The euro crisis so far Susan Senior Nello University of Siena © McGraw-Hill Companies, 2011.

The euro crisis so far

• Susan Senior Nello

• University of Siena

© McGraw-Hill Companies, 2011

The introduction of the euro

• Following the decision on which countries should join the euro of May 1998, from January 1999 the euro emerged as a virtual currency and conversion rates of the various member currencies were irrevocably fixed. It is perhaps a reflection of how strong the political commitment to EMU was during this period that the process proceeded smoothly and without strong speculative attacks against currencies.

• In June 1998 the European Central Bank (ECB) came into operation.


The introduction of the euro

• From 1 January 2002 12 EU countries replaced their national currencies with euro notes and coins. Only three of the then EU member states remained out of what became known as the ‘eurozone’ or ‘euro area’: the UK, Denmark and Sweden.

• Slovenia joined from January 2007, Cyprus and Malta from 2008, Slovakia in 2009 and Estonia joined in 2011.



The theory of optimum currency areas (Robert Mundell)

• A currency area is defined as a group of countries that maintain their separate currencies, but fix the exchange rates between themselves permanently. They also maintain full convertibility among their currencies, and flexible exchange rates towards third countries.

• The problem then becomes determining the optimum size of the currency area and, more specifically, deciding whether it is to the advantage of a particular country to enter or remain in a currency area.


Cost/benefit analyses of economic and monetary

union• Most theoretical assessments of whether countries

should join together to form an economic and monetary union take the traditional optimal currency area approach as a starting point, but attempt to assess the various costs and benefits.

• In general it is assumed that the costs of forming an economic and monetary union will fall, and the benefits will rise as the level of integration increases.


The benefits of economic and monetary union 1:

• a saving in transaction costs;

• increased transparency in comparing prices;

• encouraging the creation of deeper and wider capital markets;

• increased trade;

• possible economies of scale in holding international reserves;

• use of the euro as an international reserve could yield seigniorage;


The benefits of economic and monetary union 2:

• the introduction of a common monetary policy which may permit countries to ‘borrow credibility’;

• improved location of industry;

• neo-functionalist spill-over into other integration areas, and

• increased weight of the member countries at a world level.


The main costs of EMU are:

• the problem of ‘one size fits all’ arising with a single interest rate and loss of the possibility of exchange rate changes between the member states. The role of the exchange rate mechanism is to compensate asymmetric shocks, i.e. shocks that affect the countries involved in different ways. But how effective is the exchange rate mechanism in correcting asymmetric shocks? McKinnon (1962) argued that with more trade openness, the cost of giving up an independent currency is less;

• the psychological cost of losing a national currency;

• the technical costs of changeover;

• loss of seigniorage for some member states;


Table 9.2 Price increases of food products in Italy between November 2001 and

November 2002Source: De Grauwe (2009), Table 7.3, p.161, reproduced by permission of Oxford

University Press.


The Maastricht convergence criteria:

• Successful candidates must have inflation rates no more than 1.5 per cent above the average of the three countries with the lowest inflation rate in the Community.

• Long-term interest rates should be no more that 2 per cent above the average of that of the three lowest inflation countries.

• The exchange rate of the country should remain within the ‘normal’ band of the ERM without tension and without initiating depreciation for two years.

• The public debt of the country must be no more than 60 per cent of GDP.

• The national budget deficit must be no more than 3 per cent of GDP.


The 5 tests for the UK to adopt the euro

• Convergence: Are business cycles and economic structures compatible so that Britain can live comfortably with common euroland interest rates on a permanent basis?

• Flexibility: If problems emerge is there sufficient flexibility to deal with them?

• Investment: Would adopting the euro create better conditions for firms taking long-term decisions to invest in the UK?

• The City of London: How would adopting the euro affect UK financial services?

• Stability, growth and employment: Would adopting the euro help to promote higher growth, stability and a lasting increase in jobs?


Monetarists vs. EconomistsSource: Figure 4.2 (p. 76 from The Economics of Monetary Union(2009) by De

Grauwe, Paul. By permission of Oxford University Press.


The European System of Central Banks

• The European System of Central Banks (ESCB) is composed of the European Central Bank (ECB) and the national central banks (NCBs) of all EU member states. •

• The ‘Eurosystem’ is the term used to refer to the ECB and NCBs of the countries that have adopted the euro. The NCBs of member states that do not participate in the euro area are members of the ESCB with a special status as they do not take part in decision-making with regard to the single monetary policy for the euro area.


The main tasks of the Eurosystem (1)

• To maintain price stability. According to the TFEU, this is to be the ‘primary objective’. The ECB has adopted two policy guides to carry out this task: a reference value for monetary policy and an inflation target of 2 per cent or less over the medium term.•

• To support general economic policies. This is a secondary function, only to be carried out without prejudice to price stability.

• To define and implement monetary policy for the euro area.


The main tasks of the Eurosystem (2)

• To conduct foreign exchange operations.• To hold and manage foreign reserves. • To ensure the smooth operation of the payments system

and supervision by the relevant authorities. • To contribute to the smooth conduct of policies pursued by

the competent authorities relating to the prudential supervision of credit institutions, and the stability of the financial systems’ . However, the ECB was not originally responsible for supervision of banks and financial institutions. Article 127/6 TFEU allows the Council acting unanimously to ‘confer specific tasks upon the European Central Bank concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings’. September 2012: a more active role for the ECB in supervision of banks was proposed.


The independence of the ECB 1

• The TFEU tries to ensure the independence of ECB by: •forbidding the ECB to lend to ‘Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities…’ (Article 123).•The article also prohibits monetary financing or the ‘direct purchases’ of debt instruments from these bodies by the ECB or national central banks.• In the second part of Article 123 it is specified that ‘Paragraph 1 shall not apply to publically owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the European Central Bank as private credit institutions’

The independence of the ECB 2

•Stipulating that the ECB should not ‘seek or take instructions from Union institutions or bodies, from any Member State or from any other body’ (Article 130).

• Requiring that members of its Executive Board (a President, Vice-President and four other members) be appointed for 8-year non-renewable terms (Article 283).


The early years of the euro

• The celebrations for the first decade of the euro were surprisingly positive, and the websites of the ECB and European Commission to commemorate its first ten years hardly make any mention of the crisis.

• In its first decade the average inflation rate in the eurozone was 1.98 per cent, and growth was 2.1 per cent for 1999-2008.

• But there were underlying imbalances and the one size interest rate did not fit all.


Growth nominal wages in the EU in 2000-2010


Balance of payments end of first quarter 2012 by eurozone country



Table 11.1 Public deficit and debt in the EU Source: Eurostat ©European Union 2011.

The incomplete Single Market for financial services

• The introduction of Economic and Monetary Union (EMU) in the EU was not matched by parallel progress in evolving a single market for financial services. After years of light-touch regulation and supervision of the financial sector, EU banks were highly over-leveraged when the crisis began. The incompleteness of the Single Market for financial services meant that instruments for regulation and supervision of EU banks were inadequate.

• The ECB was not alone among central banks in focussing on price stability and failing to take adequate account of interest rate decisions on the behaviour of banks. Excessive lending led to property bubbles in Ireland, Spain and Slovenia, and subsequently private indebtedness lead to problems of public deficits and debt in these countries.



Some key dates in the international economic crisis

• August 2007 Problems in the US mortgage market spilt over into the interbank market

• Sept. 2008 Default by Lehman Brothers. • Oct. 2008 The US Congress passed TARP (the Troubled Asset Relief

Program which authorised expenditure of up to $700 billion. • Major central banks jointly announced that they were prepared to take

measures to ease tensions in money markets.• Feb. 2009 USA presented plans for a support package including up to $1

trillion in a Public-Private Investment Program to purchase troubled assets.

• July 2010 US President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to the regulation and supervision of the U.S. financial system.


The Eurozone crisis Figure 11.7 Monthly sovereign bond yields in

2010/11Source: Eurostat data, © European Union, 2011.

Monthly sovereign bond yields in 2012 (January-July)



The epicentre of the crisis shifts to the eurozone

• Jan. 2010 Greek sovereign debt crisis worsens: deficits are at least double those reported.

• May 2010 Agreement on an EU/IMF package of assistance for Greece. Bail-out fund for eurozone countries of up to €750 billion, including a special-purpose European Financial Stability Facility (EFSF). The ECB decided to intervene in markets to buy 10-year government bonds (the Securities Market Programme), and to exempt the Greek government from minimum credit requirements

on collateral.

The Irish Crisis 1

• Following Ireland’s entry to the eurozone in 1999, low interest rates and inflows of foreign capital allowed Irish banks to borrow heavily to finance the Irish property boom.

• Politicians who relied on developers, builders and bankers for electoral support helped to fuel the construction bubble with tax breaks and failure to tighten regulation.

• In September 2009 the Irish government introduced guarantees for the debts of six Irish banks, maintaining this was necessary to prevent systemic collapse.

• In March 2010 the NAMA (the National Assets Management Agency) came into operation as a ‘bad bank’ to acquire bad property loans at a steep discount from the banks.

• The results of the stress tests published in July 2010 were positive for all the Irish banks.


The Irish Crisis 2

• If the bank bail-out costs are also included, the Irish budget deficit rose to about 32 per cent of GDP in 2010, with public debt of 98.6 per cent.

• The financial turmoil precipitated a fall of government in Ireland, and the question of loss of national sovereignty was hotly debated in the Irish press.

• November 2010: agreement was reached on a €85 billion bail-out package for Ireland


The bail-out funds

• At the time of the Irish bail-out, it was agreed to set up a permanent European Stability Mechanism (ESM) for dealing with debt crises in the eurozone with an effective lending capacity of €500 billion.

• In March 2012 The Eurozone finance ministers agreed to allow the temporary EFSF to continue to run for a year in parallel with the permanent ESM. The overall ceiling for ESM/EFSF lending, as defined in the ESM Treaty, was raised to €700 billion. However, from mid-2013, the maximum lending volume of ESM will be €500 billion, its initial level.


The bail-out funds

• In April 2012 it was agreed to increase IMF resources by $430 billion. With the lending ceiling of €700bn of the EMS/EFSF and the amounts already committed under the Greek Loan Facility and the EFSF, the overall eurozone firewall amounts to €800bn ($1060bn). With the IMF financing the total sum available amounts to some $1500bn.

• A banking license for the ESM?• Decision of the German Constitutional Court of

September 2012.


The summer of 2011: The Portuguese bail-out and fears of contagion

• In March 2011 the Portuguese Prime Minister Socrates resigned when the Parliament rejected the fourth set of austerity measures in a year and in May 2011 also Portugal was granted a €78 billion bail-out from the EU and IMF.

• There were worries of contagion to larger eurozone countries in particular in August 2011 when the spread on ten-year bonds Spain and Italy widened. In 2010 it was estimated that Ireland accounted for 1.7 per cent of eurozone GDP, Portugal for 1.9 per cent, Greece for 2.6 per cent, but Spain for 11.4 per cent and 12.7 per cent for Italy.


Fear of contagion

• In the face of widening spreads on long-term bonds, the ECB extended it purchases of bonds on secondary markets to Spain and Italy.

• Austerity packages introduced by the Berlusconi government were considered inadequate and failed to assuage markets and in November 2011 a government of technocrats under Mario Monti was

formed.


The debate about Eurobonds

• Eurobonds would entail euro area sovereign debts being jointly guaranteed by member states of the eurozone, and would have the expected advantage of lowering borrowing costs for peripheral countries.

• US experience under Hamilton.• Different proposals to render the idea more

palatable to countries such as Germany.


Reform of EU governance and the debate about fiscal union

• The package of six legislative proposals (known as the ‘Six-Pack’) published by the European Commission in September 2010.

• At a European Council meeting of February 2011 Germany, with the backing of France, tabled a ‘Competitiveness Pact’.

• In March 2011 agreement was reached on a Euro-Plus Pact. Britain, the Czech Republic, Hungary and Sweden remained out of the Pact and the European Stability Mechanism.

• At the European Council of January 2012 agreement was reached by 25 countries on the proposed intergovernmental Fiscal Compact treaty. British Premier David Cameron remained isolated vis-à-vis all the other member states.

• Many of the Commission’s ‘Six-Pact’ proposals have entered into force, in particular, with a package of December 2011.


The package on economic governance of December 2011

• Stronger preventive action through a reinforced Stability and Growth Pact (SGP) and deeper fiscal coordination.

• Stronger corrective action through a reinforced Stability and Growth Pact.

• Minimum requirements for national budgetary frameworks• Preventing and correcting macroeconomic and

competitiveness imbalances

• Application of the new economic governance rules was to be reinforced by ‘reverse qualified majority’ voting whereby a Commission recommendation or proposal to the Council is considered adopted unless a qualified majority of member states

votes against it. © McGraw-Hill Companies, 2011

The Longer-Term Refinancing Operations (LTRO)

• In December 2011 the Governing Council of the ECB agreed an unprecedented measure to allow unlimited quantities of cheap 3-year loans to banks.

• Under the scheme known as LTRO (longer-term refinancing operations) in December 2011 523 banks borrowed €489 billion roughly equivalent to 5 per cent of the GDP of the eurozone. In a second stage of the LTRO scheme the ECB lent a further €529.5 billion to some 800 banks in February 2012.

• In order to receive the unlimited three-year loans the banks had to provide collateral, and this created difficulties for some of the banks most in need of liquidity. To meet this situation the ECB also made adjustments to what could be considered as collateral.


The ongoing Greek crisis

• The EU and IMF had long been pointing to the persistent failure of Greece to complete the fiscal and structural reforms requested in return for the €110 billion bail-out of May 2010.

• Greece had suffered five years of recession, and pro-cyclical austerity measures worsened the situation.

• It was largely the high interest rates on refinancing debt that pushed the Greek debt-to GDP ratio from 113 to 163 per cent in three years.

• In late 2011 agreement in principle appeared to be reached on a second bail-out for Greece, with a haircut or ‘voluntary’ restructuring of outstanding Greek bonds and implementation of further austerity measures. The Greek Prime Minister Papandreu announced that he would hold a referendum on the package, but was forced to step down in favour of a crisis coalition.


Fear of exit from the euro by Greece or another member state

• The EU Treaty does not foresee exit from the euro, though Article 50 of the Lisbon Treaty allows for exit from the EU.

• Exit would probably involve a plethora of legal cases over redenominated contracts, a run on banks, bank failures, and massive capital exodus in the expectation of substantial devaluation. Capital controls would probably be necessary to prevent currency leaving the country.

• There would be inflationary pressures resulting from higher prices of imports after devaluation. Printing and distributing a new currency would also involve technical costs and would take time, ruling out the possibility of secrecy or surprise. Debt default, increased poverty and widening income disparities would be difficult to avoid.


Contagion

• With Greek exit it would be difficult to avoid bank runs in other peripheral countries, and possibly also elsewhere due to the still wide, though reduced exposure of banks.

• Banks had been cutting cross-border lending since mid-2010, but this process accelerated in the first half of 2012, reflecting worries that euro break-up would

lead to capital controls and tighter regulation.


The second Greek bail-out

• In March 2012 €14.5 billion of Greek debt was due for repayment so the need to finalise agreement on a Greek deal became more urgent.

• The Troika of European Commission, ECB and IMF offered a €130 billion bail-out and lower interest rates on bail-out loans to Greece provided an additional list of reforms was approved.

• The conditions for the private sector involvement (PSI) or ‘voluntary’ restructuring of Greek sovereign debt were rendered more stringent. In February 2012 the restructuring or ‘haircut’ agreed was 53.5 per cent on €206 billion of Greek debt.

• It was hoped that this would reduce Greek debt from 160 per cent of GDP to 120.5 per cent by 2020.


Towards a bail-out for Spanish banks 1

• In March 2012 the new Spanish prime minister Rajoy announced that the target for the government deficit was to be raised from 4.4 per cent (agreed by the previous government with the EU) to 5.8 per cent of GDP for 2012.

• This was said to be necessary because the country was in recession and the 2011 deficit had been higher than forecast. EU partners subsequently endorsed the new target.

• Additional problems also arose from fiscal laxity and mismanagement at the level of some autonomous regional and municipal governments.

• The government tightened fiscal austerity, introduced labour market reforms and required banks to set aside an extra €54 billion of bad loan provisions and capital buffers in 2012.


Towards a bail-out for Spanish banks 2

• There were worries about Spanish banks and their failure to recognise the full extent of their loan losses as a result of property investments in the decade to 2007.

• In particular, extra capital was needed for the nationalised Bankia, which had been formed out of seven former savings banks. As in Greece, bank deposits were shrinking as clients moved their capital abroad in a slow-motion bank run. In the first three months of 2012 it was estimated that almost €100 billion had left the country There was discussion about segregating difficult property loans into a ‘bad bank’ or asset management agency agency similar to the Irish NAMA.

• In June 2012 Spain formally asked for a bailout of its banks and €100 billion in assistance from eurozone funds was agreed.


The link between banking weaknesses and sovereign

debt• .Under then existing rules the €100 billion in eurozone assistance

had to be channelled by the Spanish government to the banks, a step that would have added to sovereign debt and raised borrowing costs.

• There was a dangerous link between banks and the sovereign debt of their country.

• Domestic banks hold a large share of sovereign debt. In 2011 domestic banks held more than 60 per cent of Irish, Portuguese and Greek bonds, and these had to pay more for funds because of the fiscal troubles of their sovereigns.


Towards the Pact for Growth and Jobs

• Though restrictive fiscal measures were necessary to calm bond markets, many felt that member states such as Germany had pushed too far for austerity measures at a time of recession. Simultaneous attempts to cut deficits may also spill over into other countries and aggravate the economic slowdown.

• During 2012 there were growing calls for measures to foster growth and employment at the national and EU levels.

• In May 2012 the Bundesbank and the finance minister Wölfgang Schäuble suggested that German prices could be allowed to rise faster than those of other eurozone countries (within a corridor of 2 to 3 per cent) to address imbalances.

•


May-July 2012

• At the June 2012 European Council (see below) a ‘Pact for Growth and Jobs’ was agreed, taking up the proposals of additional capital for the EIB, €5 billion in EU project bonds, and more targeted use of EU Funds to promote economic, social and territorial cohesion.

• World Economic Outlook (WEO) Coping with High Debt and Sluggish Growth of October 2012. The short-term fiscal multipliers could be much higher than previously estimated (0.9-1.7% rather than 0.5%).

June 2012 Cypriot bail-out• July 2012 fears of a bail-out for Slovenia•


June 2012 The Report of the Four Presidents (Herman Van Rompuy, Barroso, Junker, and

Draghi)

• 1. An integrated financial framework with common measures for recapitalising or closing banks, and a European scheme to guarantee customer deposits, provided a single supervisor for EU financial institutions was in place. There would be conferral of the power to supervise banks on the ECB (in line with Article 127/6 TFEU). The ESM could act as the ‘fiscal backstop’ to bank resolution and deposit guarantees, and methods for extending its tools for intervention should be examined. There was to be differentiation between aspects linked to the functioning of the monetary union and stability of the euro, and those relating to the Single Market to assuage countries outside the eurozone such as Britain.


June 2012 The Report of the Four Presidents

2. A qualitative move towards a fiscal union, which would probably require treaty change. This would involve an integrated budgetary framework with coordination, joint decision-making, tighter enforcement and ‘commensurate steps towards common debt issuance’. The mutualizing of sovereign debts was seen as a medium-term objective and its details were not spelt out. Upper limits on deficits and debts would be agreed in common, and EU capacity to manage economic interdependencies would be reinforced, possibly by introducing a eurozone fiscal body, such as a treasury office. The role and functions of the EU budget would also be redefined.


June 2012 The Report of the Four Presidents

3. An integrated economic policy framework with adequate mechanisms to ensure growth, employment, competitiveness and social cohesion, and to address imbalances. This should take into account policies regarding labour markets and tax coordination and should ensure the smooth running of EMU.

4. Measures to ensure democratic legitimacy and accountability, also through close involvement of the European parliament and national parliaments.

July 2012 German manifestos for and against against a banking union


The June 2012 European Council

• Pact for Growth and Jobs’• Agreement to draw up a plan for common supervision of banks

involving the ECB by the end of 2012. • It was agreed that the ESM could directly help refinance troubled

banks without having to pass through national governments once the supervision of the ECB is in place. The aim was to ‘break the vicious circle between banks and sovereigns.

• It was agreed to drop seniority status for eurozone loans to recapitalize Spanish banks, but not for other loans or bond purchases.

• The European Council agreed ESM intervention on secondary bond markets. Monti believed that the terms for intervention had been rendered lighter, but this was denied by Germany, Finland and the Netherlands.

•


Changes in the Role of the ECB

• In July 2012 the President of the ECB Mario Draghi expressed his determination to do ‘whatever it takes to preserve the euro’. He considered it ‘squarely’ within the mandate of the ECB to prevent ‘convertibility risk’ arising from doubts that the euro would survive, and maintained that it was ‘pointless to bet against the euro’.



• The justification for unconventional measures by the ECB was that the transmission mechanism of monetary policy was no longer working. Draghi warned of ‘financial fragmentation’ with far higher interest rates being paid by firms and households in peripheral countries such as Greece, Spain and Italy than in core countries such as Germany. The ‘singleness’ of monetary policy, long seen as a cornerstone of financial integration, was being undermined, and the collapse in cross-border lending by banks exacerbated this problem. If the interdependence between banks and sovereign debt could be reduced by the ECB buying government bonds, the price paid by banks to access funding could be cut, and banks might be prepared to pass these lower costs on to firms and households.



• In September 2012 the agreement was reached on ECB intervention to buy shorter-duration bonds.

• The ECB would renounce seniority on loans to address the fears of private investors.

• Interventions would require beneficiary countries to ask for support from eurozone bail-out programmes, and to accept ‘strict and effective’ conditionality.

• Bundesbank president Jens Weidmann, withheld his vote on the programme, though the other German representative, Jorg Asmussen voted in favour.

• The Bundesbank commented publically on Weidmann’s decision, stating that he considered bond-buying tantamount to financing governments by printing banknotes.


The role of the German Constitutional Court

• In September 2012 the German Constitutional Court ruled against delay of ratification of the ESM while they decided whether it is compatible with the German Constitution (or Grundgesetz).

• The complaint was that the ESM undermined the budget sovereignty of the Bundestag or German Parliament, and lacked democratic control.

• The Court in Karlsruhe stated that any increase in the German financial liability to the ESM above €190 billion would have to be sanctioned by the Bundestag, and comprehensive information on the operations of the ESM would have to be provided to the parliamentarians.

• The Court also ruled in favour the legality of the Fiscal Compact treaty.


The European Commission’s proposals for a banking union• In September 2012 the European Commission presented

proposals for a banking union with ECB responsibility for supervision of all Eurozone banks. The ECB would have the power to monitor the liquidity of banks and require them to increase capital if considered necessary.

• It could penalise and even close banks across the Eurozone by withdrawing their licenses. A eurozone-wide deposit guarantee and European bank resolution scheme was opposed by Germany and was not proposed.

• A second proposal would modify the role of the European Banking Authority, which would co-operate closely with the ECB. Voting arrangements in the EBA would be adapted to ensure the rights of non-eurozone countries are protected, and to preserve the integrity of the Single Market.


Criticisms of the proposal for a banking union

• It had been suggested that the ECB should supervise only larger cross-border banks (though, smaller banks may also be dangerous as Northern Rock, Dexia and Bankia show)

• The ECB could be overstretched if it has to supervise the 6000 eurozone banks.

• The ECB will set up a supervisory board, but there could be conflicts of interest so it will be necessary to ensure that there is a firewall between the ECB’s activity of providing cheap loans to banks and its supervisory role. The ECB could be subject to political pressure and interference, jeopardising its commitment to price stability.

• Member states are worried about the implications for their banking sectors, and there are concerns about differential treatment for non-eurozone countries.


Conclusions

• After the relatively smooth first years of the euro, since late 2009 the eurozone has lurched from crisis to crisis. Many of the peripheral member states have entered recession, and the risks of bank runs, default and exit from the euro of one or more countries remain. Repeatedly, the announcement of austerity packages by national governments, agreement by the European Council or intervention by the ECB caused markets to rally, only to be followed shortly after by renewed widening of spreads.


That disaster has so far been avoided in such turbulent times is thanks to some

timely policies:

• The bond-buying programme of the ECB with its relaxing of collateral under Trichet

• The unlimited three-year loans from the ECB to banks (LTRO). • Austerity measures in Italy, Portugal and Spain, and a second

Greek deal.• Monitoring, supervision, and economic conditionality by the EU

have increased (even without the Fiscal Compact treaty).• More consensus on measures to promote growth, employment and

competitiveness. • The programme for outright monetary transactions to allow

unlimited purchase of short-run government bonds by the ECB. • The threat of delay of the ESM and Fiscal Compact by the German

constitutional Court has been overcome for now• Work has begun on a Eurozone banking union.


Turbulence seems set to continue.

• The EU (and consequently the eurozone) has a sui generis institutional structure and in general tries to move forward by consensus. It takes time and concessions to reach common positions. Disagreements are open, and markets pick up vulnerabilities. Again and again agreement seems to have been reached in the European Council only to evaporate subsequently when the details have to be worked out.

• The EU is also constrained by its treaties, and this also circumscribes the role of the ECB.


Turbulence seems set to continue.

• Many banks in countries such as Spain still need to be recapitalised.

• Recession seems likely to continue in various peripheral countries, rendering structural reforms difficult and knocking austerity packages off target. Fiscal laxity by some regional authorities has been exposed in some peripheral countries. Differences in growth and competitiveness persist.

• The application of economic conditionality by the EU raises issues about respect for democratic principles and national sovereignty.


Conclusions

• Faced with the costs and high risks of contagion of eurozone break-up or even exit of one or more countries, the eurozone is edging messily towards tigher integration with steps towards a fiscal, banking and political union.

• Progress is piecemeal and the process causes tensions with non-eurozone countries (such as Britain over financial regulation).

• It seems probable that the traits of a two- or multi-speed EU will be reinforced.

• EU integration has always lurched forward in times of crisis and it seems likely that this will again be the outcome of efforts to ‘do all that it takes to save the euro’.


The euro crisis so far Susan Senior Nello University of Siena © McGraw-Hill Companies, 2011.

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Transcript of The euro crisis so far Susan Senior Nello University of Siena © McGraw-Hill Companies, 2011.