lorca-susino - the euro in the 21st century; economic crisis and financial uproar (2010)

List of Graphs viiPART I HISTORICAL AND THEORETICAL INTRODUCTION TO THE EURO 1 historical and Theoretical considerations 3 PART II THE EURO AS A COMMON, INTERNATIONAL, AND GLOBAL CUR

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The euro in the 21st century economic crisis and Financial uproar

MAríA LorcA-susino

University of Miami, USA

© María Lorca-susino 2010

All rights reserved no part of this publication may be reproduced, stored in a retrieval system

or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the publisher.

María Lorca-susino has asserted her right under the copyright, Designs and Patents Act, 1988,

to be identified as the author of this work.

Published by

Ashgate Publishing Limited Ashgate Publishing company

The euro in the 21st century : economic crisis and

financial uproar (The international political economy

of new regionalisms series)

1 euro 2 euro area 3 european union countries

economic integration 4 european union countries

economic conditions 21st century 5 Financial crises

european union countries 6 Board of Governors of the

Federal reserve system (u.s.) 7 european central Bank

8 international Monetary Fund

i Title ii series

332.4'94-dc22

Library of Congress Cataloging-in-Publication Data

Lorca-susino, María.

The euro in the 21st century : economic crisis and financial uproar / by María Lorca-Susino.

p cm (The international political economy of new regionalisms series)

includes indexes.

isBn 978-1-4094-0418-7 (hbk) isBn 978-1-4094-0419-4 (ebk)

1 euro 2 euro area 3 european union countries economic conditions 21st century

4 europe economic integration i Title

hG925.L67 2010

337.1'42 dc22

2010026844 isBn 978 1 4094 0418 7 (hbk)

isBn 978 1 4094 0419 4 (ebk) I

List of Graphs vii

PART I HISTORICAL AND THEORETICAL INTRODUCTION

TO THE EURO

1 historical and Theoretical considerations 3

PART II THE EURO AS A COMMON, INTERNATIONAL, AND

GLOBAL CURRENCY: AN EMPIRICAL STUDY

3 statistical Analysis of the euro as a stabilizer for the eurozone 49

4 The euro as an international and Global currency 81

PART III THE EURO AND THE EUROZONE: BEFORE,

DURING, AND AFTER THE FIRST ECONOMIC

CRISIS OF THE 21ST CENTURY

5 The new Monetary order of the 21st century 111

6 The eurozone and its First economic crisis 143

7 The Future of the eurozone and the eu at a crossroads:

8 The euro in the Twenty-First century: The need for a

The Euro in the 21st Century

2.1 european commission euro Area Business climate indicator 322.2 us conference Board, us Leading index of 10 Ten economic

2.3 GDP based on purchasing power parity (PPP) per capita in

2.4 Inflation in selected AEC countries 372.5 GDP based on purchasing power parity (PPP) in Mercosur

2.6 Inflation in Mercosur full member countries 412.7 current account balances in Mercosur full member countries 412.8 Alternative measures of political and economic integration—six

2.9 economic freedom—six countries compared 432.10 some problematic factors for political integration—six

3.2 us Dollar index with 20-month simple moving average and

3.4 Deutsche mark composite and us Dollar index 58

3.13 Dow Jones industrial Average (DJiA) 643.14 DJiA with 30-month moving average and de-trended 64

3.16 DAX with 30-month moving average and de-trended 66

The Euro in the 21st Century

viii

3.23 crB and crude oil indexes with covariance 69

3.26 crude oil and us Dollar indexes with covariance 71

3.28 us 2-year Treasury note and eurodollar (3 months) 733.29 us 10-year Treasury note and Bund 743.30 eurodollar (1 month) and eurodollar (3 months) 743.31 euriBor (3 months) and eurodollar (3 months) 753.32 euriBor (3 months) and LiBor (1 month) 76

4.1 export activity between eurozone’s Member states 844.2 Total bond issuing activity in eurozone 864.3 evolution of eurozone bond issuing—central and local governments 874.4 sovereign bond spread with German yield 894.5 Evolution of Eurozone bond issuing—corporate and financials 904.6 GDP comparisons—us, eu, and eurozone 944.7 comparison of growth in trade exports to the world 95

4.9 Bond, equities, and bank assets compared (as % of GDP), 2007 984.10 Financial asset comparison—us and eurozone 994.11 hourly compensation costs in manufacturing 1004.12 Labor productivity growth indexes compared 101

4.14 comparison of us and eurozone GDPs 1044.15 Consumer Confidence Indicators—Eurozone and US compared 105

5.2 euro and uK pound, April 2008 to August 2009 125

5.4 special drawing rights, percentage change 1305.5 Time series data on international reserves and foreign currency

5.6 Bank of russia foreign exchange reserves by currency 1365.7 Banco central do Brasil—reserve currency composition 1375.8 chinese yuan and hong Kong dollar 1405.9 Euro and the euro/Hong Kong dollar composite 140

6.1 comparative analysis of government debt levels, 2010 1456.2 euroarea government debt as % of GDP 1466.3 Government debt in eastern eu countries 1476.4 General government financial balances—selected countries 149

6.5 Eurozone government deficits 1506.6 Deficits and surpluses in Eastern EU countries 1516.7 sovereign bond spread with German yield 152

6.11 economic sentiment indicator (esi) 157

6.14 spanish peseta and crude oil index 169

6.18 Average labor costs per worker in spain 1746.19 spain’s trade balances, 1997–2008 1766.20 Academic excellence—comparison of spain with selected countries 1776.21 Labor productivity index—selected countries 1786.22 General government debt as % of GDP—euroarea and spain 1796.23 spain’s total government revenues and expenditures 1807.1 Trade balances for Germany and the eurozone 194

8.3 us Dollar index and trade-weighted us Dollar index 217

8.9 singapore euro and us Dollar index 2248.10 us Dollar index movement—June 2004 to March 2010 225

8.24 self-made us Dollar index and its cross-rates at the critical point 243

The Euro in the 21st Century

x

9.1 Job openings and labor turnover survey 2529.2 comparison of us and eu productivity 2529.3 comparison of us and eu capacity utilization 253

9.5 european commission euro Area Business climate indicator 2559.6 Comparison of Consumer Confidence Indicators—US Conference Board and european commission consumer indicator for the

9.7 Gross household saving rate—share of gross savings as % of gross

1.1 Monetary system date overview 71.2 summary of monetary evolution from the Bretton Woods system

2.1 List of existing and de facto monetary unions 34

2.3 recognized regional economic communities (recs) 36

3.3 summary of stock exchange, crude oil, and crB indexes 51

4.1 Functions of an international currency 834.2 some currencies pegged to the us dollar, the euro, the uK

4.3 credit rating of countries by Moody’s, standard and Poor’s

4.4 Currency Composition of Official Foreign Exchange Reserves

4.5 Leading exporters and importers in world merchandise trade,

4.6 Financial assets, us and eurozone compared (in us$ trillions,

using 2008 exchange rates for all years) 975.1 currency distribution of reported foreign exchange market turnover: percentage share of average daily turnover, April 2007 1155.2 Daily global foreign exchange turnover, 1989 to 2008

5.3 Daily average foreign exchange turnover, net of double-counting,

5.4 Daily foreign exchange turnover and transactions costs, net of

double-counting, by instrument, counterparty and currency,

5.5 Daily foreign exchange turnover and transactions costs, net of

double-counting, by instrument, counterparty and currency,

The Euro in the 21st Century

xii

5.6 comparative analysis: the uK pound, annual turnover and

5.7 Daily averages of trading transactions in the uK pound

(in us$ millions), 2001 and 2007 compared 1225.8 special drawing rights allocations to iMF members since 1970 126

5.10 Participants and credit amounts in iMF’s nAB and cAB

5.11 Foreign exchange turnover, net of local and cross-border interdealer double-counting, by instrument, counterparty and currency

5.12 estimated reserves of foreign exchange and gold (as at

5.13 emerging and developing economies (in us$ millions) 1356.1 some european corporate defaults in 2009 1536.2 Macroeconomic data in time of crisis 1666.3 structural and cohesion funds received by spain since 1986 1666.4 credit default risks as measured by credit default swaps prices

(cost in us$ for a us$10,000 debt for 5 years) 1727.1 estimated global exposure to Greece’s default 1877.2 Cost–benefit analysis of introducing the Economic Monetary

7.3 The Lisbon Agenda – employment rate objectives 201

8.2 Summary of ideas and fields used 226

Joaquín Almunia

This insightful and timely monograph by María Lorca-susino is likely to meet the needs of a diverse readership: academics, policy-makers, and analysts of finance, economics, and European affairs This broad appeal should not come

as a surprise if one considers the topics chosen by the author and her courage in dealing with their complex and sensitive repercussions

The introduction of the euro and the creation of the eurozone are among the greatest achievements of europe’s process of integration however important these achievements have been for financial and monetary policy and for the internal market, their significance is not limited to these domains I have long held the author’s view that the euro has strong political, social, and cultural implications, which will become increasingly clear in the years to come The present study also offers a timely analysis of recent events, as evidenced by its sections devoted to the economic and financial crisis that started in 2008 and that is—at the time of this writing—still with us

We can be proud of our common currency and of what it has done for the european union over the past ten years The euro has brought stability, trade and investments to the countries that have adopted it The euro has also brought large benefits to the other countries of the EU, principally because it has shown what europe can do when it stands united behind an ambitious project Finally, the euro has become an international currency and a pillar in the global monetary system; as such, it has projected a strong image of europe in the world and has become a symbol of our unity and determination

since the end of 2008, the euro has helped the eu weather the economic and financial storm The crisis hit just as the Eurozone was establishing itself as

a model for the world to study and emulate and has since tested eu countries’ ability to play as a team both within the union and on the world scene i am convinced that the eu will once again manage to turn the formidable challenges

of these months and years into fresh opportunities for the european project The need for stronger and smarter supervision of the financial sector is one of the main lessons europe has learned in these testing times over the past few years, supervision has remained largely national, while financial services have grown increasingly global As a consequence, the case for a set of reforms that would adapt our regulatory frameworks to reality has become compelling While day-to-day supervision will remain a national responsibility, common supervisory

The Euro in the 21st Century

xiv

authorities will allow everyone to play according to the same rules; they will reconcile differences between national authorities; and they will make sure that

eu law is applied correctly and uniformly

in this context, i would like to comment on the belief held by some that there is an inherent tension between regulatory and market forces i regard this view as misguided for two main reasons: first, because a clear and coherent legal framework is essential in all areas of business and, second, because markets are not natural phenomena that occur beyond our control; they are human constructs and social institutions; they exist to serve society in essence,

a market is established, defined, and governed by a set of agreed conventions and formal rules set by society; there is no principled contradiction between regulation and the market The application of eu competition rules is a good example Competition policy ensures that markets are open, fair, and efficient;

it creates a level playing field for all businesses and it ultimately brings benefits

to enterprises and consumers alike

As to the broader policy implications, the current crisis has taught us that europe needs to couple stability-oriented macroeconomic policies with structural reforms if we are to meet our goals for growth and social justice recent analyses carried out by the european commission identify the creation

of favorable conditions for entrepreneurship and innovation as priority areas swift and incisive policy initiatives can create a better environment for business

in europe, where companies can become more competitive and thrive This will help Europe’s entrepreneurs to profit from the recovery in world trade driven by growing demand from emerging economies; perhaps one of the best routes that can take us out of the recession and put us back on track

i believe that economic policies are means to higher ends To cite from

“europe 2020”—the overall strategy the eu has adopted as a beacon for all its policies in this second decade of the century—our efforts must be directed towards the creation of a smart, sustainable and inclusive economy delivering high levels of employment, productivity and social cohesion i am happy to note that Dr Lorca-susino adopts a similarly broad outlook, explicitly linking the risks associated with soaring national debts to economic hardship on the ground and their likely consequences on the standards of living of our fellow european citizens

This is the most important reason why we need to take concerted action at european and national level; ensuring good economic policies is a matter for everyone’s concern The european commission will not tire in encouraging structural reforms across the eu We will also continue to support policies that deepen and broaden macroeconomic surveillance i am fully aware that the comprehensive and ambitious agenda we advocate requires a fair amount

of political will, determination, and coordination among national authorities

Works such as The Euro in the Twenty-First Century are very useful in this

respect, because they offer policy-makers a sound and impartial basis for their

debates, negotiations and deliberations european citizens demand that budget cuts, austerity plans, and more flexibility go hand-in-hand with more and better opportunities, and enhanced social cohesion it is the task of europe’s leaders to heed this call and revive the success of the euro’s first roaring decade.

Joaquín AlmuniaJuly 2010

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i would like to acknowledge the help and support received from Dr Joaquín roy and Dr Michael B connolly Also, i would like to thank the academic ideas received from every single paper published by the european union center at the University of Miami under the Jean Monnet/Robert Schuman Paper Series and the european union Miami Analysis (euMA) special series Finally, special thanks

go to Dr Bruce Bagley, Dr Manuel santos, and the university of Miami

To my Family

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ACP Countries African, Caribbean, and Pacific Countries

BDL Bank Deutscher Länder

Bric countries Brazil, russia, india, and china

cAD canadian dollar

cAP common Agricultural Policy

cDs credit default swaps

cMe chicago Mercantile exchange

co crude oil index

COFER Composition of Official Foreign Exchange ReservescPe central planned economy

cPi consumer Price index

crB commodity research Bureau

DAX German Deutscher Aktien indeX 30

Dem German mark or deutsche mark

DJiA Dow Jones industrial Average

D-mark German mark or deutsche mark

ecB european central Bank

ecoFin economic and Finance council

ecoWAs economic community of West African states

ecsc european coal and steel community

ecu european currency unit

eec european economic community

eFTA european Free Trade Association

eMi european Monetary institute

eMs european Monetary system

eMu economic and Monetary union

erM exchange rate Mechanism (erMii after introduction

of the euro, if distinction needed)escB european system of central Banks

euratom european Atomic energy community

euriBor euro interbank offered rate

FDi foreign direct investments

The Fed us Federal reserve Bank

The Euro in the 21st Century

xx

Fed Funds Federal Funds rate

FrG Federal republic of Germany

GDP gross domestic product

GDr German Democratic republic (formerly east Germany)GnP gross national product

hicP harmonized index of consumer Prices

iGc intergovernmental conference

iMF international Monetary Fund

iTL italian lira

Jer Joint employment report

LiBor London interbank offering rate

LMu Latin Monetary union

nBer national Bureau of economic research

ncB national central Banks

nyBT new york Board of Trade

nyse new york stock exchange

oAPec organization of Arab Petroleum exporting countriesocA optimum currency area

oecD organization for economic cooperation and Developmentoeec organization for european economic cooperationoPec organization of Petroleum exporting countries

PiiGs countries Portugal, italy, ireland, Greece, spain

sDr special drawing right

seA single european Act

sGP stability and Growth Pact

TFeu Treaty on the Functioning of the european union

TMT technology, media, and communications

us united states of America

ueMoA African economic and Monetary union

usDX us Dollar index

ussr union of soviet socialist republics

WAMZ West African Monetary Zone

WWi World War i

WWii World War ii

hisToricAL AnD TheoreTicAL inTroDucTion

To The euro

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historical and Theoretical considerations

This chapter uses a new regionalism approach to examine how the introduction of the euro has affected the so-called “new world order” in the twenty-first century and how the current economic crisis and financial uproar is affecting both the new order and the tenets of the new approach

The introduction of the euro created the eurozone, a new region considered

a supranational or world region with an important role in the current global transformation The euro has demonstrated that although it was introduced as an economic tool for integration, it has a political, social, and cultural dimension Thus, the euro has become a multidimensional form of integration because the actors behind integration are not only states, but also a large number of institutions and organizations with the political desire to strengthen regional coherence and identity The eurozone should be considered the core region because it is economically and politically dynamic and structured and the rest of the european union (eu) and non-eu members relate to it Particularly, this chapter explains how, under new regionalism, the eurozone and the euro have helped increase not only economic, but also political, social, and even cultural homogeneity respecting diversity

Further, this book reflects that the current economic crisis and financial uproar has affected the new regionalism trend that began in the 1980s with the political and economic integration efforts in the eu and the eurozone The current economic events are affecting the integration process in the eu and the eurozone

in two dangerous but interesting ways on the one hand, the economic crisis has negatively affected to different degrees the economies of some countries such

as Portugal, italy, ireland, Greece, and spain in particular, Greece, spain, and Portugal are in financial and economic positions that are halting the integration program, particularly financial and economic integration On the other hand, these economic difficulties are pushing certain countries to look inward in a sort of defensive mechanism such is the case of Belgium, the uK, and in spain, where national nationalism is suddenly being revamped and is now becoming more skewed than ever as the economic situation is getting worse As a consequence, countries that were in line to adopt the euro are rethinking their view on becoming part of the eurozone Mainly, the impossibility of using monetary policy as a method of adjustment in the event of deep monetary problems, added to the lack of coordination among eurozone Member states on how to tackle the current crisis, has also made certain countries wanting to join the eu and the eurozone change their prospects Furthermore, the current crisis has affected other integration projects such as Mercosur and the African integration however, Asian countries

The Euro in the 21st Century

4

seem to be immune and January 1, 2010 has become a milestone date because

it was the beginning of the china-AseAn Free Trade Area This agreement, which has an economic purpose in mind, is a “breeze of fresh air” for models for regional unity because “today, the free trade area is of greater significance amid the ongoing global financial crisis and rising trade protectionism when developing

countries are more vulnerable because of their fragile economies.” (People’s Daily Online 2010)

Finally, this chapter introduces an overview of the rest of the book’s contents and presents the book’s research design and methodological approach, because this book uses a number of time series and statistical approaches to strengthen its findings in order to provide the conclusion with a solid theoretical and statistical foundation Also, chapter 1 explains what have been the technical and theoretical difficulties found along the way This chapter explains that the EU and the Eurozone suffer from an important lack of time series availability and variety The fact that it

is complicated, at best, to find the same time series for a number of countries in the same time frame and period of time makes any quantitative analysis complex

The Twentieth Century: Regionalism and the New World Economic Order

The twentieth century witnessed dramatic changes in the state and nature of government and governance This century endured two major world wars, a cold war, a major economic recession, and a number of minor ones however, all these events seem to have taught that conflict and confrontation result in nothing but social misery and economic pauperism

Thus, although the first half of the century witnessed two world wars, the second half of the century put to work the lesson that cooperation is more productive than destruction In particular, the end of the Cold War and the first stages of globalization made a number of geographically closed countries realize the benefits of cooperating and coordinating economic strategies to find synergies in a non-zero-sum game The devastation of World War ii and the economic situation

in which most of world’s nations were immersed required the arrangement of the economic system, beginning with the urgency for fixing dangerous imbalances in the currency system in order to control currency fluctuations and allow commerce

to flourish

After World War ii, the world had to be completely reconstructed The regionalist approach provided the right set of tools because, according to Wallis,

regionalism was characterized for being all about government, structures,

coordination, and power For instance, regionalism was oriented towards empowering any one government with the mandate to “construct” and defend the nation while the world was going through one of the most turbulent periods

of history regionalism was concerned about developing the public sector to create a backbone of government, which consequently was necessary to establish structures The devastation of the two wars had left nations and governments

with almost no structure, and it was necessary to spend resources on the creation and organization of much-needed government and country structures for the efficient functioning of nations Furthermore, regionalism was closed because it was concerned with defining boundaries and jurisdictions that ranged from the delimitation of national borders to the design of economic, political, and social policies that needed to be implemented As a consequence, it was clear that countries were looking to coordinate how to best implement those policies, and

as Allan Wallis (n.d., 4) explains, “coordination typically implied hierarchy; for example, a regional authority with powers to determine the allocation of resources

to units of government within its boundaries.” Finally, all these four factors required accountability, which is a way of analyzing if the established goals have been accomplished and implementing corrective measures if they have not

A number of economic and monetary systems were put in place, and although none worked out completely satisfactorily, they were all stepping-stones rather than stumbling blocks and contributed to the need for cooperation at the economic and monetary level in order to strengthen synergies to enhance governance, government, and the living standard of the population Thus, attempts at the monetary level unveiled the advantages of monetary and economic integration.The first stepping-stone that led to regionalism was the creation of the Bretton Woods system (July 1944–August 1971) During Bretton Woods, european currencies were under control because countries participating in the system signed

an agreement in which national authorities were to submit their exchange rates

to international disciplines This system bolstered coordination and planted the seed for further cooperation and the beginning of regionalism under the Bretton Woods system, the us dollar was the numeration of the system, or the standard to which every other currency was pegged; this meant that other currencies were to peg their currencies to the us dollar and maintain market exchange rates within

± 1 percent of parity At the same time, in order to bolster faith in the dollar, the

us agreed to link the dollar to gold at the rate of $35 per ounce of gold When the US economy began to weaken, loss of confidence in the dollar prompted other countries to redeem their dollar reserves for gold, further weakening us exposure F.W engdahl (2004, 140) explains that “at the end of 1967, international holders

of dollars went to the new york Federal reserve Gold Discount Window and demanded their rightful gold in exchange.” De Gaulle’s economic adviser, Jacques rueff, went to London in January 1967 with a proposal for raising the price of gold, which would in turn mean the devaluation of the us and uK currencies Washington refused to change the $35 per ounce official valuation of gold Because the us was neither going to exchange dollars for gold nor change the gold valuation, France, the country that had most requested to redeem dollars for gold and was one of the largest holders of gold, withdrew from the system nonetheless, engdahl (2004, 142) explains:

France itself was the target of the most serious political destabilization of the postwar period Beginning with the leftist students at the university of strasbourg,

The Euro in the 21st Century

6

soon all of France was brought to a chaotic halt as students rioted and struck across France coordinated with the political unrest (which, interestingly, the French communist Party attempted to calm down), u.s and British investment houses started a panic run on the French franc, which gained momentum as it was touted loudly in Anglo-American financial media The May 1968 student riots in France were the response of the vested London and New York financial interests

to the one G-10 nation which continued to defy their mandate Taking advantage

of the new French law allowing full currency convertibility, these financial houses began to cash in francs for gold, draining French gold reserves by almost 30% by the end of 1968, and bringing a full-blown crisis in the franc.

Under the Bretton Woods System, Germany’s industry became the most efficient and competitive sector in europe, and its economy became the leader among those of other european nations The secret of this success rested in Germany’s industrial ability to take advantage of increases in demand within its borders and within most european countries by maintaining strong productivity growth while keeping labor costs from rising and achieving sound export competitiveness

As Germany’s export surplus began to grow, becoming a national symbol of monetary and economic performance, economic imbalances began to surface for other European countries In fact, most European “firms constructed their growth strategy mostly on extracting productivity growth without much investment but

by using existing capacity” (halevi 2005, 4) Germany, instead, would use those surpluses to modernize its industries, which helped to develop new products and improve productivity

The Bretton Woods system worked well as long as the us economy remained strong and countries agreed to hold dollars on the basis of their value in gold unfortunately, in the 1960s, due to the decline in the us’s balance of payments position, the system began to collapse As a result, there was an oversupply of dollars held by foreign banks, and countries were less willing to hold dollars These countries soon began to redeem their dollars for gold, resulting in a fall in gold reserves and an increase in the gold price in August 1971, President nixon announced that the us would no longer exchange dollars for gold, and the us dollar was removed from the Bretton Woods gold standard

After the collapse of Bretton Woods, currencies opted for a system of floating rates However, this system soon proved not to be beneficial In an attempt to restore order to the exchange market, ten leading nations made up of the european

economic community (eec) Member states, as well as the uK, ireland, and

Denmark, met at the smithsonian on December 16 and 17, 1971 This partnership

marked the first step in regionalism Two days of negotiations resulted in a new

system of exchange-rate parity that was called the “smithsonian Agreement.” As Daniels and Vanhoose (2004, 12) explain, “Although this new system was still a dollar-standard exchange-rate system, the dollar was still not convertible to gold.” unfortunately, the smithsonian Agreement collapsed within 15 months and a de

facto system of floating rates emerged The reason for this collapse is explained by Mundell (2003, 12) as follows:

The us monetary policy was expansionary in the 1972 presidential election year and the balance of payments deficit built up large dollar balances in Europe and Japan In February 1973 the U.S raised the official price of gold to $42.22

an ounce (where it remains to this day) This devaluation only served to whet the appetites of speculators and the crisis intensified The market price of gold soared and exchange markets became turbulent.

After the collapse of this agreement, european countries realized that they really needed to seek currency stability and independence from the us dollar This time they signed the Basle Agreement, on April 10, 1972, which had been designed as

an intervention system of the central banks This intervention system, commonly known as the “currency snake,” limited fluctuations between currencies and the US dollar to a maximum of 2.25 percent and fluctuations between any two currencies participating in the snake to a maximum of 4.5 percent

unfortunately, this system failed mainly because economic events, led by us dollar fluctuations, made it impossible for the majority of currencies in the snake

to remain within the fluctuation bands Members participating in the snake were constantly leaving and entering For example, the uK and ireland left the snake in June 1972; italy left in February 1973; and France left in January 1974, rejoined

in July 1975, and left again in March 1976 (schwartz 1983) By March 1973, only Germany and the Benelux countries remained in the snake system, underscoring once more the cohesion of the FrG economy and the strength of the D-mark Furthermore, these events demonstrated that those countries that were not inclined

to pursue price stability to avoid inflation were doomed The lesson learned was that in order to have currency stability, countries must follow a uniform monetary policy consequently, Germany’s helmut schmidt and France’s Valéry Giscard d’estaing did not give up on the dream of engineering a united europe To ensure currency stability, they originated the european Monetary system (eMs).Table 1.1 summarizes the dates of the various arrangements discussed above

The european Monetary system March 1979–December 1998 The economic and Monetary union January 1999 to present

The Euro in the 21st Century

in line” to join the eu, which gives a sense of emptiness on the other hand, it seems as if the Lisbon Treaty impasse has stalled the deepening process, because there has been scant progress in integrating the eu in areas such as security, defense, immigration, and social policies in addition, the four freedoms are still not fully implemented, and economic integration has not been accomplished This situation has been worsened with the economic crisis and financial uproar that has made certain actors wonder about the eu project, particularly because economic and monetary integration successes have been the fuel necessary for the eu and the eurozone to continue moving forward The Lisbon Treaty impasse was the result of an implacable economic situation in ireland that let society reject

it, and in the UK, the vision of the euro changes with the economic difficulties

of the country currently, the uK is facing one of worst recessions in history, and the actual position is that 75 percent of the population would reject adopting the euro (Tax Payers Alliance 2009) Finally, the current economic situation in Greece and the necessity for implementing harsh budgetary reforms are causing social upheavals and many complain about the prudence of remaining within the eurozone and the eu

David Marsh (1993) explains that the european Monetary system (eMs), introduced on March 13, 1979, became the ultimate plan designed to obtain monetary cooperation among members of the European Union in order to finally provide the currency stability necessary for the introduction of a common currency

in order to achieve this goal, Member states had to work towards synchronizing their economies in many areas, which increased their feeling of belonging to a group Because european countries trade more with each other than with the rest of the world, it made sense for them to transcend currency fluctuations and transaction costs in order to allow trade to flourish even more As a consequence, the eMs came into effect in 1979 with the blessing of the Federal republic of Germany (FrG), which wanted to ensure its export grounds and surpluses by putting european currencies under the control of the exchange rate Mechanism (erM) (see Table 1.2) The eMs became a successful mechanism and was operative until December 31, 1998 when Member States fixed their currencies to the euro The introduction of the eMs in 1979 launched many economies further into an expansionary economic cycle that boosted productivity, exports, employment, internal demand, and investment in both equipment and construction This has been considered the new regionalism approach in action

Despite many setbacks, neither the political nor the economic project of a united Europe were abandoned, and the first stage of the Economic and Monetary union’s (eMu) adoption of the euro was eventually introduced on July 1, 1990

With the introduction of the eMu, the D-mark became the anchor currency and the Bundesbank became the de facto central bank for the other countries because it was doing the best job of keeping inflation low The problem arose due to the strength

of the German economy and the low-inflation policies of the Bundesbank, which ultimately forced other countries to follow its lead countries were able to follow the Bundesbank but, by the mid-1980s, were driven to use changes in interest rates

to maintain their currencies within the bands however, at the beginning of the 1990s, the eMs was strained by the differing economic policies and conditions of its members, particularly those of the newly reunified Germany, and a revision of the eMs requirements was necessary The Brussels compromise, in August 1993, awarded the EMS with a new fluctuation band of ± 15 percent

System to the European Monetary System

european Monetary system (eMs) Currency fluctuation

of +/-2.25% (6% for italy).

Maintains the eMs system of currency fluctuation for those currencies willing

to adopt the euro in January 1, 2000.

Despite all the ups and downs, the eMs worked well Most importantly, the eMs ended with the imposition of rigid bands, which never helped to stabilize the currency, but rather attracted currency speculators however, the eMs did help stabilize the currency to the point that—in the mid-1980s, when Jacques Delors became President of the european commission—the momentum was perfect for the creation of the common currency With the introduction of the euro, regionalism and its proposals made a step forward to a new regionalism approach

The new regionalism approach better explained the necessity to promote even freer trade and economic integration, because it was proven that regionalism had positive political effects new regionalism has been called a “halfway house between the nation-state and a world not ready to become one” (McMahon and Baker 2006, 3) Allan Wallis stated that the interest in a newer version of regionalism was the result of the globalization of the economy that at the end

of the cold War allowed for “international trade agreements, like nAFTA, and the development of a european community all demonstrate reduced economic competitiveness on a country-by-country basis, and increased competitiveness on

a region-by-region basis.” This new approach was strengthened with the creation

The Euro in the 21st Century

in fact, new regionalism is, according to Fredrik söderbaum (2003, 1),

“characterized by its multidimensionality, complexity, fluidity and non-conformity, and by the fact that it involves a variety of state and non-state actors, who often come together in rather informal multi-actor coalition.”

According to Allan Wallis, the new regionalism approach is characterized

by five key elements that perfectly well explain the foundation of the EU and the eurozone First of all, the european project is fundamentally concerned with governance, because the main role of institutions such as the european central Bank or the european commission is to set the goals of what must be accomplished, establish the rules, and implement the regulation necessary to achieve these goals Furthermore, these goals are achieved through the implementation of a process in fact, in order for countries to join the eu, it is necessary that certain objectives are met, which requires the implementation of a process rather than mere structures Also, recommendations on certain structural reforms—for example, labor market reforms—advise the introduction of a number of processes intended to improve employment rates second, new regionalism is concerned with open boundaries,

a concept implied in some of the policies that have been pooled from each nation,

as well as the concept embedded in the four freedoms so characteristic of the eu Third, new regionalism entails collaboration, a trait found in most of the Treaties and Directives, the Lisbon Agenda, or even in the newly introduced europa 2020 collaboration means canceling all coercive measures, which annuls the need to implement the necessary structural reforms because they can be implemented

as collaborative rather than as punitive measures This goes hand in hand with the fourth characteristic of new regionalism: that Member states operate on a basis of trust and not accountability This means that Member states are trusted

to implement the recommendations and not held accountable if they do not For instance, the current economic and financial crisis has been deepened by the fact that some eu Member states had not been meeting the necessary requirements and were not held accountable for not doing so for years

The integration process is currently at a crossroads, however, because it has

hardly been tested The Lisbon Treaty impasse and the current economic crisis are testing the foundations of the union to the point that support for the project

is being negatively affected in fact, different actors are beginning to raise doubts and concerns concerning the integration process First, it is questioned as to

whether globalization is still positive for the economic development of a nation second, there is close scrutiny as to whether the eu is still the best actor to defend nations’ battered economic interests certain countries are in the middle of a harsh economic recession, and certain actors are wondering if being part of the eu and the eurozone is still in their best interests under these circumstances and feelings,

it might be that the eu—borrowing but adjusting Barry Buzan’s idea—is no longer regarded by important powerful actors as a “regional economic complex,” understood as a group of states whose economic needs and concerns are so highly interlinked that it is almost impossible to differentiate the economic needs and concerns of any one of the nations in isolation This is what the eurozone and the

eu is expected to have become, because the four freedoms, the introduction of the euro, and the objective of becoming a solid economic bloc should have forced economies to become one The current economic crisis and the impasse of the Treaty of Lisbon have significantly weakened the project

Therefore, a thorough analysis of the european feelings recorded in the Eurobarometers demonstrate that under the current economic crisis and financial uproar, europeans are falling out of love with the eu and the eurozone and are in fact seeking to go back to the nation-state as a provider and defender of interests

In fact, Eurobarometer 71 (Eurobarometer 2009b) has reported significant shifts in public opinion about the eu and its institutions A detailed analysis of these studies demonstrated that european public opinion on the role of the eu, globalization, integration, and enlargement has suffered a setback, which could eventually become negative for the support of the project eurobarometer’s analysis demonstrates that europeans are drifting away from the global vision of the eu and turning

to their national governments for coverage and even protectionism with renewed nationalistic feelings

This trend indicates that, under the current economic crisis, europeans would rather trust their national government to help them cope than they would institutions of the eu eurobarometer 72 (2009c) reports that there has been a dramatic shift in opinions concerning the institution that europeans believe could better handle the current economic crisis suddenly, europeans are forming a growing consensus that national governments are better fitted to solve the current economic crisis than the institutions of the eu in detail, whereas eurobarometer

71 states that only 12 percent felt that their national government had the right tools

to tackle the crisis while 21 percent defended the eu in this role, in eurobarometer

72 (2009c), national governments had the support of 19 percent of europeans while only 22 percent believed that the EU was better fitted to take effective action to deal with the current situation This concludes that there is an increased inclination among europeans towards the national governments however, the

eu is still the preferred actor nonetheless, this conclusion is strengthened by the fact that before 2008—when the current economic situation became a global issue—public opinion held that the eu was the best actor to take care of a harsh economic situation (eurobarometer 2009c) This agrees with the public opinion that stated before the crisis that the EU had “sufficient power and tools to defend

The Euro in the 21st Century

12

its economic interests in the global economy” (eurobarometer 2009c) however, under the current circumstances, this confidence has decreased significantly special eurobarometer 307 explains that 43 percent of europeans believe that the national level is the level exercising the most impact on their daily lives whereas

9 percent believe it is the european level and 38 percent believe that it is the regional or local level Also, 50 percent of europeans believe that the regional or local authorities are the institutions to trust, against 47 percent who believe the eu

is the best actor (eurobarometer 2009) concerning the future of the eu, in June

2007, 58 percent of europeans felt fairly optimistic, whereas only 11 percent felt very optimistic (eurobarometer 2007b) Finally, the current crisis has negatively affected the opinions of europeans towards globalization, with 43 percent of europeans believing that globalization presented a threat to employment and companies in their respective countries in november 2008, and only 39 percent believing it was a good opportunity (eurobarometer 2008)

As a consequence, europeans have changed their opinion of the integration process as well as of the enlargement and the euro concerning the current speed

of the ongoing integration process and the construction of europe, the results evidence a desire to reduce the speed of building europe (eurobarometer 2005), which coincides with the fact that 55 percent of europeans believe that “things are going in the wrong direction” in their country, with 39 percent having misgivings about the eu level (eurobarometer 2008d) As a consequence, the images of the eurozone and the euro have suffered a deterioration, and “more than two-thirds of non-member states citizens thought that their country should not rush into joining the euro area: 36 percent would like to have the euro introduced after a certain time and one-third as late as possible” (eurobarometer 2008c, 3) Furthermore, the current economic crisis has affected european opinion on the euro’s introduction

in september 2007, 45 percent of the population favored the introduction of the euro, with 35 percent rather or very much against it Two years later, the polls showed that in september 2009, 44 percent of the population favors it and 37 percent are against it (eurobarometer 2008c) Although this is not a dramatic change, it may indicate a trend

The impact of globalization on national economies and the current economic crisis force governments to put in place bailout plans, and yet economic and political nationalism have still emerged These nationalistic feelings are strengthened because europeans feel their economic security and standard

of living are seriously threatened because there has been a “substantial loss of jobs in manufacturing; in recent years this has been particularly associated with companies moving their manufacturing plants to eastern europe, india, china, and the Far east” (european Movement 2006) Thus, according to raymond J Ahearn (2006), “since the summer of 2005, a number of eu member states have erected barriers to prevent cross-border mergers and acquisitions that undermine the effort to deepen the single market.” The latest eurobarometer shows that 61 percent of europeans believed in the middle of 2009 that the worst was still to come (eurobarometer 2009c) This state of mind explains the recent revival of

protectionism and nationalistic feelings This situation is attacking the essence

of the idea behind the single market and the basic foundation of the integration process curiously enough, this trend is coming from some Member states’

“governments (and or politicians) fearful of losing national prestige and jobs as a result of merger activity” (Ahearn 2006, 4) For instance, the uK’s conservatives have clearly stated that if they win the upcoming election (in May 2010) they would never adopt the euro and that they will not be in favor of any more transfer

of sovereignty to the eu without a proper national referendum

Chapters in this Book

What follows is a brief introduction to the individual chapters The purpose of chapter 2, “The euro as a common currency,” is threefold First of all, this chapter summarizes the main tenets of the optimal currency Area (ocA) and explains the theoretical evolution of this theory since it was first presented by robert Mundell, in 1961, in the paper titled “A Theory of optimal currency Areas,” until it was finally used as the theoretical framework for the creation of the euro in 1999 secondly, this chapter succinctly overviews the most important attempts to introduce a monetary and economic union; thus, it reviews the various efforts taken since the Latin Monetary union of 1865, up to the Delors reports and the introduction of the economic and Monetary union This chapter stresses the fact that all these failed attempts must be considered stepping-stones that had led to the perfection of a long-time dream: the introduction of a successful common currency Finally, chapter 2 analyzes integration attempts in Africa and

in the southern zone and compares these attempts with the eu and the eurozone

to identify a number of reasons why these two blocs are not making progress with their integration efforts Today, the creation of the european economic and Monetary union (eMu) has proven to be a good shelter from the current economic storm, and the euro has become an anchor of regional stability and integration As a consequence, the eurozone has become an example to follow, and the common currency has come to be regarded as the solution that will end economic crises and prevent further ones in light of these outcomes, the current chapter explains how African and Latin American countries are all reconsidering the importance of regional monetary integration This chapter reviews the fact that many of these countries have already integrated into a number of trading blocs This chapter also analyzes the fact that although the African effort is slowing down yet achieving results, the Latin American attempts have unfortunately proven to

be crisis-prone as well as both economically and politically unstable As a result, they have not been able to fully reach their trading potential, let alone achieve monetary integration in light of these circumstances—and taking the eurozone

as a benchmark—this chapter addresses the economic and monetary sacrifices as well as the difficulties that all those countries willing to form a solid single market, and eventually a monetary union, must face and endure

The Euro in the 21st Century

14

chapter 3, “statistical Analysis of the euro as a stabilizer for the eurozone,” analyzes whether the euro has truly become a common currency in order to conclude affirmatively that the euro is a common currency and a stabilizing factor for the eurozone, this chapter focuses on a thorough, innovative, quantitative analysis

of the fitness of the euro as a stabilizing factor, using a vast variety of indexes

in three markets: the foreign exchange market, the stock market, and the money market First, the euro is studied in the foreign exchange market with the purpose

of comparing and explaining the evolution of the euro vis-à-vis other currencies second, the evolution of the euro is analyzed to explain how the common currency

is affecting the stock market cycles on both sides of the Atlantic, demonstrating that the introduction of the euro has helped synchronize stock indexes and provide european investors with wider investing opportunities Furthermore, this chapter presents an interesting study that shows that the euro has helped keep inflation under control, which is one of the “musts” of the common currency This study

is presented with an innovative graphical analysis of the relationship between the evolution of crude oil, commodity prices, and the euro Third, this chapter analyzes the euro and its impact on the money market indexes This study is important because the european central Bank uses the money market as an escape valve to fight inflation and to maintain price stability, and this will affect the money supply and the value of the euro vis-à-vis other world currencies This section revises the us money market to provide a basis for understanding the money market in the eurozone This chapter becomes particularly innovative as it introduces three statistical studies The first one is the covariance used to measure the extent that two random variables vary together, defined as Cov(x,y) = E{[x – E(x)][y-E(y)]} The importance of this statistical method is that the result obtained will indicate the relationship, or lack thereof, between two random variables For instance, when the result of the covariance is negative, it indicates that the two random variables have varied in opposite directions, meaning there is no linear relationship between the two Also, the larger the magnitude of the product, the stronger the strength

of the relationship The covariance presented in the chapter is a custom-made formula that has been altered and programmed as a built-in effect in the omega Prosuit 2000i computer program This covariance has a length of 30 months (or periods) and has been programmed to move within a –0.35 to +0.35 range The second statistical tool used is the “de-trend.” When a time series is de-trended, the secular trend is removed from the macro data: therefore, the cyclical and growth components of that time series is disentangled De-trending a time series is a controversial aspect of the business cycle study because it implies transforming data, and some scholars believe this is a manipulation of pure data however, de-trending has been demonstrated to be particularly useful when studying certain time series exhibiting high volatility Finally, a number of series has been studied using a 20-month simple moving average A simple moving average is a statistical technique used to analyze a set of data points by creating an average of one subset

of the full data set at a time with each number in the subset given an equal statistical weight in this chapter, a 20-month simple moving average is used, which means

a 20-month simple moving average of closing price is the mean of the previous

20 months’ closing prices if those prices are: PM, PM-1, PM-2, PM-3 … PM-19, then the formula is SMA = {(PM + PM-1 + PM-2 + … + PM-19) / (20)} Finally, each time a new data (month or period) is added to the time series, the entire moving average is recalculated to account for the new value added while dropping out the old one

The purpose of chapter 4, “The euro as an international and Global currency,”

is twofold: to analyze if the euro has become (a) an international and (b) a global currency This chapter shows that the creation of the european Monetary union and the introduction of the euro brought about an intense debate concerning whether or not the euro would manage to challenge the status of the us dollar and the hegemonic power of the united states consolidated since World War ii For this challenge, the euro had to first consolidate its position as a common currency, then gain recognition as an international currency, and finally become a global,

or dominant, currency As the euro gained international financial recognition, it became a stabilizing tool capable of furthering the political integration process of the eu The euro has provided the economies of europe with a degree of collective macroeconomic stability, flexibility, and economic transparency that individual Member states could never have achieved on their own Therefore, the effect of the euro has been not only economically but also politically significant, because its inception as an international currency has provided enough weight to garner, for Europe, some of the political influences heretofore enjoyed solely by the US due

to the hegemony of the dollar since World War ii

This chapter studies whether or not it can be claimed that the euro has become

an international and global currency The results show that the euro has developed a solid market that has consequently eroded some of the advantages that historically supported the hegemony of the us dollar as a global, or dominant, currency hence, the euro can be considered an international currency; nevertheless, the

us dollar remains the sole global currency There are two correlated reasons that explain the reign of the us dollar on the one hand, there is an inertia in the use

of the us dollar due to years of currency preeminence on the other hand, this preeminence has given the greenback an edge over the euro in terms of the size, credit quality, and liquidity of the dollar financial market over the euro financial market The preeminence of the us dollar has helped the us exercise political hegemony, which has resulted in the “Pax Americana.”

The euro has, nonetheless, transformed the eurozone into a solid and internationally respected economic bloc with a wide area of influence and with

an ever-increasing voice in the political and economic arena however, these achievements have oftentimes been the target of fear and confusion as expressed by public opinion and representing the perspective of the euro-skeptics nevertheless, the reality is that the eurozone has become viably competitive with the us for the first time in history

Chapter 5 explains that the current economic crisis and financial uproar that began in september 2008, globalization, and the necessity of achieving economies

The Euro in the 21st Century

16

of scale and synergies to keep high competitiveness levels are all pushing to reform the current international monetary order The current global monetary system is anchored in the us dollar at a point of time when the world has reached sophisticated economic and monetary synergies due to globalization forces.From a monetary point of view, the need for a new global monetary system

is based on the fear that if the US government continues running the deficit to counter the worst recession since the Great Depression, the value of the us dollar will decline, negatively affecting the value of held assets in this currency, especially when almost 75 percent of today world’s currency reserves are held in

us dollars consequently, it is believed that the current us dollar-based global monetary system must be revised and that a more inclusive system should emerge This chapter explores two alternatives First, some advocate the need for having

an international reserve currency other than the us dollar, disconnected from any particular country, and find in the IMF’s Special Drawing Rights the right tool Second, some proclaim the benefits of having a single, global, common currency and monetary system managed by a global central bank within a global monetary union

This chapter, therefore, explains that robert Mundell, the father of the euro, has been advancing the idea of a global common currency for some time now, claiming that a reduction in the number of currencies in circulation will reduce transaction costs, increase price transparency, and force economic synergies he has named this global currency the “intor.” it is not supposed to be a single currency; rather, countries and areas would keep their own currencies, which would circulate along with the intor Further, Mundell has lately been advocating the need to have a fixed dollar–euro rate to avoid big swings in the exchange rate He believes that implementing this fixed rate would be an easy and convenient way of increasing world trade because the us and the eurozone make up almost 50 percent of the world economy

The introduction of a global common currency will have a direct impact on the foreign exchange market and its two participants—the customer and the market maker—because it would eliminate transaction costs for the customer and reduce benefits for the market maker These transaction costs and benefits are measured

by the spread between the bid price and the ask price in the foreign exchange market This section presents the foreign exchange turnover by instruments—spot, forwards, swaps—in 2001, 2004, and 2007 to establish the importance that the FX market has gained over the last ten years second, it calculates the transaction costs for consumers and benefits for the market makers of the euro–sterling cross-rate

in 2004 and 2007 to assess how the euro–sterling cross rate will affect the foreign exchange market if it were to join the euro and disappear Finally, it analyzes the counterparties involved in this market, to shed light on which economic agent would be most affected if the pound were to cease to exist Thus, this chapter analyzes the impact in terms of transaction costs of the uK pound by calculating the bid–ask spread and interprets it as a transaction cost that consumers face when exchanging pounds and euros and a benefit that market makers receive in these

transactions This study concludes that the pound is a financial instrument of great economic revenues, a “cash cow” for the market makers, and of great economic cost for consumers.

The second approach to reinventing the international monetary system rests on the fact that the current global economic crisis has revived the role of the international Monetary Fund (iMF) and the purpose of the dormant special Drawing rights (sDr) The idea is for the sDr to substitute for the us dollar as the world reserve currency however, the structure of the sDr and the iMF means that rich-country governments will end up dominating this new world economic order and limiting the access to the funds that emerging countries truly need nonetheless, many envision the iMF as a global central bank and the sDr as a common currency Finally, this chapter elaborates on the fact that Brazil, russia, india, and china are not only becoming increasingly important in the foreign exchange market, but also important advocates of a new monetary order, because they are major holders of foreign reserves

chapter 6, moreover, presents an overview of the economic and monetary performance of eurozone Member states, and it explains their current situation

it highlights that before the introduction of the euro, Portugal, italy, ireland, Greece, and Spain (also known as “PIIGS countries”) were in constant financial and economic turmoil, a situation that disappeared due to the economic prosperity

of the past years and the economic and monetary sobriety that adopting the euro imposed on them nevertheless, PiiGs countries, also known as the “Garlic Belt,” have barely met the economic and monetary requirements imposed by Maastricht

As economic hardship intensified, these Eurozone Member States began to feel how their already feeble monetary and economic stability was becoming increasingly difficult to maintain and even more impossible to disguise In fact, for the past years, PIIGS countries are not only suffering from excessive deficits and debts, but are also overwhelmed with other economic unbalances such as unmanageable and excessive current account deficits, which the current economic crisis is exacerbating due to, among other reasons, their extremely uncompetitive trade position As a consequence, they are beginning to blame the euro

The problem that these countries are facing stems from the fact that monetary union amplifies fiscal imbalances, since opting for competitive currency devaluation

is no longer an option and the only other alternative comes from forcing bond yield differentials down This chapter shows that in 2005 there were almost no yield differentials between the German Bund and the yields of those countries with excessive current-account deficits In 2009, however, yield spreads have become a worrisome reality, which has, in turn, increased government default risks measured by a sudden increase in the demand for credit default swaps (cDs) hence, the current economic turmoil has in fact demonstrated that in a monetary union, currency risk is substituted by default risk, since the sovereign debt of each Member state is issued under the control of each Member state Ministry of Finance due to the fact that there is no european Ministry of Finance The Treaty

of Maastricht forces Member states to obey a common monetary policy, but when

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18

it comes to the fiscal requirements, each Member State is free to implement its own fiscal measures Therefore, fiscal policy has become the “escape valve” to help offset monetary pressure Most of the countries in dire straits are not complying with fiscal requirements, and it is argued that these countries should have been compelled by eu authorities with respect to the limits however, there have been times when countries such as Germany and France were not respecting these limits either and were not punished The problem is that Germany and France have an economic and fiscal structure completely different from Greece, Portugal, and spain under the current economic turmoil, these scenarios have become a difficult liability to ignore and, in fact, Greece has become the focus of attention because its economic circumstances have almost caused the disintegration of the union This chapter touches on the problem in Greece to analyze the importance

of the stability and Growth Pact as a stabilizing factor however, this chapter goes on to show how this fiscal instability is now present on the bond and equity markets, which in turn are negatively affecting the financial strength of not only those countries involved, but of the entire union This chapter pays attention to understanding the state of the current account of many of the countries involved in this financial uproar because this account helps shed light on the current situation This chapter concludes by thoroughly analyzing the economic, political, and social situation of spain, another country that has brought grave concern to the stability

of the EU due to its high public debt, current account deficit, and unemployment.Chapter 7 explains that, despite the euro’s runaway success during its first decade of existence, eurozone governments must assume responsibility and strengthen efforts to coordinate and reform the economic, monetary, and social policies needed to maintain the solid performance of the eMu and the euro This chapter shows that the eurozone and the eu are at a crossroads where economic and fiscal reforms, and most importantly structural reforms, must be implemented

to avoid a painful outcome This crisis in Greece—the result of a continuous lack

of transparency and hiding the real state of affairs—makes one wonder what has happened to the political class in some countries, “long behind and forgotten” seem to be the principles put forward, curiously enough by classical Greeks such

as socrates, Plato, Aristotle, or eratosthenes, whose works and philosophical views have much to do with theorizing on the idea of the perfect state or government.This chapter explains that, despite a number of asymmetric shocks preparing

us for “thinking the unthinkable,” everything should be done to help the euro and the eurozone survive After detailing the dramatic events visited upon the eurozone by Greek economic mismanagement, this chapter shows that the cost of participating in the euro has increased because this economic crisis has demonstrated that a common monetary policy might be inappropriate for certain countries it warns that the cost of leaving the euro club is beginning to

be imaginable, particularly if countries experiencing economic hardship default

on their national debt, experience the collapse of their national banking system,

or suffer civil unrest however, withdrawal from the eurozone is a complicated matter from both a legal standpoint—since it is not contemplated in any of the

treaties—and from an economic standpoint, since reintroducing a national currency would be difficult and painful Despite the fact that withdrawing from the eurozone is not a stipulated option, this chapter thoroughly examines the potential breakup of the eurozone, if the economies of eurozone Member states are not set back on track and a solution is not put into place This chapter elaborates on the two possible scenarios to save the project on the one hand is the prospect that eurozone Member states do nothing to help defaulting countries Another possibility is that Member states decide to help by offering bilateral funds to save a country in difficulties This chapter also elaborates on the role of the IMF, because the actual legal framework has the “no-bailout” rule that prevents Member states from saving a country, which gives no other option to a country short of money than to turn to the iMF as a lender of last resort Knowing the role of Germany

is critical in understanding the behavior of the eurozone Member states in the current crisis, because Germany is reluctant to help countries neither able nor willing to put their finances in order However, this chapter explains that Germany does not want to see the disappearance of the eurozone or of the euro, but is ready

to let go of those countries that are not up to the test Although Germany was ready

to introduce the euro as a way to put certain countries on a leash—because these countries were using competitive currency devaluation to gain competitiveness against Germany—nowadays, Germany’s industries are so consolidated that if certain PiiGs countries were to reintroduce their national currencies, it would hardly affect Germany’s economy Furthermore, the pursuit of competitiveness—via currency devaluation—must be analyzed in conjunction with the idiosyncrasy

of the financial market and its impact on the economy Introducing either the old or

a new currency is extremely complicated The immediate fate of the reintroduced currency is that it would be attacked by the market, which would automatically send the markets plunging; as a consequence, these countries would suffer from “euroization.” Going back to a new devalued currency is going to have a tremendous impact nowadays, not only when converting sovereign debt but, most importantly, when converting private debt held outside the country The reason for this reluctance to lend financial help to certain defaulting countries is based

on the fact that certain countries have not been willing to implement the type of structural reforms necessary to make themselves competitive The eu and the Eurozone are not just suffering a financial crisis, but this financial crisis has its roots in a complete lack of necessary structural reforms The proper functioning

of the eMu depends not only on Member states adopting and complying with monetary and fiscal policy requirements, but on a number of structural reforms, especially in the labor market, required to foster economic growth and a stable euro Before 1960 unemployment was not considered an economic issue that demanded worldwide attention; hence, research concerning unemployment was not taken into consideration, due to the fact that the unemployment rate within the european community stood at less than 3 percent of the labor force however, for the past twenty years the unemployment rate has increased dramatically in various countries As a result of the economic and political impact of a significant