What Future for the Eurozone?

1. What Future for the Eurozone? Ton Notermans Tallinn University of Technology Tallinn School of Economics and Business Administration Antonius.notermans@ttu.ee

2. My Home Town

3. Maastricht, Netherlands

4. My Current Home Town

5. Tallinn: An Old Hanseatic Town

6. 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

7. 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

8. Euro Notes

9. Diverse Development Levels of Eurozone Countries

10. 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

11. 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

12. The Eurozone Crisis in Figures

13. Escalating Unemployment

14. ... which especially affects the young

15. 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

16. Greek Demonstrator Comparing Chancellor Merkel to Hitler

17. Italian Newspaper Suggesting Chancellor Merkel is a Nazi

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

19. 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: Partijvoor 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

20. 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

21. 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)?”

22. Perceived Benefits from EU membership

23. 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

24. Recent Opinion DataSource: The New Sick Man of Europe: The European Union, Pew Research Center, May 13, 2013.

25. What caused the Eurocrisis? • The answer would seem easy: excessively high public debt Public 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%]

26. Two Causes of Excessive Public Debt But the answer is not that easy Public debt in Greece was clearly the outcome of irresponsible spending and taxation policies But in Spain, Ireland and Cyprus, the need to bail out failing banks caused excessive public debt The sequence is thus: Excessive Private Debt → Bank Failures → Bank Bailouts → Excessive Public Debt → need for EU / IMF Assistance

27. Two Questions • What Caused Excessive Public Debts in Countries without big banking Crises: Greece, Portugal, Italy • What caused the Banking Crises?

28. 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

29. 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]

30. 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

31. 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

32. EU Policies fail to reduce public debt in the crisis countries

33. 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

34. 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

35. 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

36. South Europeans Do Not Trust Their Governments

37. 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.

38. Thank You 감사합니다.