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Doomed to Failure? By Remy Piwowarski & Ethan Lutske

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Page 1: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Doo

med

to

Failu

re?

By R

emy

Piw

owar

ski &

Eth

an L

utsk

e

Page 2: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Ove

rvie

wO

verv

iew

Wha

t is t

he E

urop

ean

Uni

on?

Wha

t is t

he E

urop

ean

Uni

on?

Hist

ory

of th

e E

urop

ean

Inte

grat

ion

Hist

ory

of th

e E

urop

ean

Inte

grat

ion

Brus

sels

Brus

sels --

Fran

kfur

t Con

sens

us v

s. Fr

ankf

urt C

onse

nsus

vs.

Mun

del

Mun

del

Qua

ntita

tive

Dat

aQ

uant

itativ

e D

ata

The

Futu

re o

f Eur

o (p

ossib

le b

reak

The

Futu

re o

f Eur

o (p

ossib

le b

reak

-- up?

)up

?)E

uro

and

Cent

ral

Eur

o an

d Ce

ntra

l -- Eas

tern

Eur

ope

Eas

tern

Eur

ope

Page 3: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Tw

o po

ints

:T

wo

poin

ts:

Disc

ussio

n af

ter e

very

issu

eD

iscus

sion

afte

r eve

ry is

sue

Feel

free

to a

sk q

uest

ions

!Fe

el fr

ee to

ask

que

stio

ns!

Let

Let ’’ s

star

t!s s

tart!

Page 4: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Thi

s is E

urop

eT

his i

s Eur

ope ……

Page 5: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Apol

ogie

sAp

olog

ies ……

Thi

s is E

urop

eT

his i

s Eur

ope ……

Eur

ope

is n

ot th

e E

U, t

houg

h…

Page 6: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Wha

t is t

he E

U?

Wha

t is t

he E

U?

An

inte

rnat

iona

l org

aniz

atio

n w

ith n

o eq

uiva

lent

in h

istor

y or

iA

n in

tern

atio

nal o

rgan

izat

ion

with

no

equi

vale

nt in

hist

ory

or i n

the

mod

ern

n th

e m

oder

n w

orld

.w

orld

.

Page 7: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Eur

opea

n In

tegr

atio

n in

a N

utsh

ell

Eur

opea

n In

tegr

atio

n in

a N

utsh

ell

9 M

ay 1

950

9 M

ay 1

950

––Ro

bert

Schu

man

n pr

opos

es th

e es

tabl

ishm

ent o

f a E

urop

ean

Stee

l Ro

bert

Schu

man

n pr

opos

es th

e es

tabl

ishm

ent o

f a E

urop

ean

Stee

l and

an

d Co

al Co

mm

unity

Coal

Com

mun

ity(( B

elgiu

m, t

he F

eder

al Re

publ

ic of

Ger

man

y, Fr

ance

, Ita

ly,

Belg

ium

, the

Fed

eral

Repu

blic

of G

erm

any,

Fran

ce, I

taly,

Lu

xem

bour

g an

d th

e N

ethe

rland

s as m

embe

rs).

Luxe

mbo

urg

and

the

Net

herla

nds a

s mem

bers

). 25

Mar

ch 1

957

25 M

arch

195

7 E

urop

ean

Eco

nom

ic C

omm

unity

is fo

rmed

. E

urop

ean

Eco

nom

ic C

omm

unity

is fo

rmed

. (c

usto

ms d

utie

s bet

wee

n th

e six

cou

ntrie

s are

abo

lishe

d on

1 Ju

l(c

usto

ms d

utie

s bet

wee

n th

e six

cou

ntrie

s are

abo

lishe

d on

1 Ju

l y 1

968)

y 19

68)

1957

19

57 --

The

The

Eur

opea

n At

omic

Ene

rgy

Com

mun

ityE

urop

ean

Atom

ic E

nerg

y C

omm

unity

is cr

eate

dis

crea

ted

1973

19

73 --

Den

mar

k, Ir

eland

and

the

Uni

ted

Kin

gdom

join

the

Com

mun

ity..

Den

mar

k, Ir

eland

and

the

Uni

ted

Kin

gdom

join

the

Com

mun

ity..

June

197

9 Ju

ne 1

979

-- the

th

e fir

st e

lect

ions

to th

e E

urop

ean

Parli

amen

tfir

st e

lect

ions

to th

e E

urop

ean

Parli

amen

t19

80s

1980

s ––

Gre

ece

(198

1)G

reec

e (1

981)

, , Sp

ain

and

Portu

gal

Spai

n an

d Po

rtuga

l (bo

th: 1

986)

join

the

Eur

opea

n (b

oth:

198

6) jo

in th

e E

urop

ean

Com

mun

ity..

Com

mun

ity..

1992

1992

––M

aast

richt

Tre

aty

form

s the

Eur

opea

n U

nion

.M

aast

richt

Tre

aty

form

s the

Eur

opea

n U

nion

.19

95

1995

--A

ustri

a, Fi

nlan

d an

d Sw

eden

join

the

EU

A

ustri

a, Fi

nlan

d an

d Sw

eden

join

the

EU

19

99

1999

––in

trodu

ctio

n of

the

euro

in fi

nanc

ial tr

ansa

ctio

nsin

trodu

ctio

n of

the

euro

in fi

nanc

ial tr

ansa

ctio

ns20

02

2002

––12

cou

ntrie

s ado

pt e

uro

as it

s cur

renc

y12

cou

ntrie

s ado

pt e

uro

as it

s cur

renc

y1

May

200

4 1

May

200

4 -- t

he C

zech

Rep

ublic

, Hun

gary

, Pol

and,

Slo

vaki

a, E

ston

ia, L

atvi

a,th

e Cz

ech

Repu

blic

, Hun

gary

, Pol

and,

Slo

vaki

a, E

ston

ia, L

atvi

a,Li

thua

nia,

Slov

enia,

Cyp

rus a

nd M

alta

join

the

EU

.Li

thua

nia,

Slov

enia,

Cyp

rus a

nd M

alta

join

the

EU

.20

07

2007

––Bu

lgar

ia an

d Ro

man

ia jo

in th

e E

U

Bulg

aria

and

Rom

ania

join

the

EU

Page 8: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Thr

ee P

illar

s:T

hree

Pill

ars:

EU

ROPE

AN

EU

ROPE

AN

COM

MU

NIT

IES

COM

MU

NIT

IES

Com

mon

Mar

ket

Com

mon

Mar

ket

(inclu

ding

(in

cludi

ng

regu

latio

ns)

regu

latio

ns)

Eco

nom

ic

Eco

nom

ic

cohe

sion

polic

yco

hesio

n po

licy

Com

mon

Co

mm

on

Agr

icultu

ral

Agr

icultu

ral

Polic

yPo

licy

Inno

vatio

n Po

licy

Inno

vatio

n Po

licy

Com

petit

ion

Com

petit

ion

Polic

yPo

licy

COCO-- O

PERA

TIO

N

OPE

RATI

ON

IN

CRI

MIN

AL

IN C

RIM

INA

L M

ATT

ERS

MA

TTE

RSJu

stic

e an

d le

gal

Just

ice a

nd le

gal

affa

irs

affa

irs

(ext

radi

tions

, (e

xtra

ditio

ns,

fight

ing

orga

nize

d fig

htin

g or

gani

zed

crim

e et

c)cr

ime

etc)

Asy

lum

and

A

sylu

m a

nd

imm

igra

tion

imm

igra

tion

FORE

IGN

FO

REIG

N

POLI

CY,

POLI

CY,

DE

FEN

SE A

ND

D

EFE

NSE

AN

D

SECU

RITY

SECU

RITY

Coop

erat

ion

in

Coop

erat

ion

in

peac

ekee

ping

pe

acek

eepi

ng

oper

atio

nsop

erat

ions

Coor

dina

tion

of

Coor

dina

tion

of

fore

ign

polic

yfo

reig

n po

licy

Page 9: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Main

inst

itutio

ns:

Main

inst

itutio

ns:

The

The

Cou

ncil

of M

inis

ters

of t

he E

urop

ean

Uni

on

Cou

ncil

of M

inis

ters

of t

he E

urop

ean

Uni

on ––

the

mai

n E

U le

gisl

ativ

e bo

dyth

e m

ain

EU

legi

slat

ive

body

. Its

main

task

is to

. I

ts m

ain ta

sk is

to

repr

esen

t mem

ber s

tate

sre

pres

ent m

embe

r sta

tes

The

The

Eur

opea

n Pa

rliam

ent

Eur

opea

n Pa

rliam

ent --

exer

cises

legi

slativ

e an

d ex

ercis

es le

gisla

tive

and

budg

etar

y po

wer

s with

the

Coun

cil o

f the

Eur

opea

n bu

dget

ary

pow

ers w

ith th

e Co

uncil

of t

he E

urop

ean

Uni

on, r

epre

sent

s the

peo

ple.

Uni

on, r

epre

sent

s the

peo

ple.

The

The

Eur

opea

n C

omm

issi

on

Eur

opea

n C

omm

issi

on --

the

main

exe

cutiv

e th

e m

ain e

xecu

tive

body

. It p

ropo

ses n

ew le

gisla

tion

and

bear

s bo

dy. I

t pro

pose

s new

legi

slatio

n an

d be

ars

resp

onsib

ility

for p

olicy

impl

emen

tatio

n. It

is ta

sked

re

spon

sibili

ty fo

r pol

icy im

plem

enta

tion.

It is

task

ed

with

pro

tect

ion

of c

omm

on in

tere

st o

f the

EU

with

pro

tect

ion

of c

omm

on in

tere

st o

f the

EU

Page 10: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

The

Gen

esis

of t

he E

UR

OT

he G

enes

is o

f the

EU

RO

1970

s. Th

e co

llaps

e of

the

1970

s. Th

e co

llaps

e of

the

Bret

ton

Woo

dBr

etto

n W

ood s

syst

em ta

kes p

lace.

s s

yste

m ta

kes p

lace.

Th

e E

urop

ean

coun

tries

mak

e a

spec

ial a

ggre

emen

t on

The

Eur

opea

n co

untri

es m

ake

a sp

ecial

agg

reem

ent o

n m

ainta

inin

g st

able

exch

ange

rate

s (ba

nd 2

.25%

). m

ainta

inin

g st

able

exch

ange

rate

s (ba

nd 2

.25%

).

1979

, the

syst

em is

disb

ande

d. T

he E

urop

ean

Mon

etar

y Sy

stem

19

79, t

he sy

stem

is d

isban

ded.

The

Eur

opea

n M

onet

ary

Syst

em

and

the

Eur

opea

n E

xcha

nge

Rate

Mec

hani

sm (E

RMan

d th

e E

urop

ean

Exc

hang

e Ra

te M

echa

nism

(ERM

-- I) a

re

I) ar

e cr

eate

d. F

ixed

exc

hang

e ra

tes a

re m

ainta

ined

bet

wee

n cu

rren

cies

crea

ted.

Fix

ed e

xcha

nge

rate

s are

main

tain

ed b

etw

een

curr

encie

s of

8 E

urop

ean

coun

tries

. The

cen

tral r

ole

is pl

ayed

by

a hi

ghly

of 8

Eur

opea

n co

untri

es. T

he c

entra

l rol

e is

play

ed b

y a

high

ly--

stab

le D

euts

chem

ark.

stab

le D

euts

chem

ark.

Ear

ly 1

990s

E

arly

199

0s ––

pres

sure

s on

the

Eur

opea

n ex

chan

ge sy

stem

pr

essu

res o

n th

e E

urop

ean

exch

ange

syst

em

indu

ced

by th

e re

unifi

catio

n of

Ger

man

y. in

duce

d by

the

reun

ifica

tion

of G

erm

any.

Page 11: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

EM

S C

risis

1992

EM

S C

risis

1992

Afte

r the

reun

ifica

tion

of G

erm

any;

Afte

r the

reun

ifica

tion

of G

erm

any;

dem

and

pres

sure

cau

ses t

he in

flatio

n de

man

d pr

essu

re c

ause

s the

infla

tion

in G

erm

any

to g

o up

in G

erm

any

to g

o up

Bund

esba

nkBu

ndes

bank

tight

ens m

onet

ary

tight

ens m

onet

ary

polic

ypo

licy

Tigh

t mon

etar

y po

licy

is Ti

ght m

onet

ary

polic

y is

inap

prop

riate

for t

he re

st o

f Eur

ope

inap

prop

riate

for t

he re

st o

f Eur

ope

(esp

. the

UK

), w

hich

is in

a re

cess

ion

(esp

. the

UK

), w

hich

is in

a re

cess

ion

Rum

ours

Rum

ours

of d

evalu

atio

n lea

d to

a

of d

evalu

atio

n lea

d to

a

pan

pan --

Eur

opea

n cu

rren

cy c

risis

Eur

opea

n cu

rren

cy c

risis

Page 12: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Polic

ymak

ers f

ace

the

ques

tion:

Polic

ymak

ers f

ace

the

ques

tion:

Wha

t to

do n

ow?

Wha

t to

do n

ow?

Page 13: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

The

Inte

nsifi

catio

n of

Wor

ks o

n T

he In

tens

ifica

tion

of W

orks

on

EU

RO

EU

RO

1988

19

88 ––

EC

coun

tries

wan

t a c

omm

on c

urre

ncy

EC

coun

tries

wan

t a c

omm

on c

urre

ncy

––D

elors

D

elors

Co

mm

issio

n pr

epar

es a

3Co

mm

issio

n pr

epar

es a

3-- s

tage

plan

stag

e pl

an19

90

1990

––St

age

ISt

age

I––

abol

ition

of e

xcha

nge

cont

rols

abol

ition

of e

xcha

nge

cont

rols

1992

19

92 ––

Trea

ty o

f Maa

stric

ht

Trea

ty o

f Maa

stric

ht ––

the

treat

y pr

ecise

d th

e th

e tre

aty

prec

ised

the

cond

ition

s of t

he a

dopt

ion

of th

e E

uro

later

kno

w a

s co

nditi

ons o

f the

ado

ptio

n of

the

Eur

o lat

er k

now

as

the

Stab

ility

and

Gro

wth

Pac

tth

e St

abili

ty a

nd G

row

th P

act

1994

19

94 --

Stag

e II

Stag

e II

––m

ainta

inin

g cu

rren

cy p

ariti

esm

ainta

inin

g cu

rren

cy p

ariti

es19

99

1999

––St

age

III

Stag

e II

Ist

arte

d in

trodu

ctio

n of

the

Eur

o in

st

arte

d in

trodu

ctio

n of

the

Eur

o in

fin

ancia

l tra

nsac

tions

finan

cial t

rans

actio

ns20

02

2002

––12

EU

cou

ntrie

s ado

pt e

uro

as it

s cur

renc

y12

EU

cou

ntrie

s ado

pt e

uro

as it

s cur

renc

y

Page 14: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Opt

imal

Cur

renc

y Ar

eas:

Opt

imal

Cur

renc

y Ar

eas:

Sym

met

ry, F

lexi

bilit

ySy

mm

etry

, Fle

xibi

lity ……

Inte

grat

ion?

Inte

grat

ion?

Thin

k of

thes

e tw

o Th

ink

of th

ese

two

varia

bles

as g

oods

on

a va

riabl

es a

s goo

ds o

n a

budg

etbu

dget

It is

nega

tively

slop

ed

It is

nega

tively

slop

ed

beca

use

a de

clini

ng

beca

use

a de

clini

ng

degr

ee o

f sym

met

ry

degr

ee o

f sym

met

ry

(whi

ch ra

ises t

he c

osts

) (w

hich

raise

s the

cos

ts)

nece

ssita

tes a

n in

crea

sing

nece

ssita

tes a

n in

crea

sing

flexi

bilit

y.fle

xibi

lity.

Wha

t doe

s int

egra

tion

Wha

t doe

s int

egra

tion

due

for t

he O

CA? H

as it

du

e fo

r the

OCA

? Has

it

been

impl

emen

ted?

been

impl

emen

ted?

Page 15: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Cycl

icall

y ad

just

ed b

udge

t bala

nce

in th

e E

uroz

one

Cycl

icall

y ad

just

ed b

udge

t bala

nce

in th

e E

uroz

one

and

the

US

and

the

US

The

EU

is n

ot re

spon

ding

fisc

ally,

and

the

econ

omies

are

pay

ing

the

price

.

Page 16: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Fran

kfur

tFr

ankf

urt --

Bru

ssel

s Con

sens

usB

russ

els C

onse

nsus

Ratio

nal E

xpec

tatio

ns (1

970s

Ra

tiona

l Exp

ecta

tions

(197

0s ––

crea

ted

by L

ucas

and

cr

eate

d by

Luc

as a

nd S

arge

ntSa

rgen

t ))Re

al Bu

sines

s Cyc

le Re

al Bu

sines

s Cyc

le (1

980s

(1

980s

––K

ydlan

dK

ydlan

d&

&

Pr

esco

tt)Pr

esco

tt)

Page 17: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Rat

iona

l Exp

ecta

tions

(1)

Rat

iona

l Exp

ecta

tions

(1)

indi

vidu

als m

ake

thei

r dec

ision

on

the

basis

of

indi

vidu

als m

ake

thei

r dec

ision

on

the

basis

of

curr

ent a

nd b

est i

nfor

mat

ion

abou

t the

futu

recu

rren

t and

bes

t inf

orm

atio

n ab

out t

he fu

ture

indi

vidu

als d

o in

divi

duals

do

not

not m

ake

thei

r pre

dict

ions

on

mak

e th

eir p

redi

ctio

ns o

n irr

atio

nal b

asis

(Key

nes

irrat

iona

l bas

is (K

eyne

s ’’an

imal

spiri

ts),

or

anim

al sp

irits

), or

m

ainly

on

the

past

exp

erie

nce

(ada

ptiv

e m

ainly

on

the

past

exp

erie

nce

(ada

ptiv

e ex

pect

atio

ns)

expe

ctat

ions

)

Page 18: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Rat

iona

l Exp

ecta

tions

(2)

Rat

iona

l Exp

ecta

tions

(2)

Basic

tene

ts o

f mon

etar

ism

Basic

tene

ts o

f mon

etar

ism ––

mon

etar

y po

licy

mon

etar

y po

licy

acts

with

long

and

var

iable

lags

acts

with

long

and

var

iable

lags

Conc

lusio

n: n

o fin

eCo

nclu

sion:

no

fine --

tuni

ngtu

ning

Onl

y O

nly

unex

pect

edun

expe

cted

mon

etar

y po

licy

can

take

an

mon

etar

y po

licy

can

take

an

effe

ct o

n G

DP

effe

ct o

n G

DP

Exp

ecte

d po

licy

can

still

aff

ect i

nflat

ion,

thou

gh.

Exp

ecte

d po

licy

can

still

aff

ect i

nflat

ion,

thou

gh.

Mar

kets

cle

ar in

stan

tane

ously

as s

oon

as c

orre

ct

Mar

kets

cle

ar in

stan

tane

ously

as s

oon

as c

orre

ct

info

rmat

ion

abou

t pric

es is

supp

lied

to th

emin

form

atio

n ab

out p

rices

is su

pplie

d to

them

Page 19: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Cre

dibi

lity

of a

Cen

tral B

ank

Cre

dibi

lity

of a

Cen

tral B

ank

Infla

tion=

Infla

tion=

f(uf(u) +

supp

ly sh

ocks

+

) + su

pply

shoc

ks +

exp

. inf

latio

nex

p. in

flatio

nPe

ople

form

their

exp

ecta

tions

on

the

basis

of c

entra

l Pe

ople

form

their

exp

ecta

tions

on

the

basis

of c

entra

l ba

nkba

nk’’ s

pron

ounc

emen

tss p

rono

unce

men

tsPe

ople

will

not

beli

eve

in c

entra

l ban

kPe

ople

will

not

beli

eve

in c

entra

l ban

k ’’s s

pron

ounc

emen

ts if

the

actio

ns o

f the

cen

tral b

ank

wer

e pr

onou

ncem

ents

if th

e ac

tions

of t

he c

entra

l ban

k w

ere

to th

e co

ntra

ry in

the

past

to th

e co

ntra

ry in

the

past

If a

cen

tral b

ank

bow

s to

pres

sure

s and

loos

ens

If a

cen

tral b

ank

bow

s to

pres

sure

s and

loos

ens

mon

etar

y po

licy,

it lo

ses i

ts c

redi

bilit

y an

d pe

ople

mon

etar

y po

licy,

it lo

ses i

ts c

redi

bilit

y an

d pe

ople

expe

ct h

ighe

r inf

latio

n in

the

futu

re.

expe

ct h

ighe

r inf

latio

n in

the

futu

re.

Cred

ibili

ty o

f the

cen

tral b

ank

Cred

ibili

ty o

f the

cen

tral b

ank

––po

licies

shou

ld b

e po

licies

shou

ld b

e st

able

and

aim

ed a

t inf

latio

nst

able

and

aim

ed a

t inf

latio

n

Page 20: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Rea

l Bus

ines

s Cyc

leR

eal B

usin

ess C

ycle

Rand

om w

alk o

f GD

P th

eory

(GD

P do

es n

ot

Rand

om w

alk o

f GD

P th

eory

(GD

P do

es n

ot

have

to c

ome

to th

e m

ain tr

end)

have

to c

ome

to th

e m

ain tr

end)

Chan

ges i

n G

DP

grow

th in

duce

d m

ainly

by

Chan

ges i

n G

DP

grow

th in

duce

d m

ainly

by

supp

ly sh

ocks

(tec

hnol

ogic

al ch

ange

s)su

pply

shoc

ks (t

echn

olog

ical

chan

ges)

Prop

agat

ion

mec

hani

sm

Prop

agat

ion

mec

hani

sm ––

in sh

ort:

low

er

in sh

ort:

low

er

prod

uctiv

ity m

akes

peo

ple

wor

k le

sspr

oduc

tivity

mak

es p

eopl

e w

ork

less

Page 21: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Bru

ssel

lsB

russ

ells

-- Fra

nkfu

rt C

onse

nsus

Fran

kfur

t Con

sens

us

Inde

pend

ent E

urop

ean

Cent

ral B

ank

Inde

pend

ent E

urop

ean

Cent

ral B

ank

Infla

tion

targ

etin

g po

licy

Infla

tion

targ

etin

g po

licy

The

risk

of a

sym

met

ric sh

ocks

is sm

allTh

e ris

k of

asy

mm

etric

shoc

ks is

small

The

risk

of a

dver

se sh

ocks

may

be

miti

gate

d Th

e ris

k of

adv

erse

shoc

ks m

ay b

e m

itiga

ted

endo

geno

usly

by

furth

er e

cono

mic

inte

grat

ion

endo

geno

usly

by

furth

er e

cono

mic

inte

grat

ion

The

risk

of a

dver

se sh

ocks

can

furth

er b

e Th

e ris

k of

adv

erse

shoc

ks c

an fu

rther

be

miti

gate

d by

STR

UCT

URA

L RE

FORM

Sm

itiga

ted

by S

TRU

CTU

RAL

REFO

RMS

Page 22: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Sum

mar

y Su

mm

ary

-- Whi

ch V

iew

?W

hich

Vie

w?

Mun

dell

Mun

dell

IIPo

litics

is p

aram

ount

Polit

ics is

par

amou

ntIn

tegr

atio

n is

the

only

In

tegr

atio

n is

the

only

su

stain

able

way

to

sust

ainab

le w

ay to

co

ordi

nate

fisc

al po

licy,

coor

dina

te fi

scal

polic

y, w

hich

is n

eces

sary

to

whi

ch is

nec

essa

ry to

co

mba

t nat

ural

com

bat n

atur

al co

mpl

icatio

ns o

f a

com

plica

tions

of a

m

onet

ary

unio

n.m

onet

ary

unio

n.E

urop

ean

Eur

opea

n Su

pers

tate

Supe

rsta

te??

Brus

sels

Brus

sels --

Fran

kfur

tFr

ankf

urt

Mon

etar

ist v

iew

Mon

etar

ist v

iew

Cent

ral B

ank

can

cont

rol

Cent

ral B

ank

can

cont

rol

all th

at is

nec

essa

ryall

that

is n

eces

sary

Trea

ties l

ike

SGP

can

lead

Trea

ties l

ike

SGP

can

lead

to fi

scal

refo

rms

to fi

scal

refo

rms

Uni

on o

f Nat

ion

Uni

on o

f Nat

ion --

stat

es?

stat

es?

Page 23: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Wha

t do

you

thin

k?W

hat d

o yo

u th

ink?

Page 24: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

DAT

AD

ATA

Page 25: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

GD

P G

row

thG

DP

Gro

wth

The

Eur

ozon

e ha

s had

Th

e E

uroz

one

has h

ad

grow

th o

ver t

he la

st fi

ve

grow

th o

ver t

he la

st fi

ve

year

s afte

r poo

r gro

wth

righ

t ye

ars a

fter p

oor g

row

th ri

ght

afte

r the

ince

ptio

n of

the

afte

r the

ince

ptio

n of

the

Eur

oE

uro

Gro

wth

spre

ads a

cros

s G

row

th sp

read

s acr

oss

natio

nsna

tions

Gro

wth

is sl

ow o

vera

ll,

Gro

wth

is sl

ow o

vera

ll,

thou

gh. U

s gro

wth

rate

has

th

ough

. Us g

row

th ra

te h

as

been

2.6

%, c

ompa

red

to

been

2.6

%, c

ompa

red

to

1.7%

for t

he E

uroz

one

1.7%

for t

he E

uroz

one

Page 26: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Infla

tion

prob

lem

sIn

flatio

n pr

oble

ms

Infla

tion

rate

s wer

e br

ough

t in

line

Infla

tion

rate

s wer

e br

ough

t in

line

befo

re th

e in

trodu

ctio

n of

the

befo

re th

e in

trodu

ctio

n of

the

Eur

o in

ord

er to

coo

rdin

ate

Eur

o in

ord

er to

coo

rdin

ate

trans

ition

.tra

nsiti

on.

Sinc

e th

en, t

hey

have

serio

usly

Si

nce

then

, the

y ha

ve se

rious

ly

dive

rged

dive

rged

Big

issue

for c

reat

ing

asym

met

ries,

Big

issue

for c

reat

ing

asym

met

ries,

real

exch

ange

rate

s, an

d cy

clic

al re

al ex

chan

ge ra

tes,

and

cycl

ical

diff

icul

ties

diff

icul

ties

Ove

r the

199

9-20

04 p

erio

d, th

e ra

nge

of c

umul

ativ

e in

flatio

n ac

ross

EM

U

mem

ber c

ount

ries w

as 1

6.5

perc

ent,

whe

reas

the

rang

e fo

r US

regi

ons w

as

only

8.7

perc

ent.

The

prob

lem is

mor

e pe

rsist

ent i

n th

e E

U

Page 27: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Infla

tion

and

Infla

tion

and

Exc

hang

e R

ates

Exc

hang

e R

ates

Pric

es a

re d

iffer

ent

Pric

es a

re d

iffer

ent

Eve

n th

ough

the

Eur

ozon

e is

a sin

gle

Eve

n th

ough

the

Eur

ozon

e is

a sin

gle

mar

ket,

price

s are

diff

eren

t with

in

mar

ket,

price

s are

diff

eren

t with

in

diffe

rent

cou

ntrie

s, an

d th

e di

ffere

nt c

ount

ries,

and

the

com

petit

iven

ess o

f nat

ions

with

in th

e co

mpe

titiv

enes

s of n

atio

ns w

ithin

the

Eur

ozon

e is

very

disp

arat

eE

uroz

one

is ve

ry d

ispar

ate

Eff

ect o

n ex

chan

ge ra

tes

Eff

ect o

n ex

chan

ge ra

tes

All

the

Eur

ozon

e is

a Si

ngle

Mar

ket w

ith

All

the

Eur

ozon

e is

a Si

ngle

Mar

ket w

ith

no e

xcha

nge

rate

s, bu

t with

pric

es

no e

xcha

nge

rate

s, bu

t with

pric

es

diffe

ring

diffe

ring

acro

sac

ros

natio

nal l

ines

and

diff

eren

t na

tiona

l lin

es a

nd d

iffer

ent

infla

tion

rate

s, th

e re

al ex

chan

ge ra

tes o

n in

flatio

n ra

tes,

the

real

exch

ange

rate

s on

good

s is v

ery

dive

rgen

t.go

ods i

s ver

y di

verg

ent.

The

lack

of a

mon

etar

y fix

har

ms b

oth

The

lack

of a

mon

etar

y fix

har

ms b

oth

ends

ends

Boom

ing

econ

omies

like

Ger

man

y w

ants

Bo

omin

g ec

onom

ies li

ke G

erm

any

wan

ts

a hi

gher

inte

rest

rate

, whi

le na

tions

like

a

high

er in

tere

st ra

te, w

hile

natio

ns li

ke

Portu

gal a

nd It

aly w

ould

wan

t a lo

wer

Po

rtuga

l and

Italy

wou

ld w

ant a

low

er

one.

Mod

erat

ion

prov

ides

stab

ility

on

one.

Mod

erat

ion

prov

ides

stab

ility

on

aver

age,

but n

ot a

nsw

ers t

o in

flatio

n av

erag

e, bu

t not

ans

wer

s to

infla

tion

issue

siss

ues

Page 28: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Eur

o an

d Fi

nanc

ial M

arke

tsE

uro

and

Fina

ncia

l Mar

kets

“Yie

ld d

iffer

entia

ls ac

ross

mem

ber

coun

tries

fell

shar

ply,

the

volu

me

of p

rivat

e bo

nd is

sues

gre

w ra

pidl

y an

d…th

e m

arke

t mic

rost

ruct

ure

conv

erge

d to

a c

omm

on a

rea-

wid

e sy

stem

.”(L

ane,

The

Real

Eff

ects

of

the

EM

U)

Out

stan

ding

stoc

k of

secu

ritie

s iss

ued

by c

orpo

rate

sin

the

Eur

o ar

ea h

as g

row

n fr

om 3

2.2

perc

ent

of G

DP

at th

e en

d of

199

8 to

74.

5 pe

rcen

t of G

DP

by Ju

ne 2

005.

Intra

-Eur

o FD

I up

by 6

2%W

hy? Pa

n-E

urop

ean

view

Mor

e tru

st in

cur

renc

iesM

ore

trust

in fu

ture

inte

grat

ion

Page 29: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Effe

cts o

f Fin

anci

al S

ucce

ssE

ffect

s of F

inan

cial

Suc

cess

Risk

div

ersif

icatio

nRi

sk d

iver

sifica

tion

Inte

rnat

iona

l risk

hed

ging

Inte

rnat

iona

l risk

hed

ging

Doe

s thi

s rea

lly h

ave

an im

pact

?D

oes t

his r

eally

hav

e an

impa

ct?

Coun

tries

can

run

large

r cur

rent

acc

ount

def

icits

Coun

tries

can

run

large

r cur

rent

acc

ount

def

icits

Gre

ece,

Portu

gal,

Spain

Gre

ece,

Portu

gal,

Spain

Goo

d in

the

long

run?

Goo

d in

the

long

run?

How

long

can

this

last

?H

ow lo

ng c

an th

is la

st?

Rate

s of r

etur

n to

inve

stm

ent h

ave

been

falli

ngRa

tes o

f ret

urn

to in

vest

men

t hav

e be

en fa

lling

Dol

lar d

epre

ciat

ion

Dol

lar d

epre

ciat

ion

Oil

pric

e in

crea

ses

Oil

pric

e in

crea

ses

Coul

d le

ad to

197

0s li

ke o

il di

ffic

ultie

sCo

uld

lead

to 1

970s

like

oil

diff

icul

ties

Page 30: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Slum

ps a

nd h

ow th

ey w

ork

Slum

ps a

nd h

ow th

ey w

ork

Eur

o br

ings

cre

dibi

lity

to p

laces

with

poo

r pric

e E

uro

brin

gs c

redi

bilit

y to

plac

es w

ith p

oor p

rice

stab

ility

and

hig

h in

tere

st ra

tes

stab

ility

and

hig

h in

tere

st ra

tes

Bond

, sto

ck, a

nd h

ousin

g pr

ices g

o up

, cap

ital f

low

s in.

Bo

nd, s

tock

, and

hou

sing

price

s go

up, c

apita

l flo

ws i

n.

Inve

stm

ent r

ises,

hous

ehol

ds g

et ri

cher

, con

sum

ptio

n In

vest

men

t rise

s, ho

useh

olds

get

rich

er, c

onsu

mpt

ion

rises

rises

But t

hen

the

capi

tal s

tock

adj

usts

, and

sinc

e th

e ca

pita

l Bu

t the

n th

e ca

pita

l sto

ck a

djus

ts, a

nd si

nce

the

capi

tal

flow

rare

ly bo

osts

pro

duct

ivity

ver

y m

uch,

loss

of

flow

rare

ly bo

osts

pro

duct

ivity

ver

y m

uch,

loss

of

com

petit

iven

ess o

ccur

s co

mpe

titiv

enes

s occ

urs

Slow

gro

wth

, hig

h un

empl

oym

ent,

and

defla

tion.

Slow

gro

wth

, hig

h un

empl

oym

ent,

and

defla

tion.

Tem

ptat

ion

is to

use

mon

etar

y po

licy

to fi

x th

e Te

mpt

atio

n is

to u

se m

onet

ary

polic

y to

fix

the

prob

lem

prob

lem ––

but t

his i

snbu

t thi

s isn

’’ t po

ssib

le.t p

ossib

le.

Page 31: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

The

Bou

nces

The

Bou

nces

Page 32: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Slum

ps a

nd th

e Fu

ture

Slum

ps a

nd th

e Fu

ture

The

Eur

o ha

s a te

nden

cy to

bou

nce

The

Eur

o ha

s a te

nden

cy to

bou

nce

slum

ps a

roun

d th

e sy

stem

as a

n slu

mps

aro

und

the

syst

em a

s an

inst

itutio

nal e

ffec

tin

stitu

tiona

l eff

ect

Affe

ct c

ount

ries w

hich

beg

an a

t a

Affe

ct c

ount

ries w

hich

beg

an a

t a

lesse

r lev

el of

succ

ess a

nd w

ere

lesse

r lev

el of

succ

ess a

nd w

ere

push

ed fo

rwar

d by

the

unio

n.pu

shed

forw

ard

by th

e un

ion.

How

doe

s thi

s affe

ct th

e fu

ture

of

How

doe

s thi

s affe

ct th

e fu

ture

of

the

Eur

ozon

e? W

ill e

xpan

sion

into

th

e E

uroz

one?

Will

exp

ansio

n in

to

Eas

tern

Eur

ope

crea

te e

ven

mor

e E

aste

rn E

urop

e cr

eate

eve

n m

ore

of th

ese

slum

ps? W

ill e

ntre

nche

d of

thes

e slu

mps

? Will

ent

renc

hed

EU

cou

ntrie

s lik

e Ita

ly an

d E

U c

ount

ries l

ike

Italy

and

Portu

gal l

eave

the

Eur

ozon

e du

e to

Po

rtuga

l lea

ve th

e E

uroz

one

due

to

slum

p?

slum

p?

Page 33: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Bru

ssel

sB

russ

els --

Fran

kfur

tFr

ankf

urt

Strik

es B

ack

Strik

es B

ack ……

(1)

(1)

The

risk

of a

sym

met

ric sh

ocks

Th

e ris

k of

asy

mm

etric

shoc

ks

can

be m

itiga

ted

by m

ore

can

be m

itiga

ted

by m

ore

flexi

bilit

y in

the

labor

mar

ket.

flexi

bilit

y in

the

labor

mar

ket.

As B

lanch

ard

(200

6) a

rgue

s: all

A

s Blan

char

d (2

006)

arg

ues:

all

coun

tries

affe

cted

by

shoc

ks h

ave

coun

tries

affe

cted

by

shoc

ks h

ave

infle

xibl

e lab

or m

arke

tsin

flexi

ble

labor

mar

kets

Flex

ibili

ty re

form

s nee

ded

also

to

Flex

ibili

ty re

form

s nee

ded

also

to

face

the

com

petit

ion

of e

mer

ging

fa

ce th

e co

mpe

titio

n of

em

ergi

ng

econ

omies

ec

onom

ies -- >

Eur

o as

a g

ood

> E

uro

as a

goo

d st

imul

us (d

evalu

atio

n is

stim

ulus

(dev

aluat

ion

is im

poss

ible)

impo

ssib

le)

Page 34: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Bru

ssel

s B

russ

els

––Fr

ankf

urt S

trike

s Bac

kFr

ankf

urt S

trike

s Bac

k ……(2

)(2

)

Rota

ting

slum

ps a

re

Rota

ting

slum

ps a

re s

peci

ficsp

ecifi

c-- >

indu

ced

by th

e >

indu

ced

by th

e ex

pect

atio

ns o

f joi

ning

the

Eur

o ar

ea

expe

ctat

ions

of j

oini

ng th

e E

uro

area

-- > in

the

futu

re th

is >

in th

e fu

ture

this

may

not

be

the

case

.m

ay n

ot b

e th

e ca

se.

Furth

er e

cono

mic

inte

grat

ion

will

Fu

rther

eco

nom

ic in

tegr

atio

n w

ill e

ndog

enou

sly

endo

geno

usly

low

er

low

er

the

risks

of a

sym

met

ric sh

ocks

the

risks

of a

sym

met

ric sh

ocks

In g

ener

al, th

ere

are

In g

ener

al, th

ere

are

no w

ide

diffe

renc

esno

wid

e di

ffere

nces

in E

urop

e in

in

Eur

ope

in

rega

rds t

o ou

tput

gro

wth

(re

gard

s to

outp

ut g

row

th ( G

ianno

neG

ianno

ne&

&

Rei

chlin

Reic

hlin

(200

6))

(200

6))

Arti

sA

rtis , ,

Kro

zlig

Kro

zlig

and

Toro

(199

9),

and

Toro

(199

9), M

anso

urM

anso

ur(2

003)

and

Del

(2

003)

and

Del

N

egro

and

N

egro

and

Ottr

okO

ttrok

(200

3) lo

ok a

t lon

g(2

003)

look

at l

ong --

term

dat

a an

d te

rm d

ata

and

argu

e in

favo

r of a

ar

gue

in fa

vor o

f a E

urop

ean

busi

ness

cyc

leE

urop

ean

busi

ness

cyc

le

Page 35: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

GD

P gr

owth

cor

rela

tions

and

G

DP

grow

th c

orre

latio

ns a

nd

rece

ssio

nsre

cess

ions

Cor

rela

tions

are

hig

h!

Page 36: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Dire

ctio

nD

irect

ion ::

Mor

e in

tegr

atio

n an

d m

ore

flexi

bilit

y!M

ore

inte

grat

ion

and

mor

e fle

xibi

lity!

(as w

e ca

n se

e, Je

an-C

laude

Tric

het,

ECB

Pre

siden

t, is

show

ing

the

dire

ctio

n…or

may

be so

met

hing

else

)

Page 37: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Wha

t do

you

thin

k?W

hat d

o yo

u th

ink?

Page 38: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Will

it c

olla

pse?

Will

it c

olla

pse?

Will

som

eone

walk

aw

ay?

Will

som

eone

walk

aw

ay?

Page 39: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Can

the

Eur

o C

olla

pse?

Can

the

Eur

o C

olla

pse?

It is

poss

ible

for a

syst

em su

ch a

s the

Eur

o to

fall

apar

t. Th

e It

is po

ssib

le fo

r a sy

stem

such

as t

he E

uro

to fa

ll ap

art.

The

coali

tion

is he

ld to

geth

er b

y m

utua

l goo

dwill

. Unl

ike

the

US

or

coali

tion

is he

ld to

geth

er b

y m

utua

l goo

dwill

. Unl

ike

the

US

or

anot

her f

eder

ated

Uni

on, t

here

anot

her f

eder

ated

Uni

on, t

here

’’ s no

cen

tral c

oerc

ive

pow

er. S

o s n

o ce

ntra

l coe

rciv

e po

wer

. So

why

wou

ld a

cou

ntry

leav

e?w

hy w

ould

a c

ount

ry le

ave?

Coun

try is

bein

g he

ld b

ack

due

to it

s suc

cess

Coun

try is

bein

g he

ld b

ack

due

to it

s suc

cess

Ger

man

y is

the

5G

erm

any

is th

e 5thth

bigg

est e

cono

my

in th

e w

orld

and

has

bee

n bo

omin

g bi

gges

t eco

nom

y in

the

wor

ld a

nd h

as b

een

boom

ing

ever

sinc

e it

reco

vere

d fr

om re

unifi

catio

n. It

wan

ts to

be

able

ev

er si

nce

it re

cove

red

from

reun

ifica

tion.

It w

ants

to b

e ab

le to

con

trol i

ts

to c

ontro

l its

ow

n m

onet

ary

polic

y sin

ce th

e pr

ice

own

mon

etar

y po

licy

since

the

pric

e --st

abili

ty m

odel

that

the

EM

U fo

llow

s st

abili

ty m

odel

that

the

EM

U fo

llow

s do

esn

does

n ’’t l

et G

erm

any

live

up to

its f

ull p

oten

tial.

Ove

r 60%

of G

erm

ans

t let

Ger

man

y liv

e up

to it

s ful

l pot

entia

l. O

ver 6

0% o

f Ger

man

sno

w w

ant t

o re

turn

to th

e D

euts

chm

ark,

and

rece

ntly

a F

renc

h po

lno

w w

ant t

o re

turn

to th

e D

euts

chm

ark,

and

rece

ntly

a F

renc

h po

l l l re

veale

d ov

er 5

0% o

f tha

t pop

ulac

e w

ants

to re

turn

to th

e Fr

anc.

reve

aled

over

50%

of t

hat p

opul

ace

wan

ts to

retu

rn to

the

Fran

c.Co

untry

is b

eing

held

dow

n an

d fla

iling

Coun

try is

bein

g he

ld d

own

and

flaili

ngTh

ese

are

the

slum

p na

tions

, lik

e Po

rtuga

l and

Italy

. The

y ar

e b

Thes

e ar

e th

e slu

mp

natio

ns, l

ike

Portu

gal a

nd It

aly. T

hey

are

b ein

g ei

ng

hind

ered

by

havi

ng th

eir n

atio

nal c

urre

ncie

s wor

th m

ore

than

wou

hind

ered

by

havi

ng th

eir n

atio

nal c

urre

ncie

s wor

th m

ore

than

wou

ld b

e ld

be

natu

ral.

They

wou

ld w

ant t

o re

turn

to th

eir E

scud

o or

Lira

, dev

ana

tura

l. Th

ey w

ould

wan

t to

retu

rn to

thei

r Esc

udo

or L

ira, d

eva l

ue th

eir

lue

thei

r cu

rren

cies

, and

thus

boo

st e

xpor

ts.

curr

enci

es, a

nd th

us b

oost

exp

orts

.

Page 40: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Diff

icul

ties t

o br

eaki

ng a

way

Diff

icul

ties t

o br

eaki

ng a

way

Inst

itutio

nal

Inst

itutio

nal

The

natio

n w

ould

hav

e to

phy

sicall

y re

plac

e all

ATM

s, sig

ns, b

anTh

e na

tion

wou

ld h

ave

to p

hysic

ally

repl

ace

all A

TMs,

signs

, ban

king

app

arat

us,

king

app

arat

us,

etc.

This

was

ach

ieve

d in

ord

er to

inst

itute

the

Eur

o in

a 3

etc.

This

was

ach

ieved

in o

rder

to in

stitu

te th

e E

uro

in a

3-- m

onth

span

due

to

mon

th sp

an d

ue to

in

tens

e co

oper

atio

n an

d w

ill. W

ill it

be

doab

le fo

r a si

ngle

nat

inte

nse

coop

erat

ion

and

will

. Will

it b

e do

able

for a

sing

le na

t ion

to re

turn

to th

eir

ion

to re

turn

to th

eir

own

curr

ency

?ow

n cu

rren

cy?

Eco

nom

icE

cono

mic

ReRe-- p

ricin

g of

all

good

s, re

form

ing

the

bank

ing

sect

or, r

epr

icing

of a

ll go

ods,

refo

rmin

g th

e ba

nkin

g se

ctor

, re --

esta

blish

ing

inde

pend

ent

esta

blish

ing

inde

pend

ent

finan

cial

mar

kets

. The

se a

re ju

st so

me

of th

e po

ssib

le ec

onom

ic fin

anci

al m

arke

ts. T

hese

are

just

som

e of

the

poss

ible

econ

omic

issue

s for

iss

ues f

or

retu

rnin

g to

a n

atio

nal c

urre

ncy.

retu

rnin

g to

a n

atio

nal c

urre

ncy.

No

guar

ante

e th

at a

retu

rn to

nat

iona

l cur

renc

y w

ould

alle

viat

e N

o gu

aran

tee

that

a re

turn

to n

atio

nal c

urre

ncy

wou

ld a

llevi

ate

any

prob

lems.

any

prob

lems.

Polit

ical

Polit

ical

Any

nat

ions

whi

ch le

aves

the

Eur

o sy

stem

wou

ld b

e lo

oked

at q

uit

Any

nat

ions

whi

ch le

aves

the

Eur

o sy

stem

wou

ld b

e lo

oked

at q

uit e

disp

arag

ingl

y e

disp

arag

ingl

y by

the

natio

ns th

ey a

re a

band

onin

g. T

he n

atio

n th

at le

aves

wou

ldby

the

natio

ns th

ey a

re a

band

onin

g. T

he n

atio

n th

at le

aves

wou

ldst

ill b

e pa

rt of

st

ill b

e pa

rt of

th

e E

U a

nd th

e Si

ngle

Mar

ket,

but w

ould

hav

e m

uch

less

abi

lity

tth

e E

U a

nd th

e Si

ngle

Mar

ket,

but w

ould

hav

e m

uch

less

abi

lity

t o a

ffect

pol

icy.

o af

fect

pol

icy.

ItIt’’ s

neve

r a g

ood

idea

to m

ake

enem

ies,

and

if le

avin

g ca

used

a c

has n

ever

a g

ood

idea

to m

ake

enem

ies,

and

if le

avin

g ca

used

a c

hain

reac

tion

in re

actio

n w

hich

sign

ifica

ntly

dam

aged

the

Eur

ozon

e, th

e re

perc

ussio

ns c

oul

whi

ch si

gnifi

cant

ly da

mag

ed th

e E

uroz

one,

the

repe

rcus

sions

cou

l d b

e lo

ng a

nd

d be

long

and

di

sast

rous

.di

sast

rous

.

Page 41: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Wha

t do

you

thin

k?W

hat d

o yo

u th

ink?

Page 42: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Cen

tral

Cen

tral -- E

aste

rn E

urop

eE

aste

rn E

urop

e

So fa

r onl

y Sl

oven

ia ha

s eur

o as

its c

urre

ncy

So fa

r onl

y Sl

oven

ia ha

s eur

o as

its c

urre

ncy

(ado

pted

on

the

1(a

dopt

ed o

n th

e 1stst

of Ja

nuar

y 20

07)

of Ja

nuar

y 20

07)

Page 43: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Diff

eren

ces

Diff

eren

ces

(acc

ordi

ng to

Sus

an

(acc

ordi

ng to

Sus

an S

hadl

erSh

adle

r , IM

F , I

MF

seni

or e

xper

t)se

nior

exp

ert)

Hig

h ca

pita

l inf

low

s (re

vers

al an

d co

ntag

ion)

Hig

h ca

pita

l inf

low

s (re

vers

al an

d co

ntag

ion)

Balas

saBa

lassa

––Sa

mue

lson

effe

cts

Sam

uelso

n ef

fect

s ––

adju

stm

ent

adju

stm

ent

impo

ssib

le th

roug

h ex

chan

ge ra

tes,

so

impo

ssib

le th

roug

h ex

chan

ge ra

tes,

so

adju

stm

ent l

eads

to h

ighe

r inf

latio

n (1

adju

stm

ent l

eads

to h

ighe

r inf

latio

n (1

-- 2%

mor

e)2%

mor

e)H

igh

budg

et d

efic

itsH

igh

budg

et d

efic

itsRe

form

s in

finan

cial

syst

ems m

ay b

e in

suff

icie

ntRe

form

s in

finan

cial

syst

ems m

ay b

e in

suff

icie

nt

Con

clus

ion:

to jo

in th

e E

uroa

rea

Cen

tral-E

aste

rn E

urop

ean

coun

tries

sh

ould

impr

ove

finan

cial

supe

rvis

ion,

mak

e co

mpe

titio

n ro

bust

and

de

crea

se d

efic

its

Page 44: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

To

join

or n

ot to

join

?T

o jo

in o

r not

to jo

in?

Gai

ns:

1.E

limin

atio

n of

cu

rren

cy e

xcha

nge

risks

.

2.M

ore

pric

e tra

nspa

renc

y –

grea

ter e

ffici

ency

3.T

he e

limin

atio

n of

th

e em

ergi

ng m

arke

t ris

ks

Cos

ts:

1.T

he lo

ss o

f con

trol

over

mon

etar

y po

licy

2.T

he li

kelin

ess o

f a

curr

ency

cris

is w

hile

st

ayin

g in

the

ER

M

II

Page 45: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

The

mos

t im

porta

nt:

The

mos

t im

porta

nt:

The

risk

of

assy

met

ricsh

ocks

and

ro

tatin

g slu

mps

(B

lanch

ard’

s pa

per)

“Con

serv

ativ

e fis

cal p

olicy

an

d lo

w

infla

tion

is w

hat e

very

Ce

ntra

l –E

urop

ean

coun

try n

eeds

”Su

san

Shad

ler

VS.

Page 46: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Lack

of p

oliti

cal s

uppo

rt?La

ck o

f pol

itica

l sup

port?

PRO

-EU

ROA

GA

INST

EU

RO

Page 47: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

One

mor

e da

nger

?O

ne m

ore

dang

er?

The

Eur

opea

n Th

e E

urop

ean

Supe

rsta

teSu

pers

tate

wou

ld in

evita

bly

(?) m

ean

the

wou

ld in

evita

bly

(?) m

ean

the

sync

hron

isatio

nsy

nchr

onisa

tion

of ta

xes a

nd so

cial s

ecur

ity p

olici

es.

of ta

xes a

nd so

cial s

ecur

ity p

olici

es.

Libe

ral r

efor

mer

s in

the

Eas

tern

Eur

ope

are

afra

id th

at

Libe

ral r

efor

mer

s in

the

Eas

tern

Eur

ope

are

afra

id th

at

it w

ould

mea

n it

wou

ld m

ean

equa

lisin

geq

ualis

ing

taxe

s in

Cent

ral

taxe

s in

Cent

ral ––

Eas

tern

E

aste

rn

Eur

ope

to th

e lev

el of

Wes

tern

Eur

ope

and

poss

ibly

the

Eur

ope

to th

e lev

el of

Wes

tern

Eur

ope

and

poss

ibly

the

slow

dow

n of

stru

ctur

al ch

ange

s in

the

slow

dow

n of

stru

ctur

al ch

ange

s in

the

labou

rlab

our m

arke

tm

arke

t -- >

>

that

may

lead

to th

e lo

ss o

f FD

I th

at m

ay le

ad to

the

loss

of F

DI c

ompe

tiven

ess

com

petiv

enes

sFr

ankf

urt

Fran

kfur

t -- Bru

ssels

Con

sens

us m

ay b

e a

bette

r opt

ion

Brus

sels

Cons

ensu

s may

be

a be

tter o

ptio

n fo

r Cen

tral

for C

entra

l -- Eas

tern

Eur

opea

n co

untri

es (?

).E

aste

rn E

urop

ean

coun

tries

(?).

Page 48: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Wha

t do

you

thin

k?W

hat d

o yo

u th

ink?

Page 49: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community
Page 50: Doomed to Failure?webfac/eichengreen/e183_sp07/183_mar20_sp07.pdfEuropean Atomic Energy Community is created 1973 -Denmark, Ireland and the United Kingdom join the Community

Ref

eren

ceR

efer

ence

Blan

char

d, O

livie

r. “P

ortu

gal,

Italy

, Spa

in, a

nd G

erm

any.

The

impl

icatio

ns o

f a

subo

ptim

al cu

rren

cy a

rea.

Oliv

ier B

lanch

ard”

. WE

L-M

IT m

eetin

g, N

YC,

Apr

il 20

06Ca

mpb

ell,

Mat

thew

. (20

06).

Cam

pbel

l, M

atth

ew. (

2006

). ““ N

on, n

ein, n

o: E

urop

e tu

rns n

egat

ive

on th

e E

uro

Non

, nein

, no:

Eur

ope

turn

s neg

ativ

e on

the

Eur

o ””. .

/The

Tim

es/,

Dec

embe

r 31,

200

6./T

he T

imes

/, D

ecem

ber 3

1, 2

006.

Eich

engr

een

Eich

engr

een ,

Bar

ry a

nd

, Bar

ry a

nd G

hiro

niG

hiro

ni, F

abio

(200

1).

, Fab

io (2

001)

. ““E

MU

and

Enl

arge

men

tE

MU

and

Enl

arge

men

t ””. C

onfe

renc

e . C

onfe

renc

e on

Eco

nom

ic an

d M

onet

ary

Uni

on o

rgan

ized

by

DG

on

Eco

nom

ic an

d M

onet

ary

Uni

on o

rgan

ized

by

DG

EcF

inE

cFin

of th

e E

urop

ean

of th

e E

urop

ean

Com

miss

ion,

Bru

ssel

s, 21

Co

mm

issio

n, B

russ

els,

21 --

22 M

arch

200

1**

22 M

arch

200

1**

Eich

engr

een

Eich

engr

een ,

Bar

ry (2

005)

. , B

arry

(200

5). ““

Eur

ope,

the

Eur

o an

d th

e E

CB: M

onet

ary

Succ

ess,

Fisc

al E

urop

e, th

e E

uro

and

the

ECB

: Mon

etar

y Su

cces

s, Fi

scal

Failu

re.

Failu

re. ””

Janu

ary

2005

Janu

ary

2005

Fito

ussi

Fito

ussi ,

Jean

Pau

l & F

ranc

esco

, J

ean

Paul

& F

ranc

esco

Sar

acen

oSa

race

no. . ““

The

Brus

sels

The

Brus

sels --

Fran

kfur

tFr

ankf

urt -- W

ashi

ngto

n W

ashi

ngto

n Co

nsen

sus.

Old

and

New

Tra

deof

fsCo

nsen

sus.

Old

and

New

Tra

deof

fs””

(200

4)(2

004)

Gian

none

Gian

none

, , Dom

enico

Dom

enico

and

and

Lucr

ezia

Lucr

ezia

Reich

linRe

ichlin

. . ““Tr

ends

and

cyc

les i

n th

e E

uro

Are

a: Tr

ends

and

cyc

les i

n th

e E

uro

Are

a: ho

w m

uch

hete

roge

neity

and

shou

ld w

e w

orry

abo

ut it

?ho

w m

uch

hete

roge

neity

and

shou

ld w

e w

orry

abo

ut it

? ””(2

006)

(200

6)Ch

artin

g a

Cour

se T

owar

dCh

artin

g a

Cour

se T

owar

dSc

hadl

erSc

hadl

er, S

usan

. , S

usan

. ““Su

cces

sful

Eur

o A

dopt

ion.

New

est E

U e

ntra

nts s

houl

d re

ap n

et

Succ

essf

ul E

uro

Ado

ptio

n. N

ewes

t EU

ent

rant

s sho

uld

reap

net

ga

ins f

rom

join

ing

the

gain

s fro

m jo

inin

g th

e eu

roeu

roar

ea.

area

. ””(2

004)

(200

4)