THE EURO: PAST, PRESENT & FUTURE

1. THE EURO:PAST, PRESENT & FUTURE Dr. Maria Lorca-Susino European Union Center of Excellence the University of Miami Fort Lauderdale, May 20, 2010

2. The facts • The Theory of Optimum Currency Areas by Robert Mundell (Nobel Price) • Adopting the euro: Costs and benefits • The History • To adopt the euro: The Maastricht Treaty • Convergence requirements to adopt • With the euro: • Monetary policy: The European Central Bank • Fiscal policy: The Stability and Growth pact • The euro and the Eurozone today

3. The History • The path to the EMU and the euro has not been an easy. • The 19th century witnessed three major attempts: • Austro-German monetary union (1857-1866). • The Latin Monetary Union (1865-1878) between France, Belgium, Italy, and Switzerland. • The Scandinavian monetary union (1875-1917) between Denmark, Norway, and Sweden. • The 20th century witness three major attempts: • The 1969 Den Haag summit, during which the Werner Report was introduced. • This report represented the first commonly agreed upon plan of action to create an economic and monetary union in October 1970 • In 1979, the European Monetary System (EMS) and the introduction of the European Currency Unit (ECU) as common currency • set up a zone of monetary stability and to increase efforts to achieve closer economic convergence between Member States • In April 1989, Jacques Delors introduced the Delors Report: • A thorough, three-stage plan—to introduce the EMU and the euro • Delors Report was approved at the informal ECOFIN meeting on May 19-20, 1989, at the Hotel La Gavina in S’Agaro on the Costa Brava (Spain). • During the Madrid European Council that took place in June 1989, the Delors Report was adopted as the roadmap for work on the creation of the EMU

4. The Theory of Optimum Currency Areas by Robert Mundell • Mundell  “the most dramatic change in the international monetary system since President Nixon took the dollar off gold in 1971.” • In 1961: paper entitled “A Theory of Optimal Currency Areas.” • In 1970 in Madrid, during a conference on optimum currency areas, he presented two major papers: • “Uncommon Arguments for Common Currencies,” • and “A Plan for a European Currency” in which he proposed to name the new currency ¨Europa.¨ • After the conference he received a phone call in his home in Siena from Lorenzo Bini-Smaghi, a senior staff member of the European Monetary Institute (EMI): • Three questions (1) the first to name the currency ¨europa¨?, (2) would be still a good name now? and (3) how long would it take to be operative? • “it is more difficult than you think. Even if there were no political impediments, it would take at least three weeks¨. • Finally, in 2003 claimed the benefits of a world currency—an idea that he had already promoted in a paper published in 1968—the “INTOR”.

5. EUROPA According to Greek mythology: Europa was a Phoenician woman of high lineage and the namesake of continental Europe. Europa was the youngest daughter of the king of Phoenicia. The story goes that, one day, she was playing with her elder sisters, Asia and Africa, by the sea when Zeus spotted her. He fell in love with her and transformed himself into a beautiful white bull. He transported her on his back to Crete and the myth of the ¨The Rape of Europa¨, ¨The Abduction of Europa¨ or “The Seduction of Europa¨began.

6. Adopting the euro: pros and cons

7. The Delors Report • Stage one: The preparatory phase  from July 1990 to December 1993 • the Member States of the EU needed, to implement the first of the “four freedoms”: the liberalization of capital movements • The Maastricht criteria • Stage two: The transitional phase  from January 1994 to December 1998. • a exchange rate mechanism was set up in order to provide currency stability between the euro and the national currencies of those countries that were not yet part of the Eurozone. • Stage three: On January 1, 1999: Enforcement of the conversion rate triggered the start of the final stage of the Delors Report, which continues to this day.

8. The Maastricht Treaty It sets standards to ADOPT the euro Protocol: ¨On the Convergence criteria”

9. To maintain the euro • Once the euro has been adopted countries must comply with the economic and monetary requirements established inTitle VI of the Maastricht Treaty. • Title VI: Economic and Monetary Policy • Chapter 1: Economic policy –Article 104 • Art. 104C – Excessive government deficits • Art 104C-2b: government deficit to GDP • Art 104C-2c: government debt to GDP • Art 104.14: Protocol on excessive Deficit Procedures • Art 103: No bail-out rule to avoid members states from becoming responsible for financial liabilities of other members • Chapter 2: Monetary policy – Article 105 • Art 105.1: objective: price stability by European System of Central Banks (ESCB) = INDEPENDENT • Art 105.2: explains tasks of ESCB • Chapter 3: Institutional provisions

10. Onthe Excessive Deficit Procedure --- The Stability and Growth Pact (SGP) Article 1: The reference values referred to in Article 104c.2 of this treaty are: 3% for the ratio of the planned or actual government deficit to GDP 60% for the ratio of government debt to GDP at market prices

14. Article 50 of the Treaty of Lisbon includes the “exit clause”: “Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.” Possibility to rejoin the union following the procedures in Article 49. “Any European State which respects the values referred to in Article 2 and is committed to promoting them may apply to become a member of the Union.” Article 2: “The Union is founded on the values of respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities.” IMPORTANT CONTRIBUTION

15. THE EUROZONEANDTHE EURO

16. Eurozone Member States: EMU Economic and Monetary Union (EMU) • 2. Economic Policy: • Fiscal Policy: Stability and Growth Pact • Gov. Deficit to GDP: 3% • Gov. Debt to GDP: 60% • 1. Monetary Policy: • European Central Bank • Price stability • 2% inflation rate

17. 1. Monetary Policy • European Central Bank (ECB) • Founded: June 1, 1998 • Operative: January 1, 1999 • Main objectives: Maintain price stability to maintain inflation under control (< 2%) • Sets interest rates in the Eurozone: EURIBOR • EURIBOR (Euro Interbank Offered Rate): is the rate at which euro interbank term deposits within the euro zone are offered by one prime bank to another prime bank. • This sets interest rates for households and business

18. Organization The Governing Council is the most important decision making body in the ECB. It is responsible for establishing monetary policy and interest rates. The General Council is composed of the ECB’s president, vice-president, and the governors of the NCBs of all EU member states. Governors of those EU countries that have not yet adopted the euro cannot participate in decisions related to the euro, although they are invited to participate in discussions involving monetary policy issues. The Executive Board is in charge of implementing the monetary decisions made by the Board and informing the various EU member states’ NCBs of these decisions

20. Harmonized Index of Consumer Price and the Euribor

21. 2. Economic Policy: Fiscal Policy • The Stability and Growth Pact (SGP): A set of requirements to maintain fiscal discipline in the EMU. • The SGP was initially proposed in the mid 1990’s by Theo Waigel (German finance minister) • Germany obsession: maintain low inflation • an important part of the German strong economy's performance since the 1950’s. • After adopting the euro, the SGP ensures that Eurozone Member States continue to observe them. • The requirements: • an annual budget deficit no higher than 3% of GDP • a national debt lower than 60% of GDP or approaching that value.

22. Stability and Growth Pact Deficit/Surplus (3%) Government Debt (60% of GDP)

23. The Euro and…

24. The EU 27 and the Eurozone Country Entry Date Actual Austria January 1, 1999 Belgium January 1, 1999 Netherlands January 1, 1999 Finland January 1, 1999 France January 1, 1999 Germany January 1, 1999 1999Ireland January 1, 1999 Italy January 1, 1999 Luxembourg January 1, Portugal January 1, 1999 Spain January 1, 1999 Greece January 1, 2001 Denmark Never joined Sweden Never joined United Kingdom Never joined

25. Denmark, Sweden, and the U.K. Denmark's national currency, the KROEN linked to the euro through The government has met the economic convergence criteria for participating in the third phase of the (EMU), but Denmark, in a September 2000 referendum rejected joining the EMU New Referendum: ? Sweden: rejected the euro in a popular vote maintains its own currency, the Swedish Krona The Swedish Riksbank founded in 1668 is the oldest central bank in the world Convergence problems – Working on inflation The U.K. The currency is the pound sterling. The Bank of England is the Central Bank The UK chose not to join the euro at the currency's launch. British Prime Minister, Gordon Brown MP, has ruled out membership for the foreseeable future. Former Prime Minister Tony Blair promised to hold a public referendum based on a number (five) points. In 2005, more than half (55%) of the UK were against adopting the currency, while 30% were in favour.

26. Enlargements: 2004 & 2007 Country EMU entry date Expected Cyprus January 1, 2008 C.Republic 2013 Estonia Has met the accession criteria 2011 Hungary 2012 Latvia 2013 Lithuania 2010 Malta January 1, 2008 Poland 2012 Slovenia January 1, 2007 Slovakia January 1, 2009 Bulgaria 2012 Romania 2014

27. Non-EU countries and the euro

28. Existing Monetary Union

29. The Facto Monetary Union

30. Planned Monetary Union

31. The Eurozone and the euro The Current Economic Crisis and Financial Uproar

32. The economic crisis…. Has increased the need of government intervention in the economy Bail-out plans Increased imbalances GDP = C + I + Gs + NE With the crisis: Reduction of the C + I Increase of Gs Deficits = Tax < Expenditures Government deficit: Borrow money to close the deficit

33. The Problem Greece and Spain: Budget cuts of 1.5% for 2010 and 2% for 2011 Portugal: halts large-scale projects worth more than €60bn ($76bn) to reduce deficit to 7.3% of GDP 60% of Germans wants to leave the euro and go back to the D-mark SOCIAL REVOLTS

34. In the mean time • MEPs  salary increased: $2,000 • Assistant Budget per Month: $20,000 • Monthly Meetings Strasburg: • Economic Profligacy • @700 MEPs • @3,000 aids • 280 m • $250 mil • 2010 budget: increased by $10m • 2011 budget: increased by 6%

35. The Danger

36. Solutions to save the Eurozone 1). Bail-out plan for Greece: €110bn in bilateral loans at 5% Breaks the Treaty “no-bail-out” rule 2). Loan Package: €750bn ($962bn) Euroarea: €440bn EU’s budget: €60bn IMF: €250bn  controversial for US’s involvement 3). The European Central Bank Buy debt from countries  a controversial and “illegal” measure

37. The IMF: €250,000 mill (US$310,000 mill) The US is the biggest contributor to the IMF The US is involved with $54,000 mill which represents the 17% stake that the US holds in the IMF.\ President Obama has contacted Spanish President  Spanish economy is 5 times bigger than Greece  too big to fail  would need an estimated €474,000 mill while Greece needed €110,000 mill. Chicago Federal Reserve Bank President Charles Evans said on Friday May 14, 2010: “It will affect global demand which will influence our net export position, I am hopeful that our exposure will be minimal to modest.” Geithner on May 15, 2010: “we have a bog stake in helping Europe manage through these things. We’re going to do it in a way that’s sensible for the American economy, the American taxpayer.” The US and the European Rescue

38. THANK YOU