What Future for the Eurozone?

Ton NotermansTallinn University of Technology

Tallinn School of Economics and Business AdministrationAntonius.notermans@ttu.ee

My Home Town

Maastricht, Netherlands

My Current Home Town

Tallinn: An Old Hanseatic Town

The Common Currency• Was seen as a crucial step towards further

integration• Was hoped to boost Europe’s economic

performance by completing the Single Market• Agreed upon at the EU Maastricht Conference

in December 1991• Introduced on January 1, 1999• Exchange rate: 1 € ≈ 1450 ₩• 18 EU Countries have adopted the Euro

The Eurozone Members• 11 original members: Finland, Ireland, Germany, Austria, the

Netherlands, Belgium, Luxembourg, France, Spain, Portugal, Italy.

• The following seven countries joined subsequently: Greece (1/1/01), Slovenia (1/1/07), Malta (1/1/08), Cyprus (1/1/08), Slovakia (1/1/2009), Estonia (1/1/11), Latvia (1/1/14)

• The UK and Denmark have negotiated an opt-out; i.e. they do not need to join even if they satisfy the entrance requirements

• Sweden has no opt-out but refuses to join• All other EU member states are required to join once they

fulfill the convergence criteria

Euro Notes

Diverse Development Levels of Eurozone Countries

LUX DNKSWEUSA AUT NLD IRE FIN BEL GER FRN UKG ITA EU27 ESP CYP ROK SLV GRE MALPOR CZR SLW EST LIT LAT CROHUN POLROMBUL0.00000

10.00000

20.00000

30.00000

40.00000

50.00000

60.00000

70.00000

80.00000

90.00000

GDP per Capita EU Countries 2012 (€1000)Eurozone Members in Red

Source: AMECO

The Eurozone Crisis• The first years after the introduction of the

Euro in 1999 showed satisfactory growth• Growth rates were higher in Greece, Spain and

Ireland than in the core countries (Benelux, Germany France)

• It seemed that the Euro would help poorer members catch-up

• But in the spring of 2010 the Eurozone crisis erupted

The Eurozone Crisis; What Happened?• Spring 2010: Greek government unable to borrow on the financial

markets to repay debts• Greece receives a first €110 billion rescue package from the EU /

IMF.• November 2010: Ireland receives a €67.5 billion rescue package

from the EU / IMF• Spring 2011: Portugal receives a €78 billion EU / IMF rescue

package• June 2012: Spain receives a €100 billion EU / IMF rescue package• March 2013 Cyprus receives a €10 billion EU / IMF rescue package• Slovenia most likely will be the next country to apply for

assistance• In Italy public finances are also in a very vulnerable position

The Eurozone Crisis in Figures

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-10

-5

0

5

10

15

Real GDP Growth (%)Source: IMF WEO Database; 2013 Figures are Estimates

Advanced economies

Euro area

Spain

Portugal

Ireland

Greece

Cyprus

Escalating Unemployment

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130.00

5.00

10.00

15.00

20.00

25.00

30.00Unemployment Rate, % of Total Labour Force

Source IMF WEO Database, 2013 Figures are EstimatesEuro Area

Advanced economies

Cyprus

Greece

Ireland

Portugal

Spain

... which especially affects the young

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

10

20

30

40

50

60

Youth Unemployment (15-24 yrs), % of Total Labour ForceSource: EUROSTAT

EU(27)

Ireland

Greece

Spain

Cyprus

Portugal

Political Fallout of the Eurocrisis

• The political effects of the Eurocrisis are at least as important as the economic effects

• European Integration is commonly seen as peace project

• But the Eurocrisis has led to acute tensions between Southern Europe and Northwestern Europe

Greek Demonstrator Comparing Chancellor Merkel to Hitler

Italian Newspaper Suggesting Chancellor Merkel is a Nazi

Germany’s Largest Newspaper telling Bankrupt Greece to sell its Islands

Populist and Xenophobic Parties on the Rise

• Several countries have seen a rapid growth of parties that are both critical of European integration and xenophobic

• Finland: True Finns Party• Denmark: Danish People’s Party• The Netherlands: Partij voor de Vrijheid• Hungary: Fidesz Party• In Greece the second and third biggest political parties by

now are the Fascists and the Communists• Italy: Movimento Cinque Stelle; Lega Nord• France: Front National

Doubts about the Benefits of European Integration

• None of these parties have a parliamentary majority (…..yet)

• But more and more people start to doubt whether European integration is a good thing

Eurobarometer Survey

• Eurobarometer is a opinion poll conducted by the EU Commission twice a year

• Until May 2011 the Commission asked the following question

• “Taking everything into consideration, would you say that (your country) has on balance benefited or not from being a member of the European Community (Common Market)?”

Perceived Benefits from EU membership

UK

Greece

Hungary

Latvia

Austria

Cypru

s

German

y

Slove

niaIta

ly

Czech Rep

ublic

France

Portuga

l EU

Swed

en

Finlan

dSp

ain

Bulgaria

Belgium

Romania

The N

etherl

ands

Malta

Estonia

Denmark

Slova

kia

Luxe

mbourg

Lithuan

ia

Poland

Irelan

d0

10

20

30

40

50

60

Percentage of Respondents Answering that their Country has not Benefitted from EU Membership, May 2011

Source: Euro-barometer

Wrong Question??

• As fewer and fewer respondents answered that they thought EU membership benefitted their country…

• The EU Commission decided to no longer include this question in its opinion polls

• Apparently the Commission did not like the results

• But not asking the question does not make the problem go away

Recent Opinion DataSource: The New Sick Man of Europe: The European Union, Pew Research Center, May

13, 2013.

What caused the Eurocrisis?• The answer would seem easy: excessively high

public debtPublic debt as a percentage of GDP in the

countries that applied for EU / IMF assistance• Greece 2010: 148.3%• Ireland 2010: 92.1%• Portugal 2011: 108.3%• Spain 2012: 84.2%• Cyprus 2013: 116.0%• [Korea 2012: 34.98%]

Two Causes of Excessive Public Debt

But the answer is not that easyPublic debt in Greece was clearly the outcome

of irresponsible spending and taxation policiesBut in Spain, Ireland and Cyprus, the need to bail

out failing banks caused excessive public debtThe sequence is thus: Excessive Private Debt →

Bank Failures → Bank Bailouts → Excessive Public Debt → need for EU / IMF Assistance

Two Questions

• What Caused Excessive Public Debts in Countries without big banking Crises: Greece, Portugal, Italy

• What caused the Banking Crises?

Fragmented Political Systems and Lack of Consensus in Southern Europe

• Spain, Portugal & Greece have had civil wars in the 20th century

• Italy was close to civil war in the 1970s• All countries have had authoritarian / military

governments in the 20th century• Public spending and lax enforcement of

taxation laws serves to contain domestic political and social conflicts

Rapid Deregulation of Finance and Speculative Investment in the EU

• South European countries strictly regulated their financial markets

• [Korea did so too when it was developing]• Since the 1990s the EU has rapidly deregulated

financial markets • Large speculative inflows from North Western

Europe destabilised countries such as Ireland, Spain, Greece

• [Rapid deregulation of finance was one of the main causes of the 1997 crisis in Korea]

What to Do: More Europe or Less Europe?

• The Debate is very Controversial• The EU Commission and countries like Germany

and France think we need more Europe• Tighter control form Brussels on the spending

policies of member states• Centralised EU supervision of banks• Common resolution mechanism for banks in

trouble

But we might need less Europe

• Asking the crisis countries to brutally cut spending creates massive unemployment

• And thus creates a lot of political and social tensions

• But it does not solve the debt problem

EU Policies fail to reduce public debt in the crisis countries

2009 2010 2011 2012 20130

20

40

60

80

100

120

140

160

180

200

Public Debt as a Percentage of GDPSource: AMECO; 2013 figures are estimates

Ireland Greece Spain Cyprus Por-tugal

Competitiveness and Devaluation• Wages in many Southern European countries have grown

faster than in Germany and the rest of North Western Europe• This is in part because inflows of speculative capital created

growth and higher inflation• But it was bad for industry• Now that the boom has collapsed industry needs to recover

competitiveness• The quickest way to do that is a devaluation of the currency• Devaluation would be bad for North West European (German)

exports• Ending the Euro might end the whole project of European

integration

Debt Default or Restructuring

• Debt levels in Greece Portugal and Spain are so high that these countries will never recover if they do not default on at least part of their debt

• But North-Western European countries are against devaluation and default

• Much of the speculative capital that flowed there came for these countries

The European Dilemma

• South European countries would need to default and devalue to recover

• But that would create enormous tension with North Western Europe

• Ending the Euro would give South European countries more autonomy

• Southern Governments don’t’ want that because they tend to blame problems on Brussels, if they leave the Euro they will need to take responsibility themselves

• Most people in Southern Europe do not want that because they don’t trust their politicians and think that economic policies set in Brussels (EU) / Frankfurt (ECB) would still be better than those set in their own capitals

South Europeans Do Not Trust Their Governments

Spain

Greece

Portuga

l

Slove

nia

Czech Rep

ublic

Poland

Italy

Croati

a

Irelan

dLat

via UKFra

nce EU

Bulgaria

Slova

kia

Romania

Lithuan

ia

Cypru

s

Hungary

Denmark

Estonia

The N

etherl

ands

Belgium

German

y

Austria

Finlan

d

Swed

en

Luxe

mbourgMalt

a0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Percentage of Respondents Who Tend Not To Trust Their National Government

Source: Eurobarometer May 2013.

Bleak Prospects for Europe

• Keeping the Euro creates enormous tension between Northern and Southern Europe and within South European Countries

• To Recover Southern Europe would Need to Leave the Euro and Default

• But that Would Create Even More Tensions Between North and South

• And many people doubt that South European governments can manage their economies without being controlled by Brussels.

Thank You

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