare. We present various policy options and their assessment. In the paper, we first discuss the framework in which an automatic stabiliser would operate and present different options for such a stabiliser. We then focus on the idea of a European unemployment insurance, and review a range of proposals that have been made in this domain. We conclude by listing the challenges and strengths of a common insurance scheme. In terms of challenges, we consider the size, funding and stabilisation impact of the scheme, the countries involved, political feasibility and harmonisation and the issue of moral hazard and permanent transfers. We also explain how these challenges can be overcome.

The global financial crisis of 2008 has severely impacted the functions and operations of different levels of government in Europe—requiring costly bailouts from national or supranational levels in some cases. A typical adjustment has been reductions in wages and benefits at different levels together with harmonization of fiscal policies across the EU and control of general government deficits (involving all levels of government). This highlights the incentive and governance problems associated with fragmentation of government. Overlapping responsibilities and absence of full information prevent effective governance and yardstick competition.

The paper offers a review of the recent processes of structural reform of subnational government in a number of EU countries, such as France, Spain, Denmark and Italy. The purely economic side of reform, i.e., achievable scale economies, and the political economy of reform, and more precisely the institutional constraints, are highlighted. With the exception of Denmark, the restructuring of levels and numbers of government has proved difficult. Meaningful reforms must address assignments and own-revenue responsibilities and transfers, together with the political economy of institutional reforms. This has lessons for large multi-level countries, such as Brazil, China, Indonesia and in South Asia.

This article will deal with the working and the impact of the new council decision of 2014 concerning the system of own resources for the European Union (EU). It will analyse the system and compare it with the previous one of 2007. In addition, this article makes several comparisons concerning the effect of these own resources in relation to the member states of the Union. The national cost price of the EU is a very current item in many member states, where there is a discussion going on concerning the future of European integration.

In the wake of the euro debt crisis, there have been multiple initiatives to repair the EU structure and governance, focused on the existing financial and fiscal framework. On the financial front, major steps—albeit still under construction—are taken toward unifying and strengthening banking regulation, supervision and resolution. By contrast, on the fiscal front, efforts in redesigning the existing framework so far have not been matched by progress toward unification. Likewise, practically no headway has been made in merging other key policy areas, such as defense, internal security, or external relations, as envisaged in the Treaty of Maastricht. Beyond taking inventory of what has been accomplished, the chapter explores the prospects and tasks for further political and fiscal integration—in line with well-known guiding principles, including subsidiarity and solidarity.

In the scenario of the Economic and Monetary Union of the European Union (EU), where the EU budget is not able to play the role of a centralized fiscal policy instrument, proposals for a budgetary union have been widely discussed. As a contribution to the debate, in this chapter we will discuss the macroeconomics of a monetary union focusing our analysis on the scope for coordination of budgetary policies. When using the public deficit as policy instrument, we will identify the full cooperation of fiscal policies with a budgetary or fiscal union. The results will allow us to explore the role that fiscal integration can play in reducing the incidence and severity of future crises, and will also allow us to derive under which circumstances a budgetary union would not be advisable. In particular, we will show to which extent a fully coordinated fiscal performance of the Eurozone’s members should be complemented with fiscal discipline, a zone-wide system of transfers, or an automatic mechanism to ensure the stability of the Eurozone.