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The Euro

Why it Failed

verfasst von: Jesper Jespersen

Verlag: Springer International Publishing

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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This book takes a close look at macroeconomic imbalances within the Eurozone and explores the profound consequences the introduction of the European Monetary Union (EMU) has had on Euro area countries. Particular attention is given to balance of payments deficits and surpluses, and the profound difficulties of rebalancing the Euro area. Throughout the chapters, the author argues that the EMU has failed to support an optimal currency area with the correct institutional arrangements due to misunderstandings at a macroeconomic level. The author also sheds light on the stability pact and the resulting macroeconomic trap which has left a number of Eurozone countries with devastatingly high rates of unemployment. The book argues that by disregarding important macroeconomic imbalances, Euro-monetarists have derailed the entire Eurozone project to such an extent that it is at risk of falling apart. Key chapters discuss the establishment of the EMU from a Euro-realist perspective and the role of the European Central Bank in rebalancing financial markets. The concluding chapter looks ahead to the future of the Euro and proposes necessary institutional solutions to the macroeconomic problems it is currently facing. Scholars and students with an interest in the current economic disarray within the Eurozone will find this work thought-provoking and highly informative.

Inhaltsverzeichnis

Frontmatter

1. Eurozone Crises

Abstract

The Eurozone countries have experienced historic macroeconomic imbalances measured by unemployment and balance-of-payments deficits and surpluses. At the same time, Eurozone countries have been following diverging macroeconomic courses since the financial crisis of 2008. Some countries are still suffering from a stagnating or even lower GDP than 10 years ago, whereas other Euro countries have grown faster than pre-2008 while at the same time reducing unemployment. On average, however, the Eurozone economy has performed significantly weaker than the non-euro economies in the EU, mainly due to a misperceived iron law of required fiscal budget balance by the member countries. The policies pursued by Eurozone institutions have been guided by misunderstood macroeconomic principles.

Jesper Jespersen

2. ‘Optimal’ Currency Area: What Does It Mean?

Abstract

The original theory of an ‘Optimal Currency Area’ was presented by Mundell (A theory of optimal currency areas. Am Econ Rev 51: 657–665, 1961). Conclusions were drawn using a neoclassical general equilibrium framework. This theory was employed when the Euro-monetarists, dominating the Delors-Commission (Report on economic and monetary union in the European community, Office for Official Publications of the EC, Luxemburg, 1989), recommended the establishment of a European Monetary Union, an independent European Central Bank, defined convergence criteria and the rules of public sector balanced budget. The theory has failed to foresee the current Euro crises. Alternatively, Euro-realistic theory, which takes analytical inspiration from Keynes’s macroeconomic methodology by using consistent stock-flow modelling, would have led to other and much less optimistic conclusions with regard to the outcome of imposing a common currency on the EU countries.

Jesper Jespersen

3. Why Was the EMU Established? Different Perspectives

Abstract

The European Monetary Union suggested in the late 1980s was considered by the euro-monetarist as a political project to promote further economic integration and to prevent Germany from becoming the dominant European power after re-unification. The institutions surrounding the European Monetary Union were designed according to the Euro-monetarists’ theory of how to create an Optimal Currency Area (OCA) recommended by the Delors Commission (Report on economic and monetary union in the European community, Office for Official Publications of the EC, Luxemburg, 1989). Hence, politics overruled any realist objection by defining loose convergence criteria making too many countries eligible for the common currency and by disregarding balance-of-payments imbalances. Furthermore, the unilateral focus on the public sector deficit without viewing private sector imbalances underestimated the structural differences between the potential member states. Had a Euro-realist analytical framework been employed, a number of these macroeconomic imbalances would have been addressed at an earlier stage with less devastating consequences.

Jesper Jespersen

4. Balance-of-Payments Imbalances have Become the ‘Achilles Heel’ of the EMU

Abstract

A balance-of-payments deficit has to be financed abroad either by the private or by the public sector. This is independent of what currency is in use. If a deficit country is excluded from foreign capital markets, it goes bankrupt. A number of Eurozone countries were harshly reminded of this when the European capital markets froze in 2009/2010.

Euro-monetarist equilibrium theory often confuses foreign deficit with public deficit. Within a monetary union, deficit countries are at the mercy of the surplus countries, because they have renounced their monetary and exchange rate sovereignty. They have made themselves dependent on the borrowing conditions set by the creditors, in case of Germany, ECB and IMF all guided by monetarist thinking and policies.

Narrow limits on balance-of-payments deficit and surplus would make the EMU countries less divergent.

Jesper Jespersen

5. Public Sector Deficit and Debt: Cause or Effect?

Abstract

Euro-monetarists assume the private sector to be self-adjusting. Therefore, persistent macroeconomic imbalances have to be rooted in dis-equilibrating policies, which manifest themselves in public sector deficits. Euro-monetarists consider business cycles as short term and as minor deviations from the growth trend. The effect of automatic stabilisers should only be accepted within the 3 percent budget limit codified in the Stability Pact. In reality, the private sector is not self-adjusting. Excess savings have, especially after 2008, become common place in most Euro countries, causing the automatic budget deficit to increase far beyond 3 percent. In this way, austerity policy has in many countries increased unemployment without significantly reducing the public sector debt ratio. Fiscal policy is relevant to stabilise the economy considered as a whole.

Jesper Jespersen

6. Macroeconomic Imbalances: Unemployment and Inequality

Abstract

The macroeconomic development in the Eurozone (as a whole) and the major non-Euro countries has been significantly different since 2010. Unemployment in the Eurozone is still much higher than previously, but very unequally distributed. The Euro-realist explanation is lack of effective demand and huge balance-of-payments imbalances within the Eurozone. The Euro-monetarist have to the contrary recommended fiscal restrain and internal devaluations in deficit countries causing stagnating output, increased inequality and a falling wage rate, which tends to ‘beggar yourself and your neighbours’ by a kind of ‘race to bottom’. The non-Euro countries have fared somewhat better by taking stock on their monetary sovereignty through currency devaluations and more relaxed monetary and fiscal policies.

Jesper Jespersen

7. Distressed European Central Bank and Financial Instability

Abstract

Following the recommendation by Euro-monetarists, the European Central Bank’s major responsibility is to secure price stability in the Eurozone by inflation targeting. In reality, the European Central Bank (ECB) had little impact on developments in money supply (M3) and price inflation. Banks behaviour, financial markets and the euro exchange rate were dominated by market forces, which led to financial stress. When the financial crisis hit in 2008/2009 countries with balance-of-payments deficits and large foreign debt had increasing difficulties to get access to capital markets. First, EU set up rescue funds providing emergency loans, later the ECB started to act as lender of last resort. In both cases, debtor countries had to accept strict conditionalities, which prolonged the stagnation within the Eurozone as a whole.

Jesper Jespersen

8. Any Future of the Euro?

Abstract

The EMU in its present form has come to a dead end. Stagnation, high unemployment and huge balance-of-payments surpluses cannot go on. Macroeconomic imbalances and popular discontent accumulate. If a future dissolution similar to the Gold Standard in the1930s should be avoided, a much needed Solidarity Fond has to be set-up. Countries with balance-of-payments surplus above 3 percent and foreign wealth beyond 60 percent of GDP should deposit the excess without interest. The revenue could be used to improve productivity in backward regions of deficit countries. In addition, public finances should no longer be a EU concern, but left to the national governments to decide upon. According to many Euro-realists, the EMU was – and still is – much too prematurely established. The Euro could be kept only as a parallel currency valued as a weighted average of all EU national currencies somewhat similar to the ECU, which worked quite well before the EMU was established.

Jesper Jespersen

Backmatter

Titel: The Euro
verfasst von: Jesper Jespersen
Verlag: Springer International Publishing
Electronic ISBN: 978-3-319-46388-9
Print ISBN: 978-3-319-46387-2
DOI: https://doi.org/10.1007/978-3-319-46388-9

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Über dieses Buch

Inhaltsverzeichnis

Frontmatter

1. Eurozone Crises

2. ‘Optimal’ Currency Area: What Does It Mean?

3. Why Was the EMU Established? Different Perspectives

4. Balance-of-Payments Imbalances have Become the ‘Achilles Heel’ of the EMU

5. Public Sector Deficit and Debt: Cause or Effect?

6. Macroeconomic Imbalances: Unemployment and Inequality

7. Distressed European Central Bank and Financial Instability

8. Any Future of the Euro?

Backmatter

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