The Euro and Europe

This house believes the euro, as a single currency, is dividing Europe and should be abolished.
Serge Moussi Fabrice Wagener

Introduction
History
After World War II : mixed economies
1951 Creation of EEC (EUROPEAN ECONOMIC

COMMUNITY) 1979 ESM (European Monetary System) and ECU (European Currency Unit) In 1999, the EURO replaces the ECU for a European financial transactions EURO in 2002 is circulated as cash

WHY?
For many reasons

They want to avoid the third world war They wanted to create a single market Stabilize exchange rate and the inflation in the Euro area

What is the situation of the EURO area currently?

EU counts 27 countries 17 have adopted the EURO currency

First currency for the amount of transactions

BUT
Public debt in EU 27 is 80,2% and 85,4% for Euro area

The public deficit in EU 27 IS 6,2% of GDP and 6,6% of GDP in Euro area
What about the increasing

of real GDP?

Two major crisis

Subprime crisis Sovereign debt crisis

Consequences There is a dichotomy in Europe: we have a northern and southern Europe

How the different parts in Euro area have faced the crisis?
Some points of comparisons

Some points of comparison

Greek unemployment German unemployment

rate

rate

Following this situation, should the Euro as a single currency be abolished?

Definitions
Eurozone: The Eurozone includes the 17 countries which

have adopted the Euro.

EFSF: European Financial Stability Facility is a special

purpose vehicule to fight against the European sovereign debt crisis. The main objective is to sustain financial stability in Europe with financial assistance to those eurozone countries with economic difficulties. 125 of the Lisbon treaty makes it illegal for one EU member to assume the debts of another member. The goal is that countries act responsible in their budgetary discipline and dont hope to get help from other members.

No-bailout-clause:The no-bailout-clause defined in article

Maastricht treaty
The 4 main criterias are:
1) Inflation rates: cant be higher then 1.5 percentage

points of the average of the 3 best performing member states. 2) Government deficit must not exceed 3% of GDP Government debt must not exceed 60% of GDP 3) Exchange rate: no devaluation 4) Long-term interest rates: must not exceed 2 % of the 3 lowest inflation member states. Goal: price stability within the Euro zone

Stability pact
Multilateral surveillance Excessive debt procedure

Reasons
Coordinate public policies Coordinate the public deficit

The stability pact is so important for Germany. Why? He has restructured his economy

Stability pact
What is the difference now?

Consequences

Cuts budget Austerity across Europe Slower growth Rising unemployment rate Debt fly off Some countries lost their triple A

What about the reactions of populations and politicians?

Change of government in Italy Indignados in Spain and change of government resignation of Prime Minister of Portugal change of government in Greece and demonstration in the street change of the president of ECB

Greece precisely

Greece precisely
Can you rule out Greece in the Euro zone? Domino effect This will weaken the Euro zone

More complicated
?

The Euro zone can it disappear?

Representing the sides

Hans Olaf Henkel Guy Verhofstadt

Professor, University of Mannheim

Former head of Germany's business federation Abolishing the Euro

Leader, Alliance of Liberals and Democrats for Europe Former prime minister of Belgium AGAINST abolishing the Euro

Anton La Guardia (moderator)

Guests
Thomas Klau

Is the Brussels correspondant of The Economist Worked 4 years as the newspapers defence and security editor

Jos Fernndez-Albertos

Head of the Paris Office and Senior Policy Fellow, European Council on Foreign Relations

Permanent fellow, Institute for Public Goods & Policies, Spanish National Research Council

The moderators opening remarks (1)

During a debate last year, the majority voted against the motion this house

believes that the euro will fragment over the next ten years o This debate was held after the first Greek bailout and the decision of the EU to arm itself with the EFSF o A lot happened: Ireland & Portugal underlie the market assaults, a second bailout for Greece, Spain & Italy started to become infected o Result of the vote would probably be different today.

Many demonstrations against the system (indignados) Deterioration of the relation between leaders of the euro zone and

divergence about the way to resolve the crisis Greek prime minister argues that cacophony and confusion are worsening the Greek situation

The moderators opening remarks (2)

21 July: Emergency summit of the euro zone, agreed a second Greek

rescue plan (with lower interest rates, longer maturities)

EFSF becomes more versatile

extend short-term credit lines & allow buying bonds of vulnerable states in the secondary market.

Last year we asked if the Euro will survive, this year the question

is if it would not be better to kill it off

The proposers opening remarks (1)

Early supporter of the

now considers his engagement as

biggest mistake.
WHY?
o Politicians broke all promises made in the Maastricht agreement (deficit

shouldnt be higher then 3% of GNP) o The punitive charges were never applied o The no-bail-out clause was skipped in the case of Greece
The Euro caused problems: Interest rates were low in Germany => Greek politicians made big

debts Bank of Spain watched the rising of big real estate bubble being unable to raise interest rates Countries in the south lost their competitiveness

The proposers opening remarks (2)

In his opinion, the problems are 3 different ones: Many banks are still unstable Negative effects of an overvalued on the southern states Huge level of debts of some euro-zone countries

He proposes 3 alternatives
Plan A: Defend the at all costs =>more debts, higher inflation- lower standarts of living. Competitiveness of the Euro zone will decrease Plan B: Greek default or Greek departure from the Euro zone => risks too high to take => People will storm the Banks in Lisbon, Athen & Madrid Plan C: Germany, Finland, Austria & the Netherlands create a new currency => competitiveness & growth would be encouraged due to a lower-valued

The proposers opening remarks (3)

Plan C requires 3 problems to be solved
Rescue banks not countries Refunding of Greece needs the abandoning of guarantees from the

countries of the new currency

Creation of a new central bank. (not led by a German, new currency

should not be named D-mark)

If it was possible to form one currency out of 17, it should also be possible to form two out of one

The opposition's opening remarks (1)

(+) (+) (+)

The success of ECB in keeping inflation low has been a source of stability and has made it possible to keep borrowing costs low for both private and public sector Euro as single currency brought stability and security during the 2008 financial crisis The euro is attractive to foreign governments as a reserve currency

(-)
(-)

The euro has certainly increased intra-EU trade

Abolishing the single currency now would be a crucial mistake

The opposition's opening remarks (2)

However
The real reason for the euro crisis is the fact that the euro

zone is a monetary union that is not supported by an economic and political union. This is a unique situation
the only role of ECB is to stabilize inflation, compared to

FED, which is a real support to the economy, and this reassures the markets
leaders must show courage and transfer additional powers

to Europe.

The moderator's rebuttal remarks

Mr. Henkel Mr. Verhofstadt Common points monetary union can no longer work without more political and

=
Differences

economic integration. proposes 2 Euros, a southern and a northern wants to move closer to a European state

Disadvantages Critics

The risk of divergence and Goals are not clearly identified: How interfering in each others much integration do we need and economic policy would still which form? exist. Citizens are not asked if they want Every country was affected by more or less integration the financial crisis, so this may Abolishing the single currency would return to either the northern destroy the single market and the or the southern states European union => The EU, euro and single market are 3 independent things. One can work without the others and vice versa.

The proposer's rebuttal remarks (1)

Critics on Mr. Verhofstadt arguments
Mr. Verhofstadt Mr. Henkel

inflation was low borrowing costs were low

was not higher then before the . too high for Germany => ten years of lower growth too low for Spain => real estate bubble National rescue packages helped to combat the financial crisis Internal trade => result of the common market, not of the Euro Budgetary discipline is necessary for Mr Verhofstadts integration strategy Maastricht agreement was often broken by politicians, why should it now work?

+
+

Euro brought stability during the financial crisis

Mr. Verhofstadt compares the EU with the US. But the difference: Compared to Europe, no one believes in the US that California should be bailed out (Greece)

The proposer's rebuttal remarks (2)

Germany: 80% of the population doubts about the stability of the euro. 60% decline further rescue funds The Euro decreases Germans enthusiasm for Europe This counts for nearly all other euro-zone countries
Angela Merkel interferes in the affairs of others,

example:
Demands budgetary discipline from Portugal Vacations habits of Spain

=> this is the result of integrating Europe

it is not the euro that needs to be saved by more European integration, Europe needs to be saved by an alternative euro policy

The opposition's rebuttal remarks (1)

(-) (-)

creating two monetary zones could never be contained or sustained in reality and would do nothing to resolve the vital governance issues at the heart of the current debate Such a plan would be a catastrophe for German industry.

(-)
(-) =>

The European banking sector would be heavily affected by these measures Abolition of Euro will blow to free trade and the free movement on capital, goods and services in Europe Despite all the challenges we are currently facing there is still insufficient reason to ditch the single currency. We do not need a plan "A", "B" or "C". We do not need an alternative to the euro.

Thomas Klau (guest) (1)

Unstable exchange rate were a big problem for the EUs first

transfer Union (named Common Agricultural Policy) They were characterized as threat to free trade
We clamor for good truffle pasta when all we provide the chef with is cheap truffle oil.
Splitting Europe (Henkel) is not a solution => internal market would be at risk while competing &

belonging to different currency areas Restructuring of the EU would sustain the rift & hurt economic perspective

Thomas Klau (guest) (2)

Effects of a fall in interest rates were underestimated, distortion was

bigger then expected => government & European institutions were powerless
Euro zone needs the institutional and political firepower => to ensure that economic disparities will not one day rip it apart Euro zone needs the tools for long term survival stronger instruments for crisis fighting & for economic, fiscal, and budgetary management

Jos Fernndez-Albertos (guest) (1)

He visited the indignados open assembly & was impressed by their

proposals. (most were reasonable & moderate)

20 years ago it would have been unthinkable to see a political crowd of

Spaniars slamming the EU in public. Todays economic troubles are partly responsible
The introduction of the Euro lead to the loss of exchange rate policy

and a common monetary policy. They expected advantages:

(+)

Loss of exchange rate policy would force devaluation-prone countries to adopt the structural reform that these economies require

(+)

Furthermore countries need to achieve the convergence criteria to be able to adopt the Euro

After the adoption of the Euro differences among national economies consisted. Same monetary policy is not always a good thing for every country.

Jos Fernndez-Albertos (guest) (2)

Single monetary policy helped the competitiveness of some countries but created bubbles in other countries.

The Common currency was not unifying european economies.

For example the situation of Germany and

Spain before and after the adoption of the common currency (before: nearly the same account balance, after: Spains position decreased by 8%, Germany increased by 8)
The big problem is that common economic policies have

different consequences in each country and this situation engender cross-national conflict over the policy itself.
it is certainly worth asking not only about the costs of a euro break-up, but also about the costs of its survival

The moderator's closing remarks (1)

The euro zone countries are captured by a financial storm. What is the

best way to survive? A big powerful boat with a German skipper Or a lot of smalls more agile boats?
More integration is the proposition made by Guy Verhofstadt. He argues

that breaking up will bring instability and that a federal union would be the only way.
Hans-Olaf Henkel on the other side explains that citizens, forced into the

artificial construction of centralized states, will start to resist. Europe is characterized by diversity and so the euro should be sacrificed.
Statements of Thomas Klau show that it wasnt always easy without the

common currency Unstable exchange rate were a big problem for the EUs first transfer union This turmoils were on the basis for the creation of the euro

The moderator's closing remarks (2)

Jos Fernandez- Alberto has another opinion. He thinks that saving the

Euro could be a lot more costly then holding it together.

Arguments from the debaters, guests, and comments from the floor

show that refering to the actual situation the individual opinions are very wide spread: the sooner we get rid of the euro the better, before it plunges the whole world into an economic crisis Only with the Euro can Europe meet the challenges coming from giants like China and India. With the rise of Asian power give or take a couple of decades, the dollar, pound and the euro will be as irrelevant as the Moldavian currency. Patience Europe, patience.

The proposer's closing remarks (1)

Mr. Verhofstadt creates angst (fear) => Foreign exchange rates, border controls, etc. would be reintroduced Mr. Henkel even before the introduction of the Euro exchange controls were eliminated Free movement of trade & services have been guaranteed since 1993 due to the common market

Henkel concludes that Plan C could to the trick, because o Risk of chaos, due to individual countries rushing back to their old currencies, could be reduced

Advantages: o Lower-valued euro=> better chance of catching up (remaining countries) o Sweden or Britain etc. may find it attractive to join the new grouping someday

The proposer's closing remarks (2)

Reject Plan A The Euro has rather damaged then supported Europe Result: dissatisfaction, rifts & animosity among members

Mr Verhofstadt should listen to economists We have different languages We have different fiscal preferences Most european citizens dislike uniformity and prefer diversity

We must stop rescuing the euro and start protecting Europe

The opposition's closing remarks (1)

(+) (-) (-) (-)

Under globalization growth, rising goods, services and capital, we need a strong EURO The loss of the single currency, the successive devaluations will lead the decline of Euro Area and slowly but surely more countries will fall into protectionism, nationalism and this will create conflicts in Europe. Euro zone represent 300m consumers and the collapse or dissolution of the euro would jeopardize (mettre en peril). Moreover monetary sovereignty implies decreasing benefit in a world of increasing interdependence. The collapse or dissolution of the euro would be a real disaster for businesses and private citizens across Europe.

(+)

Since the introduction of the euro, private citizens no longer have to face constant money exchanges every time a frontier is crossed within the euro area (Internet: easily compare goods in different countries priced all in the same currency)

The opposition's closing remarks (2)

However, the recent crisis learns us, that a single currency creates not only great benefits but also serious obligations.

A single currency requires not only a common monetary policy, but also an unambiguous economic and fiscal policy. Moreover, in addition to monetary union, a real economic and fiscal union and even a political union are required
To increase discipline and solidarity among its members, the euro zone is in urgent need of a Eurobond market, in which part of the public debt of the euro-zone countries would be accommodated the Stability and Growth Pact needs to be reformed and Automatic measures and sanctions without member states first having to approve them are necessary for those who break the rules.

Which recent evenements may impact the situation?

French Elections o The end of the Merkozy Era? o Franois Hollande wants to renegiotiate the fiscal compact (preserve the french social model at all costs?) o in France, debt is high and rising, unemployment o France needs reform, Hollande has no real solutions o cut the budget deficit by rising taxes, not cutting spendings o if France gets into trouble, the Euro survival would be even more at risk.

Standart & Poors changed Spains rating from A to BBB+ (26.4.2012) credit gets more expensive fir Spain unemployment rate in April in Spain at the highest level since 18years (24,44%) expected economic growth of 0,3% turns into an 1,5% economic recession Resignation of the Dutch government Austerity measures accepted some days later (+)

Winner announcement (1)

A clear majority is against breaking up the Euro Not breaking up the Euro, raises the question if

Europeans want more European Integration and the answer is YES

The result of this debates shows that there is big

support for all the things that need to be done to save & protect the Euro:
More money to help weaker states More co-ordination of economic policy

Winner announcement (2)

Any questions?