The Euro-Project at Risk

Hauskrecht, Andreas and Stuart, Bryan and Hankel, Wilhelm (2010): The Euro-Project at Risk.

Abstract

In contrast to Robert Mundell‘s Optimum Currency Area theory and his recommendation of forming a monetary union, the economic fundamentals of Euro area member countries have not harmonized. The opposite holds: the Euro core countries - most of all Germany, but also the Netherlands and Finland - increased productivity growth while limiting nominal wage growth. However, Mediterranean countries - particularly Greece, but also Spain, Portugal, and Italy - have dramatically lost international competitiveness. Although the overall balance of payments for the Euro area at large is almost balanced, internal disequilibria are skyrocketing and default risk premiums and tensions within the Euro area are rising, thus jeopardizing the stability of the monetary union. The findings confirm that a common currency without fiscal union is inherently unstable. The international financial and economic crisis has merely triggered events which highlight this instability. The paper discusses three possible scenarios for the future of the Euro: a laissez faire approach, a bailout, and finally an exit strategy for the Mediterranean countries, or an organized exit by a group of core countries led by Germany, forming their own smaller monetary union.

• Item Type: MPRA Paper
• Language: English
• Keywords: Optimum currency areas, monetary union, risk spreads, central banking, exchange rates, fiscal policy
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems; E - Macroeconomics and Monetary Economics > E0 - General > E00 - General; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; F - International Economics > F3 - International Finance > F33 - International Monetary Arrangements and Institutions

References

Corsetti, Giancarlo, and Nouriel Roubini (1996): European versus American Perspectives on Balanced-Budget Rules, The American Economic Review, pp. 408-413.

Eichengreen, Barry, and Juergen von Hagen (1995): Fiscal Policy and Monetary Union: Federalism, Fiscal Restrictions, and the No-Bailout rule. CEPR Discussion Papers 1247.

European Commission (2009): Sustainability Report. Directorate-General for Economic and Financial Affairs.

Fratianni, M. and A. Hauskrecht (2002): A Centralized Monetary Union for Mercosur. Learning from EMU. Fordham University.

Fratianni, Michele, and Andreas Hauskrecht (1998): From the Gold Standard to a Bipolar Monetary System. Open economies review 9:S1, 609-635.

Frankel, J.A., and A.K. Rose (2002): An Estimate of the Effects of a Common Currency on Trade and Income, The Quarterly Journal of Economics, 117 (2).

Hagen, Juergen von (1991): A Note on the Empirical Effectiveness of Formal Fiscal Restraints, Journal of Public Economics 44, pp. 199-210.

Hankel, Wilhelm, Noelling, Wilhelm, Schachtschneider, Karl Albrecht, and Joachim Starbatty (1998): Die Euro-Klage. Warum die Waehrungsunion scheitern muss. Reinbek bei Hamburg.

Hankel, Wilhelm, Noelling, Wilhelm, Schachtschneider, Karl Albrecht, and Joachim Starbatty (2001): Die Euro-Illusion. Ist Europa noch zu retten? Reinbek bei Hamburg.

Hankel, Wilhelm (2008): Die Euro Luege und andere volkswirtschaftliche Maerchen. 2nd Edition, Wien.

Meade, J.E. (1957): The Balance of Payment Problems of a European Free Trade Area, Economic Journal, 67, 379-96. 18.

Mudell, R. (1961): A Theory of Optimum Currency Areas, The American Economic Review, Vol. 51, 657-665.

Mundell, R. (1997): A Plan for a European Currency. A revised version of Mundell 1973: A Plan for a European Currency, presented at the conference on Optimum Currency Areas at the Tel-Aviv University.

Pisani-Ferry, Jean, Aghion, Philippe, Belka, Marek, von Hagen, Juergen, Heikensten, Lars andAndre Sapir (2008): Report on the euro area. Bruegel Blueprint 4.

Poterba, James M. (1996): Budget Institutions and Fiscal Policy in the U.S. States, The American Economic Review, pp. 395-400.

Schmitz, Birgit und Juergen von Hagen (2009): Current Account Imbalances and Financial Integration in the Euro Area. University of Bonn.

Scitovsky, T. (1958): Economic Theory and Western European Integration. Stanford.

Strauch, Rolf R., and Juergen von Hagen (2001): Formal Fiscal Restraints and Budget Processes As Solutions to a Deficit and Spending Bias in Public Finances U.S. Experience and Possible Lessons for EMU. ZEI Working Paper, B14, 2001.

Theurl, Theresia (1992): Eine gemeinsameWaehrug fuer Europa. Oesterreichischer Studien Verlag.