Abstract
Euro was introduced to extend and strengthen the euro-integrations, but it might in turn blow them up. There is neither an econometric model nor conclusive inference to prove that euro and eurozone, as we know them, will disappear. Nevertheless, construction problems, misfortunate political decisions in monetary matters, breach of fundamental rules of the game, and their poor enforcement had created and strengthened incentives working against the survival of the zone. In order to survive, the eurozone needs to address three problems. First, who is going to pay debts of troubled countries? Second, how to keep fiscal discipline in the eurozone in order to avert another debt crisis? Third, how to regain competitiveness, not only in the troubled eurozone countries but in the whole EU? For now, the eurozone has partial answers to the first two questions, but it is short of a comprehensive and viable solution. A demise of euro and eurozone seems to be a setback to nanny state and a step toward getting rid of it in Europe.
I think within the next 10 to 15 years the eurozone will split apart.
Milton Friedman, according to: London, S. 2003.
Milton Friedman. Lunch with the FT, Financial Times, June 06.
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Notes
- 1.
Austria, Belgium, France, Finland, Germany, the Netherlands, Ireland, Italy, Luxembourg, Portugal, and Spain.
- 2.
The EU inspection found out in 2005 that Greek governments have cheated about the figures related to their budgetary balance 1998–2004.
- 3.
With the introduction of euro, 68% of Germans were “unhappy” and 3% “very unhappy.” Cf. Eurobarometer (2002, p. 74).
- 4.
Mundell (1997, p. 17).
- 5.
Antonio Martino (2008) has collected a number of Friedman’s elaborations on the euro.
- 6.
The majority of German economists, including some famous names like Hans Werner Sinn, were in favor of the euro at the time of its inception. However, a group of 155 German influential economists wrote a petition against the introduction of a common currency, and later on brought the German government before the German Constitutional Court in Karlsruhe, but have lost the case. German economists pointed out in the petition that the euro came prematurely and that a single currency requires a larger liberalization in the labor market (to offset inflexible exchange rates) and structural reforms to enhance competitiveness and add: “In spite of an unusually low level of interest rates, hence reduced costs of debt service, and in spite of numerous examples of creative accounting, the core countries have not succeeded in reducing deficits markedly and sustainably below the 3% reference value. Moreover, the average debt ratio of the member states has not come down since 1991 but has risen by 15 percentage points. As a result, it now exceeds the 60% reference value of the Maastricht Treaty by a large margin. This is contrary to the spirit of the treaty.” (Norman and Münchau 1998). At the site: http://www.international.se/9802brdpr.htm (accessed January 5, 2012).
- 7.
There were also proposals for unconditioned assistance—either by the ECB “purchasing as much public debt as necessary” or by debt issuance on behalf of the EU countries (Uxo et al. 2011, p. 589). —but it is difficult to see the rationale of such ideas. Purring good money behind bad money never worked, and it will not work now.
- 8.
Deposit facility was even negative (−0.30%).
- 9.
The rule is watered down in the meantime to allow purchase of bonds with credit rating from AAA to B− (B minus). Greek bonds are lower ranked from B−, so that the ECB continues to violate the rule.
- 10.
The emergency liquidity assistance (ELA) for Greek central bank and commercial banks lasted for years and crossed 90 billion euros in 2015.
- 11.
Maastricht Treaty, Art. 104. The Treaty on the Functioning of the European Union, Art. 125.
- 12.
It was increased to 80 billion in March 2016.
- 13.
Fairless (2016).
- 14.
According to Carney and Jolis (2010).
- 15.
Cf. Di Nino et al. (2011).
- 16.
Prokopijević (2010, p. 380).
- 17.
It is sometimes called “sudden stop”; see Baldwin and Giavazzi (2015, p. 24).
- 18.
See Sinn (2014, p. 6).
- 19.
For example, Greece and Cyprus. Some other troubled countries (Italy, Portugal, Spain, etc.) borrowed in 2014 and 2015 on financial markets with yields below 2% for 10-year bonds. These very favorable borrowing conditions are possible due to a low interest rate policy by ECB and its other measures. Financial market analysts believe that without these measures, yields for these countries would cross 7% that is considered unsustainable for longer time in the case of stagnant or slow-growing economies.
- 20.
There is already parliamentary political resistance in several countries providing assistance, like Germany, Austria, Finland, Slovakia, Netherlands, and Luxembourg.
- 21.
Germany has sent more than 1800 billion euros to its provinces in the East in the period of 1990–2010. Transfers have raised salaries in the East above productivity level, which had killed investments and competitiveness and has led to an economic failure of the German East. These transfers were managed by the German administration, which is for sure superior in its performance to the international administration in Brussels. Transfers moved from Germans to Germans, thus cutting off disputes about their desirability; fiscal transfers in the EU would move from one nation to another, feeding disputes among different governments and national elites about reasonability of the operation, and disputes of this type were a seed of dissolution for many multinational countries and units. Fiscal transfers to the East after reunification of Germany was a second failed German attempt to bridge the fiscal and development gap via transfers. The first one is related to the Finanzausgleichsgesetz in the 1960s.
- 22.
The exposure of some other countries on May 8, 2015, was France, 409 billion euros; the Netherlands, 117 billion euros; Austria, 57 billion euros; and Finland, 37 billion euros. Total commitment is 20–40% higher than exposure, depending on country in question. Cf. CesIFO (2015).
- 23.
Among proponents of austerity is Phelps (2012).
- 24.
The structural deficit is the deficit that remains across the business cycle. It emerges when a government is spending more than a long-term average of tax revenue can bring in. Structural deficit is total government deficit minus cyclical deficit. Cyclical deficit is output gap times elasticity of fiscal balance. Again, output gap is equal to potential (full employment) output of economy minus actual output of economy. Output gap is expressed in % terms difference. Finally, elasticity of fiscal balance captures percentage change in government expenditure net of government revenue per 1% change in output gap.
- 25.
The following conditions are cited according to EC (2011) at the site: http://ec.europa.eu/europe2020/priorities/economic-governance/graph/index_en.html (accessed February 15, 2012).
- 26.
Before the rule of “structural deficit” was introduced, there was no guarantee that preserving fiscal discipline is possible, even when obeying the rules 3/60%. If a country keeps deficit slightly below 3%, over two dozen years, it will accumulate a debt of over 60%, even if it was debt-free before. For this, the debt limit of 60% makes no sense, neither theoretically nor in practice. The rule of “structural deficit” limits deficit over business cycle to 0.5% of GDP per year and makes fast accumulation of debt impossible.
- 27.
Some official proposals on how to regain it fall short or miss the point, because they assume as given what needs to be achieved: “The restoration of confidence in the future of eurozone will lead to economic growth and jobs.” Herman Van Rompuy, President of the European Council, according to Ben Rooney. 2012. “Europe strengthen fiscal ties,” March 2. http://money.cnn.com/2012/03/02/markets/european_union_fiscal_pact/index.htm (Accessed on March 4, 2012).
- 28.
According to the rules, common market is open and free, but reality is different. Countries prevent access to foreign competitors in several sectors, like energy, banking, insurance, transportation, public procurement, and services.
- 29.
For example, a larger reduction of salaries is easier to achieve via depreciation of national currency than via nominal (and real) cut of them expressed in euro, because the later move will face bitter, lasting, and non-abating opposition. A larger cut of salaries, say 30–40%, is practically impossible until the country is a member of the eurozone.
- 30.
Economist from Slovenia Jože Mencinger was first to draw an analogy between EU and Yugoslavia in his newspaper articles and interviews for the regional press.
- 31.
There are already popular guides on exit option, cf. Bootle (2012).
- 32.
Pejovich (2009, pp. 33–34).
- 33.
Mises stated in the early 1930s that communism is sentenced to death, but it lasted for six decades more to see its historic end (Cf. Mises 1922).
- 34.
Cf. Mundel (2000).
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Prokopijević, M. (2018). The End of Euro. In: Karasavvoglou, A., Goić, S., Polychronidou, P., Delias, P. (eds) Economy, Finance and Business in Southeastern and Central Europe. Springer Proceedings in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-70377-0_1
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