Category: Euro

The state of Europe’s current economic recession taints all promise for its future, its excellence, and its international prestige, as manufacturing in the EU has hit its lowest point since the previous eurozone crisis in October 2012 and is expected to stay this way for the rest of 2019. Although the euro, a common currency shaping the eurozone as a monetary union in which 19 of the 28 countries in the EU recognize the euro as its sole legal tender, was enacted as a means of promoting integration in both real and financial sectors, fundamental policy gaps between the ‘northern core’ and the Baltics negate the prospect of integration as a notion that solely promotes growth and progress but rather as an obstacle forcing European nations to formulate common, cooperative solutions that promote homogeneity. As a means of mitigating the crippling nature of the crisis on European welfare, the US Federal Reserve, the ECB, and other international banks funneled US dollars into European financial systems, which helped bolster economic activity within the continent by making American dollars more accessible outside of US stocks. Due to the volatile nature of increasing liquidity as a move that will potentially force the EU into back into another 2007-2008 financial crisis, policy experts’ question as to whether or not this investment should be recognized as a viable long-term solution under the belief that a solution of this caliber will only present a temporary fix to the underlying issue at hand. Currently, the European Central Bank (ECB) based in Frankfurt, Germany and the national banks of eurozone member states constitute the Eurosystem, in which the monetary policies of these countries are managed under an independent body. Homogeneity is achieved through the use of key mechanisms, such as the Stability and Growth Pact (SGP) and the Financial Services Action Plan (FSAP), outlining a number of rules and procedures member states are expected to adopt internally with the intent of facilitating the growth of the financial sector under the common currency regime.

The prospect of a common European currency was a central tenet of the 1992 Maastricht Treaty, which explicates certain criteria countries must follow to join the euro and laid the foundation for the creation of a ‘European’ institutional structure which acts to ensure the stability of the common currency in the international market. Shortly after things turned sour with the euro’s implementation, the EU proposed the ratification of the Fiscal Compact which promotes the concept of a ‘structural budget’ where its effects are not observable with calculations subject to consistent revision over time. In 2007 when the eurozone crisis was first emerging, 17 eurozone summit leaders met to agree on a second bailout for Greece in the hopes of preventing the debt crisis from consuming the whole of Europe’s economy. Three years later, the EU implemented the European Stability Mechanism with the intent issuing provisions to alleviate strenuous amounts of debt within debtor countries. The GA has also been involved in helping Europe mitigate the effects of the crisis in A/71/216, which enhances cooperation between the EU and the IMF, as well as transparency measures concerning economic reform. Even though we’ve come a long way since the euro was first introduced, there is still much to do to prevent the euro from plunging the EU into a prolonged economic recession.

Germany is a leader in reforming labor markets and keeping unit labor costs in check, which is why we are at the forefront of efforts to mitigate the eurozone crisis. Germany is adamant about maintaining fiscal responsibility under the SGP, as the SGP provides a clear-cut framework for optimal integration of the euro and will thus enable us to minimize the number of crises that occur within the EU, such as the one that occurred in 2010 with Greece. In Germany, federal revenues and expenditures are controlled by federal laws, which accompany an extensive bailout system keeping our economy in check and minimizing the severity of shocks when they occur. Our nation has also adopted a universal banking system in which the Federal Financial Supervisory Authority (BaFin) acts as the main institution of financial regulation concerning the private sector and economic risk. Keeping this in mind, Germany proposes the implementation of the 2020 Eurozone Plan of Public Investment, a political union, a European debt reduction fund, and means by which we will be able to recapitalize banks through private and state injections.

Firstly, Germany proposes the implementation of the 2020 Eurozone Plan of Public Investment, which will make the countries themselves accountable for how they choose to invest their capital. Doing so will make much more sense than simply relying on the ECB to impose ‘stronger’ mechanisms that regulate this facet of the economy while still allowing for full transparency on sovereign debt exposures. In our framework, the ECB will first tabulate who owes what to whom, which will require each country in the eurozone to submit an account of their current income and expenditures. Our choice in making the ECB regulate these finances as opposed to formulating legislation is fitting in the sense that the purpose of the ECB was always to manage monetary protocols as an independent body. This will also require a neutral, non-member state, preferably the Swiss, to further assess each country’s situation as to confirm the assessments made by the ECB from an objective standpoint. Upon retrieving the final draft of these assessments, we will then issue means, such as the removal of public investment in national budgets (and therefore measured deficits), to keep expenses at bay. If we were to follow this route, in particular, we will give the European Investment Bank (EIB) a central role in public investment financing in which struggling nations will be able to lease new infrastructure investments and gradually reimburse the EIB through a user fee that covers interest rates over time. Doing so will improve governance in their respective economies by minimizing austerity measures in the cutting of investments, thus improving the collective state of the eurozone in the long run.

As a stateless central bank within a bloc where national governments retain fiscal sovereignty, however, the ECB has very few tools with which they will be able to use to pressure governments to pursue economic policies that are consistent with its inflation target. The lack of governance of both fiscal and monetary unions, especially with how some, if not most, nations blatantly ignore vital conventions, such as the ‘no bail-out’ clause, enshrined in EU treaties, requires some form of common, more centralized decision-making—a political union, perhaps—noting how the formation of policies concerning taxes, payments, and resource transfers involves excessive political commentary. Our political union will opt for the creation of a core Union inside the EU as a means of propelling genuine political integration, as well as effective governance of economic infrastructure and foreign affairs, with full democratic accountability and parliamentary control.

The Eurozone is a geographic and economic region that consists of all the European Union (EU) countries that have fully incorporated the euro as their national currency. As of 2019, the Eurozone consists of 19 countries in the EU: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

In 1992, the countries making up the European Community (EC) signed the Maastricht Treaty, thereby creating the EU. The creation of the EU had a few areas of major impact—it promoted greater coordination and cooperation in policy, broadly speaking, but it had specific effects on citizenship, security and defense policy, and economic policy. Regarding economic policy, the Maastricht Treaty aimed to create a common economic and monetary union, with a central banking system (the European Central Bank (ECB)) and a common currency (the euro). In order to do this, the treaty called for the free movement of capital between the member states, which then graduated into increased cooperation between national central banks and the increased alignment of economic policy among member states. The final step was the introduction of the euro itself, along with the implementation of a singular monetary policy, coming from the ECB. It also introduced convergence criteria, or requirements that countries must meet in order to use the euro as currency.

The EU introduced the euro in 1999, and physical euro coins and paper notes were introduced in 2002. The symbol ‘EUR’ is the abbreviation for the euro. The euro is the second-largest reserve currency as well as the second-most traded currency in the world after the United States dollar. As of August 2018, with more than €1.2 trillion in circulation, the euro has one of the highest combined values of banknotes and coins in circulation in the world, having surpassed the U.S. dollar. The value of the Euro is dependent on the performance of all 19 countries within the Eurozone. ‘The Good’ part is that smaller countries like Malta and Cyprus to have access to lower interest rates and increase investments throughout their countries. ‘The Bad’ part is that the value of the euro is reliant on strong performances of all the countries that are in the Eurozone. ‘The Ugly’ part is that if one country runs into economic instability it can bring the rest of the Eurozone down with them. For instance, the Greek Debt Crisis Financial markets can be divided into money and equity markets. The money market consists of the unsecured and secured ‘cash’ segments and derivatives segments. The money market in a broader sense also includes the market for short-term debt securities. New issuance of debt securities by euro area residents totaled EUR 749.9 billion in January 2019. Redemptions amounted to EUR 608.3 billion and net issues to EUR 141.6 billion. The annual growth rate of outstanding debt securities issued by euro area residents was 2.1% in January 2019, compared with 1.9% in December. Concerning the currency breakdown, the annual growth rate of outstanding euro-denominated debt securities was 2.9% in January 2019, compared with 2.7% in December. For debt securities in other currencies, this rate of change was – 2.3% in January 2019, compared with – 2.8% in December.

The market value of the outstanding amount of listed shares issued by euro area residents totaled EUR 7,483.6 billion at the end of January 2019. Compared with EUR 8,204.0 billion at the end of January 2018, this represents an annual decrease of -8.8% in the value of the stock of listed shares in January 2019, up from -11.7% in December.

New issuance of listed shares by euro area residents totaled EUR 2.9 billion in January 2019. Redemptions amounted to EUR 3.5 billion and net redemptions to EUR 0.6 billion. The annual growth rate of the outstanding amount of listed shares issued by euro area residents (excluding valuation changes) was 0.7% in January 2019, compared with 0.8% in December. The annual growth rate of listed shares issued by non-financial corporations was 0.4% in January 2019, the same as in December. For MFIs, the corresponding rate of change was -0.1% in January 2019, the same as in December. For financial corporations other than MFIs, this growth rate was 2.7% in January 2019, compared with 2.8% in December.

Major European stock exchanges in the Eurozone include Euronext – European stock exchange that is made up of 5 market places in Belgium, France, Ireland, Portugal, and the Netherlands. On this stock exchange, there are 1,300 companies listed with overall 4.36 trillion market cap and over 30 indices. Also, Deutsche Borse which operates Europe’s third largest stock exchange with 2.22 trillion market cap predominately listed by German companies.

As we all know, The U.S. Securities Market is self-reliant, subjected to one set of regulations fiscal policy, the market is not interdependent and the dollar is the haven currency. On the other hand, Eurozone financial markets perform harmonious, however local governments have different structures and regulations for their economies and every country has their own regulations and fiscal policy: same currency issued debt but with different interest rates.

It is important to understand the underlying differences between two systems. The fundamental difference in corporate funding between the U.S. and Europe is that European companies rely far more heavily on bank lending. Overall, some 80% of corporate debt in Europe is in the form of bank lending, with just 20% coming from the corporate bond markets – almost the inverse of the U.S. Data suggests that there is a shortfall in capacity of more than $1 trillion a year between what European companies raise in the capital markets and what they could potentially raise if capital markets were as developed as in the U.S. The structure of the European banking system, with a series of national champion banks traditionally operating within their own borders, allied with a strong local network of regional banks (and backed up by all of those deposits) has historically made bank lending the default option for most companies. A key difference with bank lending is that in the U.S. banks securitize or sell on many of their loans into the much more developed institutional loan market, whereas in Europe a far larger proportion of bank loans remain on bank balance sheets. In addition, alternative sources of funding such as capital markets have been fragmented across national borders and have only in the past few decades begun to catch up with the U.S. This is reflected in the significant gap in depth in most sectors of the capital markets.

As the official currency used by the 27 member states of the European Union (EU), the euro is one of the main currencies traded by market participants and has an influence on global markets. Although it was launched since January 1, 1999, physically the euro was used on January 1, 2002. Since its introduction, only 19 member of European Union countries have directly used the euro as official currency and 8 other countries still use their local currency. Why don’t all EU countries use the euro? Does the euro really fulfil its purposes for EU? Of course, there are certain reasons and policies that will affect each country. This paper will discuss the pros and cons of the euro adoption from an economic point of view.

The formation of the euro currency and the Maastricht Agreement were related to an agreement at the meeting of European countries in Rome in 1957, which planned the formation of a common market and military unification. This plan is expected to have multiple functions; increase trade and safeguard against European countries from losses of dollars in the international monetary system. The euro is the currency used in 19 member states of the European Union. On an official basis, this currency began to be used on January 1, 1999, but was physically used started on January 1, 2002. The euro from one country may be used in any European country that joins another single euro currency.

There are nineteen member states of the European Union that use the euro as currency. The area where this currency is used is known as the Eurozone. The first eleven countries started using it in early 1999. Greece is the 12th user since early 2001. Starting January 1, 2007 Slovenia has joined. Cyprus and Malta have been using since January 1, 2008. Slovakia followed by using the euro in 2009. Estonia adopt euro in 2011, Latvia in 2014 and most recently Lithuanian in 2015. The countries using this currency are: Germany, Ireland, The Netherlands, France, Luxembourg, Austria, Finland, Belgium, Italy, Portugal, Spain, Greece, Slovenia, Cyprus, Malta, Slovakia, Estonia, Latvia, Lithuania. In addition, several small countries also use the euro: Andorra, Monaco, San Marino, The Vatican. Some regions are also allowed to use the euro as currency: Montenegro and Kosovo.

It is hoped that the presence of the euro as a cross-border trade transactions in the European region for European Union countries is expected to reduce dependence on the US dollar. This is due to the dominance of the circulation of the US dollar not only in the European region but also in the international world. This situation underlies the leaders to form a new currency as a competitor to the US dollar in international trade.

To coordinate monetary policy, the Eurozone formed the euro-system. It consists of the European Central Bank (ECB) and the central banks of member countries. The main objective of the monetary authority is to maintain price stability, maintain financial stability and promote financial integration.

The ECB is chaired by a president and a board, which consists of the heads of the central banks of the member countries. One of the main tasks of the ECB is to keep inflation in eurozone countries under control. The inflation rate target is around 2% as November 2020. In the context of economic reforms after the 2008 global financial crisis, the eurozone set provisions to provide loans to member countries in times of emergency.

The economy is one of the most important factors in every country, because if a crisis occurs in a country, it will have a negative impact on the country’s economic and financial stability. Therefore, financial and trade issues that can worsen macroeconomics globally must be addressed as soon as possible.

Member countries coordinate economic policies to achieve sustainable economic growth rates and high employment opportunities. The scope of economic coordination includes fiscal, monetary, single market operations and supervision of financial institutions.

Meanwhile, the national governments of member countries still have control over elements such as: the government budget, tax, pension system, labor regulations and capital market regulations.

In fiscal management, the Stability and Growth Pact (SGP) requires fiscal discipline among members. The requirement is countries in eurozone should maintain a fiscal deficit less than 3% of GDP and a fiscal debt of less than 60% of GDP.

Even though it has been inaugurated as the official currency for more than 20 years in the European Union, it turns out that there are still 8 countries that have yet to make the euro as an official currency. Of course, there are certain reasons why the country still maintains its official currency. Economic factors are taken into consideration in this decision. Some of them do not want to move to the eurozone to maintain economic independence.

Macroeconomic Point of View

As the currency used in most of Europe, the euro has good credibility as one of the world’s currencies and is even one of the main currencies of foreign exchange reserves. According to the International Monetary Fund (IMF), the euro is used as the highest global currency reserves after USD. In addition, the stability of the euro makes transaction costs and currency hedges lower. With the existence of a single currency, transactions in the eurozone have much lower nominal exchange rate uncertainty.

When the euro serves as the currency in international trade, the transaction costs between countries will decrease. The flow of goods, services, capital and labor will be more efficient and integrated. Broader market access, domestic companies can sell goods and services freely to other countries with less risk from the currency point of view. Productivity between countries in the eurozone can increase. Including when there is an investment flow between member countries, there will be no risk of currency differences.

A relatively stable euro currency can help countries with a tradition of inflation, for example Italy. However, the stability and integration of trade in the eurozone does not have a significant effect on economic growth. Since the crisis that hit in 2008, economic growth in the Eurozone has not reached an average of 3%, even decreasing drastically in 2020 due to the effects of the Covid-19 pandemic.

Microeconomic Point of View

From the trade side in meeting people’s needs, the euro opens wider opportunities and increases competition. Companies from one eurozone country can meet the needs of another eurozone country. Demand increases and supply can be obtained from a wider range. The company not only competes with local competitors but also other member countries. Under these conditions, there will be price transparency, reducing monopolies, and increasing innovation.

Euro Crisis

On 2008, several years after the euro was launched, there was an economic crisis in a number of European countries such as Greece, Portugal, Ireland and Spain which was marked by sluggishness and large budget deficits. Along with that, the euro exchange rate also weakened compared to other currencies. This condition makes a number of countries such as Germany, which supports the provision of aid funds to save debt-ridden European countries, to worry about this funding overflow. On the other hand, the economic rescue program implemented by means of economic tightening has caused upheaval and popular protests.

The crisis storm experienced by European countries had a domino effect on other European countries. Ireland, Portugal, Hungary and Spain were dragged into the storm of the domestic economic crisis and even Ireland had to receive an injection of funds from the European monetary authority and the International Monetary Foundation (IMF) as a step to save Ireland into a further crisis. For this reason, a bailout is needed for financial stability in Europe, especially maintaining the value of the euro currency.

On the one hand, the Eurozone brings benefits and adds to the bargaining position of European countries. On the other hand, the countries of the Eurozone pose problems, such as a lack of adaptation from one country to another. This happens because not all countries agree on the monetary system in the economy following the eurozone system.

In the global economic order, especially in non-eurozone countries, there was no direct impact of the crisis and it does not mean that it does not exist. The biggest impact occurs on the people of non-eurozone countries who have difficulty accessing currency values and pressure on the banking sector. In addition to pressure from monetary and financial policies, these countries experience difficulties in importing countries, including Asia, because the level of multinational trade among European countries is very high.

Conclusion

Discussing currency is like the philosophy of a coin, there are two opposing sides. The existence of the single euro currency offers various conveniences in trade, investment, financial integration, and even tourism. Exchange rate risk has also decreased for all countries in the eurozone. However, in reality there are other countries in the EU that have not adopted the euro.

Countries that have not adopted the euro, apart from not meeting EU requirements from an economic point of view, also have other considerations. Turning to the Euro can be a tumultuous process if the economy is unstable from the start. Inflation is the risk and most worrying problem for countries in the transition process. In addition, a major change in the banking system is required. Countries that have their own currency have a national banking system that has the power to regulate the value of the currency and the number of banknotes printed, based on the country’s needs for various reasons, such as fighting inflation. After becoming part of the European Union, the country agreed to be managed by the European Central Bank.

Adopting the euro can also trigger a country’s stability including weak political commitment, various views on economic priorities within the country, and turmoil in international markets.

The European Project has always been more or less ambiguous about its objective. The famous Schuman Declaration of 9 May 1950, considered to be the guiding principle behind the European project, is without doubt the clearest of the founding texts. It assigned the six signatory states the objective of achieving, through the European Coal and Steel Community, “the setting up of common foundations for economic development as a first step in the federation of Europe”. Federation was what it was all about.

At the end of the Second World War, the goal was to create a peaceful region, for that France and Germany relied on economic agreements to achieve it. These two nations were fighting with each other for two raw materials which were coal and steel. That is how the European Coal and Steel Community was built. Building a single market around these two industries was the best way to avoid any tensions and at worst war between European countries. Later, the Treaty of Rome established the European Economic Community. This union was based on the customs of the six main countries of the area, namely, France, West Germany, Luxembourg, Belgium, Italy and the Netherlands. The abolition of customs duties allowed for the free movement of goods and marks the beginning of convergence between these countries. The aim of this paper is to present the reason for the Eurozone crisis, which factors led to this crisis, what were the consequences of this crisis, is there still some impact today and what is the future of Europe, with or without a common currency.

History of the Eurozone

The Euro was born of the decision of the European Union leaders to establish an Economic and Monetary Union, with a single currency, under the Maastricht Treaty signed in 1992. But first it was in June 1988, that the European Council announced its intention to establish an Economic and Monetary Union. The former president of the European Commission, Jacques Delors, was asked to form a committee to study the stages of progress. The Delors’ report, published the following year in three phases. The first one is the strengthening of monetary cooperation and the complete liberalization of capital movement. Then, the next phase was the creation of the European Monetary institute. And the third phase was the irrevocable fixing of exchange rates and the introduction of the Euro.

The first stage in the construction of the Economic and Monetary Union began in 1990 with the decision of the European Council to give new responsibilities to the Committee of Governors of the Central Banks of the member states of the European Economic Community. In fact, during this phase, the European Council was to bring the different national monetary policies closer together, in order to arrive at the fixing of conversion rate between currencies, planned for the third phase. The Committee’s new tasks are, therefore, to consult and promote the coordination of member states’ monetary policies. In addition, this first step towards the establishment of the Economic and Monetary Union includes extensive legal work to amend the Treaty of Rome. To this end, an intergovernmental Conference on the Economic and Monetary Union was convened in 1991. This was held at the same time as another political union. The result of these negotiations is probably one of the most important treaties in the history of the European integration, the Treaty of Maastricht, also known as the Treaty on European Union. The Maastricht Treaty sets out, among other things, the five convergence criteria which govern a member state’s entry into the future monetary union.

The second stage of the Economic and Monetary Union began with the establishment of the European Monetary Institute. This institution was a temporary one which replaced the European Monetary Cooperation Fund and whose objective was to pursue the monetary integration of the community with a view to the creation of the European Central Bank. The European Monetary Institute was not responsible for the conduct of monetary policy (which remains a national prerogative) and cannot carry out foreign exchange interventions. It is responsible for further strengthening coordination between central banks and for preparing the creation of the European System of Central Banks. During this second phase, the European Council decided on the name of the new single currency, the Euro, while the European Monetary Institute presented the selected designs of the banknotes. In 1997, the European Council adopted the Stability and Growth Pact, which consists of two parts (preventive and corrective) and aims to ensure budgetary discipline in the Economic and Monetary Union. The Council of the European Union meeting with the heads of states and government voted unanimously that eleven member states fulfilled the necessary conditions to adopt the single currency.

The third phase started when the European Central Bank took over from the European Monetary Institute and eleven member states entered the third stage, namely Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland. This group, now known as the ‘Eurozone’ expanded, later, with eight new member states (Greece, Slovenia, Cyprus, Malta, Slovakia, Estonia, Latvia and Lithuania). In theory, all the EU countries are supposed to participate in the Economic and Monetary Union and eventually join the Eurozone. However, two countries have a derogation. Denmark refused to commit to EMU from the outset and Sweden has an informal ‘opt-out’.

The Eurozone Crisis

The economic and financial crisis that broke out in 2008 highlighted the need to strengthen economic governance in the EU and the Eurozone. The crisis led member states to put in place new, and more precise and effective common policy instruments. These reforms, which have been the subject of several summits, have concerned all three strands of the Economic and Monetary Union: monetary, economic and fiscal. The stability of the single currency has, for long, been put to the test during the crisis, and the scholars has repeatedly questioned the future of the Euro. The economies of several member states have been badly hit. Indeed, national deficits and debt levels have far exceeded the rules set out in the Maastricht Treaty. The EU has put in place rescue packages to replenish national coffers. At the same time, member states discussed deepening the Economic and Monetary Union reaffirm the Maastricht principles and ensure better economic and monetary coordination.

In 2011, the European Semester came into force. It is a new tool for budgetary and economic coordination and surveillance. The EU decided to strengthen the Stability and Growth Pact adopted in 1997, the so-called ‘Sixpack’ reform imposes quasi-automatic procedures in case of infringement of the rules and the introduction of graduated financial sanctions.

In 2008, Ireland became the first country in Europe to go into recession. Its GDP fell by 3,5% and its public deficit reached 7,2% of GDP, far exceeding the 3% standard imposed by the Maastricht Treaty. Within the EU, Spain and the United Kingdom will follow. The years 2008 and 2009 can be considered as the hardest, since the GDP of the EU-28 grew by only 0,5% in 2008 before posting a negative growth of 4,3% the following year. It was not until 2010 that growth picked up again (2,1%), before another recession in 2012 (-0,4%). Faced with systemic risks, the reaction of European institutions was swift. After the collapse of Lehman Brothers, the European Central Bank gradually lowered its key rate from 4,75% to just 1%.

The Eurozone crisis of 2008-2009 is first and foremost a banking crisis, caused by risky innovations, in a context of uncontrolled financial liberalization and globalization. It was not caused by rising public debts and deficits. However, it did cause a sharp deterioration in public finances, due to support for banks, failing tax revenues and policies to support activity. From the end of 2008, the financial markets speculated on the break-up of the zone. The financial crisis has been prolonged into a crisis of public debt in the Eurozone. The crisis has led to a sharp rise in the public deficits and debts. Public debt is expected to reach levels not seen in fifty years.

According to the Commission, the crisis has caused a sharp fall in potential growth. The Commission has revised its estimates, even for the pre-crisis period, raising the output gap for the euro area for 2007 from -0,2% to 2,5%, potential growth for the area would only be 0,9% per year on average from 2008 to 2010 instead of 2,1%. The structural public deficit of the area would have been 1,9% of GDP in 2007 and would reach 5,1% of GDP in 2010.

According to some observers, this crisis has revealed many flaws in the Euro’s production. Some of them are as follows. A common monetary policy conceived with the European Central Bank confined to monetary stability (inflation dogma and prohibition of direct lending to states), the absence of common budgetary, economic or fiscal policy (on the contrary, deregulation and fiscal competition set the states against each other). And finally, the lack of specificity of the Eurozone in the general functioning of the European Union, although there is a Eurozone, there is no coordination between countries and no solidarity between states. What was highlighted about the Euro was that it allowed for low and uniform interest and exchange rates and this is precisely what asked the differences between the economies and encouraged some countries to go to a massive debt, creating bubbles (like estate agencies in Spain for example).

In the end, the attempt to converge the economies reinforced the divergence of the economies and favored the creation of two Europes: Northern and Southern.

What Will Happen to the European Union?

The consequences of the crisis and the difficult recovery of several countries in the region, steered the scholars to question the future of the common currency in Europe. During the crisis, the International Monetary Fund (IMF), the OECD and the Commission pushed governments to undertake large fiscal support programs. Now, these international institutions are pushing governments to undertake restrictive policies, while growth has not returned to the Eurozone.

Countries should return to their pre-crisis levels of public debt would lead to high interest rates that would crowd out investment and harm growth. But households want to hold a higher level of public debt because they need assets to finance their retirement and equities have proved too risky an investment. The sharp increase in public debt in the crisis has not been accompanied by a rise in interest rates and on the contrary, short rates are very low and long rates in line with the growth rate. A public deficit that supports growth, with interest rates as low as possible, cannot be accused of crowding out investment.

The IMF is asking developed countries to undertake restrictive policies of an additional 0.8 percentage points of GDP each year, without discussing the implications of this strategy on activity. If the multiplier of a generalized revival is 2, this means that growth will be reduced by 1.6 percentage points per year, public balances will not improve (since the fall in activity will reduce tax revenues), debt ratios will increase due to the economic slowdown. International organizations are calling for adjustment to be made by cutting public spending rather than raising taxes, without comparing the social utility of public spending and the spending of taxpayers hit by higher taxes, and without taking into account their impact on demand. They call for budgetary rules and independent fiscal policy committees. Yet the crisis has shown that fiscal policy cannot be rule-based and must be driven by a determined political power, which a committee of experts will never be.

From the end of 2008, financial markets started to speculate on the debts of European countries. Overall, the sharp rise in global debts and public deficits did not lead to increases in long-term interest rates, as the markets believed that money rates would remain low for a long time and that there was no risk of inflation or overheating. But the markets have realized that there is a flaw in the organization of the Eurozone. While governments of other developed countries cannot go bankrupt because they can always be financed by their central bank, the countries of the Eurozone have given this possibility. As a result, speculation was triggered in the most fragile Member States, namely Greece, Spain and Ireland, which had experienced strong growth before the crisis, but which had to change their growth model because of the crisis.

Financial markets risk completely paralyzing fiscal policy. In the past, when a country’s demand was too weak, the central bank lowered its interest as much as possible, the State increased its deficit, the low level of interest rates prevented the public debt from increasing too much, the mistrust of the markets resulted in a drop in the exchange rate, and therefore gains in competitiveness which helped to support activity. The risk is that later, a country from the Eurozone will no longer be able to increase its deficit, for fear that the markets will cause interest rates to rise, under the pretext of a risk premium. We cannot allow the financial markets to speculate on the bankruptcy of states. Therefore, the risk of state bankruptcy must be zero, the central bank must always be obliged to finance the states, even in the Eurozone. The European authorities and member countries were slow to react, not wanting to give the impression that member countries were entitled to automatic aid from their partners and wanting to punish Greece for not having respected the Pact. However, the European authorities indicated to the markets that they were providing unlimited support, first to Greece and then to all the countries under threat. In return, the threatened countries had to announce unprecedented budgetary austerity programs, which would condemn them to a sharp decline in activity and a long period of recession.

The Future of the Euro

Social protection expenditure since 2008 in the European Union reveals significant contrasts particularly East-West. The impact of the crisis and the changes in social policies are still visible. Indeed, the crisis made it possible to impose major cuts in social spending (like pensions and healthcare), which is the Commission’s permanent objective. But the risk here is to jeopardize the social cohesion and forcing households to save their pensions and healthcare system with the financial institutions responsible for the crisis.

According to Joseph Stiglitz, the single currency, if it remains in its current form, threatens the future of Europe, “the European project is too important to be sacrificed on the cross of the Euro”. Insofar, as the economy is intimately linked to politics, the Euro crisis can be explained above all by political blockages that prevent the progress that is indispensable for a more harmonious functioning of the economic and monetary union (to reform the structure of the Eurozone). For Joseph Stiglitz, the failures of the Eurozone are attributable to a combination of two factors. The first one is the failure of what he calls a ‘flawed ideology’, being the economic theories and the general conception of the economy that have guided economic policy choices so far. The second one is the lack of deep political solidarity between member countries, which has led to the paradoxical result that the victims are the guilty ones (example of Greece).

The Euro was founded on the promise of prosperity and political integration, and for Stiglitz neither of these goals has been achieved. The macroeconomic performance of the Eurozone has been particularly poor. Moreover, economic integration has gone much faster than political integration, which has led to a break-even point, in the framework of the monetary union of Europe that has not, by any means, eliminated its democratic deficit. In particular, he insists that this poor performance, due to the prolonged recession, not only weighs on future potential growth, but also leads to suffering and disappointment, especially for the younger generations, who are confronted with the full effects of the crisis. It is therefore not surprising to see the electoral progress of populist and sovereign parties that reject Europe (for example the illiberal turn that Hungary and Poland are taking).

Stiglitz’s ideas are followed by most of the politicians and economists. They criticized the rush to austerity being imposed on Greece, among others, suggesting it would be counterproductive by depressing growth and the competitive imbalances between Eurozone members would be impossible to overcome. They suggested the ultimate consequence of the crisis would be a much smaller eurozone with Germany at the center and countries such as Greece, Portugal, Italy and Ireland on the outside.

The 2008 crisis was inevitable, and this kind of crisis can happen again if no concrete measures are put in place to face them. Especially, with the sanitary crisis the world is facing today. But in the future to reduce the impact of such a crisis or to avoid it, will be the creation of a political integration within the European Union. Indeed, the European Union is suffering from a democratic deficit, and to reduce it could help to avoid any crisis in the future. This political integration could also slow down the wave of populism that Europe is facing.

The state of Europe’s current economic recession taints all promise for its future, its excellence, and its international prestige, as manufacturing in the EU has hit its lowest point since the previous eurozone crisis in October 2012 and is expected to stay this way for the rest of 2019. Although the euro, a common currency shaping the eurozone as a monetary union in which 19 of the 28 countries in the EU recognize the euro as its sole legal tender, was enacted as a means of promoting integration in both real and financial sectors, fundamental policy gaps between the ‘northern core’ and the Baltics negate the prospect of integration as a notion that solely promotes growth and progress but rather as an obstacle forcing European nations to formulate common, cooperative solutions that promote homogeneity. As a means of mitigating the crippling nature of the crisis on European welfare, the US Federal Reserve, the ECB, and other international banks funneled US dollars into European financial systems, which helped bolster economic activity within the continent by making American dollars more accessible outside of US stocks. Due to the volatile nature of increasing liquidity as a move that will potentially force the EU into back into another 2007-2008 financial crisis, policy experts’ question as to whether or not this investment should be recognized as a viable long-term solution under the belief that a solution of this caliber will only present a temporary fix to the underlying issue at hand. Currently, the European Central Bank (ECB) based in Frankfurt, Germany and the national banks of eurozone member states constitute the Eurosystem, in which the monetary policies of these countries are managed under an independent body. Homogeneity is achieved through the use of key mechanisms, such as the Stability and Growth Pact (SGP) and the Financial Services Action Plan (FSAP), outlining a number of rules and procedures member states are expected to adopt internally with the intent of facilitating the growth of the financial sector under the common currency regime.

The prospect of a common European currency was a central tenet of the 1992 Maastricht Treaty, which explicates certain criteria countries must follow to join the euro and laid the foundation for the creation of a ‘European’ institutional structure which acts to ensure the stability of the common currency in the international market. Shortly after things turned sour with the euro’s implementation, the EU proposed the ratification of the Fiscal Compact which promotes the concept of a ‘structural budget’ where its effects are not observable with calculations subject to consistent revision over time. In 2007 when the eurozone crisis was first emerging, 17 eurozone summit leaders met to agree on a second bailout for Greece in the hopes of preventing the debt crisis from consuming the whole of Europe’s economy. Three years later, the EU implemented the European Stability Mechanism with the intent issuing provisions to alleviate strenuous amounts of debt within debtor countries. The GA has also been involved in helping Europe mitigate the effects of the crisis in A/71/216, which enhances cooperation between the EU and the IMF, as well as transparency measures concerning economic reform. Even though we’ve come a long way since the euro was first introduced, there is still much to do to prevent the euro from plunging the EU into a prolonged economic recession.

Germany is a leader in reforming labor markets and keeping unit labor costs in check, which is why we are at the forefront of efforts to mitigate the eurozone crisis. Germany is adamant about maintaining fiscal responsibility under the SGP, as the SGP provides a clear-cut framework for optimal integration of the euro and will thus enable us to minimize the number of crises that occur within the EU, such as the one that occurred in 2010 with Greece. In Germany, federal revenues and expenditures are controlled by federal laws, which accompany an extensive bailout system keeping our economy in check and minimizing the severity of shocks when they occur. Our nation has also adopted a universal banking system in which the Federal Financial Supervisory Authority (BaFin) acts as the main institution of financial regulation concerning the private sector and economic risk. Keeping this in mind, Germany proposes the implementation of the 2020 Eurozone Plan of Public Investment, a political union, a European debt reduction fund, and means by which we will be able to recapitalize banks through private and state injections.

Firstly, Germany proposes the implementation of the 2020 Eurozone Plan of Public Investment, which will make the countries themselves accountable for how they choose to invest their capital. Doing so will make much more sense than simply relying on the ECB to impose ‘stronger’ mechanisms that regulate this facet of the economy while still allowing for full transparency on sovereign debt exposures. In our framework, the ECB will first tabulate who owes what to whom, which will require each country in the eurozone to submit an account of their current income and expenditures. Our choice in making the ECB regulate these finances as opposed to formulating legislation is fitting in the sense that the purpose of the ECB was always to manage monetary protocols as an independent body. This will also require a neutral, non-member state, preferably the Swiss, to further assess each country’s situation as to confirm the assessments made by the ECB from an objective standpoint. Upon retrieving the final draft of these assessments, we will then issue means, such as the removal of public investment in national budgets (and therefore measured deficits), to keep expenses at bay. If we were to follow this route, in particular, we will give the European Investment Bank (EIB) a central role in public investment financing in which struggling nations will be able to lease new infrastructure investments and gradually reimburse the EIB through a user fee that covers interest rates over time. Doing so will improve governance in their respective economies by minimizing austerity measures in the cutting of investments, thus improving the collective state of the eurozone in the long run.

As a stateless central bank within a bloc where national governments retain fiscal sovereignty, however, the ECB has very few tools with which they will be able to use to pressure governments to pursue economic policies that are consistent with its inflation target. The lack of governance of both fiscal and monetary unions, especially with how some, if not most, nations blatantly ignore vital conventions, such as the ‘no bail-out’ clause, enshrined in EU treaties, requires some form of common, more centralized decision-making—a political union, perhaps—noting how the formation of policies concerning taxes, payments, and resource transfers involves excessive political commentary. Our political union will opt for the creation of a core Union inside the EU as a means of propelling genuine political integration, as well as effective governance of economic infrastructure and foreign affairs, with full democratic accountability and parliamentary control.

The Eurozone is a geographic and economic region that consists of all the European Union (EU) countries that have fully incorporated the euro as their national currency. As of 2019, the Eurozone consists of 19 countries in the EU: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

In 1992, the countries making up the European Community (EC) signed the Maastricht Treaty, thereby creating the EU. The creation of the EU had a few areas of major impact—it promoted greater coordination and cooperation in policy, broadly speaking, but it had specific effects on citizenship, security and defense policy, and economic policy. Regarding economic policy, the Maastricht Treaty aimed to create a common economic and monetary union, with a central banking system (the European Central Bank (ECB)) and a common currency (the euro). In order to do this, the treaty called for the free movement of capital between the member states, which then graduated into increased cooperation between national central banks and the increased alignment of economic policy among member states. The final step was the introduction of the euro itself, along with the implementation of a singular monetary policy, coming from the ECB. It also introduced convergence criteria, or requirements that countries must meet in order to use the euro as currency.

The EU introduced the euro in 1999, and physical euro coins and paper notes were introduced in 2002. The symbol ‘EUR’ is the abbreviation for the euro. The euro is the second-largest reserve currency as well as the second-most traded currency in the world after the United States dollar. As of August 2018, with more than €1.2 trillion in circulation, the euro has one of the highest combined values of banknotes and coins in circulation in the world, having surpassed the U.S. dollar. The value of the Euro is dependent on the performance of all 19 countries within the Eurozone. ‘The Good’ part is that smaller countries like Malta and Cyprus to have access to lower interest rates and increase investments throughout their countries. ‘The Bad’ part is that the value of the euro is reliant on strong performances of all the countries that are in the Eurozone. ‘The Ugly’ part is that if one country runs into economic instability it can bring the rest of the Eurozone down with them. For instance, the Greek Debt Crisis Financial markets can be divided into money and equity markets. The money market consists of the unsecured and secured ‘cash’ segments and derivatives segments. The money market in a broader sense also includes the market for short-term debt securities. New issuance of debt securities by euro area residents totaled EUR 749.9 billion in January 2019. Redemptions amounted to EUR 608.3 billion and net issues to EUR 141.6 billion. The annual growth rate of outstanding debt securities issued by euro area residents was 2.1% in January 2019, compared with 1.9% in December. Concerning the currency breakdown, the annual growth rate of outstanding euro-denominated debt securities was 2.9% in January 2019, compared with 2.7% in December. For debt securities in other currencies, this rate of change was – 2.3% in January 2019, compared with – 2.8% in December.

The market value of the outstanding amount of listed shares issued by euro area residents totaled EUR 7,483.6 billion at the end of January 2019. Compared with EUR 8,204.0 billion at the end of January 2018, this represents an annual decrease of -8.8% in the value of the stock of listed shares in January 2019, up from -11.7% in December.

New issuance of listed shares by euro area residents totaled EUR 2.9 billion in January 2019. Redemptions amounted to EUR 3.5 billion and net redemptions to EUR 0.6 billion. The annual growth rate of the outstanding amount of listed shares issued by euro area residents (excluding valuation changes) was 0.7% in January 2019, compared with 0.8% in December. The annual growth rate of listed shares issued by non-financial corporations was 0.4% in January 2019, the same as in December. For MFIs, the corresponding rate of change was -0.1% in January 2019, the same as in December. For financial corporations other than MFIs, this growth rate was 2.7% in January 2019, compared with 2.8% in December.

Major European stock exchanges in the Eurozone include Euronext – European stock exchange that is made up of 5 market places in Belgium, France, Ireland, Portugal, and the Netherlands. On this stock exchange, there are 1,300 companies listed with overall 4.36 trillion market cap and over 30 indices. Also, Deutsche Borse which operates Europe’s third largest stock exchange with 2.22 trillion market cap predominately listed by German companies.

As we all know, The U.S. Securities Market is self-reliant, subjected to one set of regulations fiscal policy, the market is not interdependent and the dollar is the haven currency. On the other hand, Eurozone financial markets perform harmonious, however local governments have different structures and regulations for their economies and every country has their own regulations and fiscal policy: same currency issued debt but with different interest rates.

It is important to understand the underlying differences between two systems. The fundamental difference in corporate funding between the U.S. and Europe is that European companies rely far more heavily on bank lending. Overall, some 80% of corporate debt in Europe is in the form of bank lending, with just 20% coming from the corporate bond markets – almost the inverse of the U.S. Data suggests that there is a shortfall in capacity of more than $1 trillion a year between what European companies raise in the capital markets and what they could potentially raise if capital markets were as developed as in the U.S. The structure of the European banking system, with a series of national champion banks traditionally operating within their own borders, allied with a strong local network of regional banks (and backed up by all of those deposits) has historically made bank lending the default option for most companies. A key difference with bank lending is that in the U.S. banks securitize or sell on many of their loans into the much more developed institutional loan market, whereas in Europe a far larger proportion of bank loans remain on bank balance sheets. In addition, alternative sources of funding such as capital markets have been fragmented across national borders and have only in the past few decades begun to catch up with the U.S. This is reflected in the significant gap in depth in most sectors of the capital markets.

As the official currency used by the 27 member states of the European Union (EU), the euro is one of the main currencies traded by market participants and has an influence on global markets. Although it was launched since January 1, 1999, physically the euro was used on January 1, 2002. Since its introduction, only 19 member of European Union countries have directly used the euro as official currency and 8 other countries still use their local currency. Why don’t all EU countries use the euro? Does the euro really fulfil its purposes for EU? Of course, there are certain reasons and policies that will affect each country. This paper will discuss the pros and cons of the euro adoption from an economic point of view.

The formation of the euro currency and the Maastricht Agreement were related to an agreement at the meeting of European countries in Rome in 1957, which planned the formation of a common market and military unification. This plan is expected to have multiple functions; increase trade and safeguard against European countries from losses of dollars in the international monetary system. The euro is the currency used in 19 member states of the European Union. On an official basis, this currency began to be used on January 1, 1999, but was physically used started on January 1, 2002. The euro from one country may be used in any European country that joins another single euro currency.

There are nineteen member states of the European Union that use the euro as currency. The area where this currency is used is known as the Eurozone. The first eleven countries started using it in early 1999. Greece is the 12th user since early 2001. Starting January 1, 2007 Slovenia has joined. Cyprus and Malta have been using since January 1, 2008. Slovakia followed by using the euro in 2009. Estonia adopt euro in 2011, Latvia in 2014 and most recently Lithuanian in 2015. The countries using this currency are: Germany, Ireland, The Netherlands, France, Luxembourg, Austria, Finland, Belgium, Italy, Portugal, Spain, Greece, Slovenia, Cyprus, Malta, Slovakia, Estonia, Latvia, Lithuania. In addition, several small countries also use the euro: Andorra, Monaco, San Marino, The Vatican. Some regions are also allowed to use the euro as currency: Montenegro and Kosovo.

It is hoped that the presence of the euro as a cross-border trade transactions in the European region for European Union countries is expected to reduce dependence on the US dollar. This is due to the dominance of the circulation of the US dollar not only in the European region but also in the international world. This situation underlies the leaders to form a new currency as a competitor to the US dollar in international trade.

To coordinate monetary policy, the Eurozone formed the euro-system. It consists of the European Central Bank (ECB) and the central banks of member countries. The main objective of the monetary authority is to maintain price stability, maintain financial stability and promote financial integration.

The ECB is chaired by a president and a board, which consists of the heads of the central banks of the member countries. One of the main tasks of the ECB is to keep inflation in eurozone countries under control. The inflation rate target is around 2% as November 2020. In the context of economic reforms after the 2008 global financial crisis, the eurozone set provisions to provide loans to member countries in times of emergency.

The economy is one of the most important factors in every country, because if a crisis occurs in a country, it will have a negative impact on the country’s economic and financial stability. Therefore, financial and trade issues that can worsen macroeconomics globally must be addressed as soon as possible.

Member countries coordinate economic policies to achieve sustainable economic growth rates and high employment opportunities. The scope of economic coordination includes fiscal, monetary, single market operations and supervision of financial institutions.

Meanwhile, the national governments of member countries still have control over elements such as: the government budget, tax, pension system, labor regulations and capital market regulations.

In fiscal management, the Stability and Growth Pact (SGP) requires fiscal discipline among members. The requirement is countries in eurozone should maintain a fiscal deficit less than 3% of GDP and a fiscal debt of less than 60% of GDP.

Even though it has been inaugurated as the official currency for more than 20 years in the European Union, it turns out that there are still 8 countries that have yet to make the euro as an official currency. Of course, there are certain reasons why the country still maintains its official currency. Economic factors are taken into consideration in this decision. Some of them do not want to move to the eurozone to maintain economic independence.

Macroeconomic Point of View

As the currency used in most of Europe, the euro has good credibility as one of the world’s currencies and is even one of the main currencies of foreign exchange reserves. According to the International Monetary Fund (IMF), the euro is used as the highest global currency reserves after USD. In addition, the stability of the euro makes transaction costs and currency hedges lower. With the existence of a single currency, transactions in the eurozone have much lower nominal exchange rate uncertainty.

When the euro serves as the currency in international trade, the transaction costs between countries will decrease. The flow of goods, services, capital and labor will be more efficient and integrated. Broader market access, domestic companies can sell goods and services freely to other countries with less risk from the currency point of view. Productivity between countries in the eurozone can increase. Including when there is an investment flow between member countries, there will be no risk of currency differences.

A relatively stable euro currency can help countries with a tradition of inflation, for example Italy. However, the stability and integration of trade in the eurozone does not have a significant effect on economic growth. Since the crisis that hit in 2008, economic growth in the Eurozone has not reached an average of 3%, even decreasing drastically in 2020 due to the effects of the Covid-19 pandemic.

Microeconomic Point of View

From the trade side in meeting people’s needs, the euro opens wider opportunities and increases competition. Companies from one eurozone country can meet the needs of another eurozone country. Demand increases and supply can be obtained from a wider range. The company not only competes with local competitors but also other member countries. Under these conditions, there will be price transparency, reducing monopolies, and increasing innovation.

Euro Crisis

On 2008, several years after the euro was launched, there was an economic crisis in a number of European countries such as Greece, Portugal, Ireland and Spain which was marked by sluggishness and large budget deficits. Along with that, the euro exchange rate also weakened compared to other currencies. This condition makes a number of countries such as Germany, which supports the provision of aid funds to save debt-ridden European countries, to worry about this funding overflow. On the other hand, the economic rescue program implemented by means of economic tightening has caused upheaval and popular protests.

The crisis storm experienced by European countries had a domino effect on other European countries. Ireland, Portugal, Hungary and Spain were dragged into the storm of the domestic economic crisis and even Ireland had to receive an injection of funds from the European monetary authority and the International Monetary Foundation (IMF) as a step to save Ireland into a further crisis. For this reason, a bailout is needed for financial stability in Europe, especially maintaining the value of the euro currency.

On the one hand, the Eurozone brings benefits and adds to the bargaining position of European countries. On the other hand, the countries of the Eurozone pose problems, such as a lack of adaptation from one country to another. This happens because not all countries agree on the monetary system in the economy following the eurozone system.

In the global economic order, especially in non-eurozone countries, there was no direct impact of the crisis and it does not mean that it does not exist. The biggest impact occurs on the people of non-eurozone countries who have difficulty accessing currency values and pressure on the banking sector. In addition to pressure from monetary and financial policies, these countries experience difficulties in importing countries, including Asia, because the level of multinational trade among European countries is very high.

Conclusion

Discussing currency is like the philosophy of a coin, there are two opposing sides. The existence of the single euro currency offers various conveniences in trade, investment, financial integration, and even tourism. Exchange rate risk has also decreased for all countries in the eurozone. However, in reality there are other countries in the EU that have not adopted the euro.

Countries that have not adopted the euro, apart from not meeting EU requirements from an economic point of view, also have other considerations. Turning to the Euro can be a tumultuous process if the economy is unstable from the start. Inflation is the risk and most worrying problem for countries in the transition process. In addition, a major change in the banking system is required. Countries that have their own currency have a national banking system that has the power to regulate the value of the currency and the number of banknotes printed, based on the country’s needs for various reasons, such as fighting inflation. After becoming part of the European Union, the country agreed to be managed by the European Central Bank.

Adopting the euro can also trigger a country’s stability including weak political commitment, various views on economic priorities within the country, and turmoil in international markets.

The European Project has always been more or less ambiguous about its objective. The famous Schuman Declaration of 9 May 1950, considered to be the guiding principle behind the European project, is without doubt the clearest of the founding texts. It assigned the six signatory states the objective of achieving, through the European Coal and Steel Community, “the setting up of common foundations for economic development as a first step in the federation of Europe”. Federation was what it was all about.

At the end of the Second World War, the goal was to create a peaceful region, for that France and Germany relied on economic agreements to achieve it. These two nations were fighting with each other for two raw materials which were coal and steel. That is how the European Coal and Steel Community was built. Building a single market around these two industries was the best way to avoid any tensions and at worst war between European countries. Later, the Treaty of Rome established the European Economic Community. This union was based on the customs of the six main countries of the area, namely, France, West Germany, Luxembourg, Belgium, Italy and the Netherlands. The abolition of customs duties allowed for the free movement of goods and marks the beginning of convergence between these countries. The aim of this paper is to present the reason for the Eurozone crisis, which factors led to this crisis, what were the consequences of this crisis, is there still some impact today and what is the future of Europe, with or without a common currency.

History of the Eurozone

The Euro was born of the decision of the European Union leaders to establish an Economic and Monetary Union, with a single currency, under the Maastricht Treaty signed in 1992. But first it was in June 1988, that the European Council announced its intention to establish an Economic and Monetary Union. The former president of the European Commission, Jacques Delors, was asked to form a committee to study the stages of progress. The Delors’ report, published the following year in three phases. The first one is the strengthening of monetary cooperation and the complete liberalization of capital movement. Then, the next phase was the creation of the European Monetary institute. And the third phase was the irrevocable fixing of exchange rates and the introduction of the Euro.

The first stage in the construction of the Economic and Monetary Union began in 1990 with the decision of the European Council to give new responsibilities to the Committee of Governors of the Central Banks of the member states of the European Economic Community. In fact, during this phase, the European Council was to bring the different national monetary policies closer together, in order to arrive at the fixing of conversion rate between currencies, planned for the third phase. The Committee’s new tasks are, therefore, to consult and promote the coordination of member states’ monetary policies. In addition, this first step towards the establishment of the Economic and Monetary Union includes extensive legal work to amend the Treaty of Rome. To this end, an intergovernmental Conference on the Economic and Monetary Union was convened in 1991. This was held at the same time as another political union. The result of these negotiations is probably one of the most important treaties in the history of the European integration, the Treaty of Maastricht, also known as the Treaty on European Union. The Maastricht Treaty sets out, among other things, the five convergence criteria which govern a member state’s entry into the future monetary union.

The second stage of the Economic and Monetary Union began with the establishment of the European Monetary Institute. This institution was a temporary one which replaced the European Monetary Cooperation Fund and whose objective was to pursue the monetary integration of the community with a view to the creation of the European Central Bank. The European Monetary Institute was not responsible for the conduct of monetary policy (which remains a national prerogative) and cannot carry out foreign exchange interventions. It is responsible for further strengthening coordination between central banks and for preparing the creation of the European System of Central Banks. During this second phase, the European Council decided on the name of the new single currency, the Euro, while the European Monetary Institute presented the selected designs of the banknotes. In 1997, the European Council adopted the Stability and Growth Pact, which consists of two parts (preventive and corrective) and aims to ensure budgetary discipline in the Economic and Monetary Union. The Council of the European Union meeting with the heads of states and government voted unanimously that eleven member states fulfilled the necessary conditions to adopt the single currency.

The third phase started when the European Central Bank took over from the European Monetary Institute and eleven member states entered the third stage, namely Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland. This group, now known as the ‘Eurozone’ expanded, later, with eight new member states (Greece, Slovenia, Cyprus, Malta, Slovakia, Estonia, Latvia and Lithuania). In theory, all the EU countries are supposed to participate in the Economic and Monetary Union and eventually join the Eurozone. However, two countries have a derogation. Denmark refused to commit to EMU from the outset and Sweden has an informal ‘opt-out’.

The Eurozone Crisis

The economic and financial crisis that broke out in 2008 highlighted the need to strengthen economic governance in the EU and the Eurozone. The crisis led member states to put in place new, and more precise and effective common policy instruments. These reforms, which have been the subject of several summits, have concerned all three strands of the Economic and Monetary Union: monetary, economic and fiscal. The stability of the single currency has, for long, been put to the test during the crisis, and the scholars has repeatedly questioned the future of the Euro. The economies of several member states have been badly hit. Indeed, national deficits and debt levels have far exceeded the rules set out in the Maastricht Treaty. The EU has put in place rescue packages to replenish national coffers. At the same time, member states discussed deepening the Economic and Monetary Union reaffirm the Maastricht principles and ensure better economic and monetary coordination.

In 2011, the European Semester came into force. It is a new tool for budgetary and economic coordination and surveillance. The EU decided to strengthen the Stability and Growth Pact adopted in 1997, the so-called ‘Sixpack’ reform imposes quasi-automatic procedures in case of infringement of the rules and the introduction of graduated financial sanctions.

In 2008, Ireland became the first country in Europe to go into recession. Its GDP fell by 3,5% and its public deficit reached 7,2% of GDP, far exceeding the 3% standard imposed by the Maastricht Treaty. Within the EU, Spain and the United Kingdom will follow. The years 2008 and 2009 can be considered as the hardest, since the GDP of the EU-28 grew by only 0,5% in 2008 before posting a negative growth of 4,3% the following year. It was not until 2010 that growth picked up again (2,1%), before another recession in 2012 (-0,4%). Faced with systemic risks, the reaction of European institutions was swift. After the collapse of Lehman Brothers, the European Central Bank gradually lowered its key rate from 4,75% to just 1%.

The Eurozone crisis of 2008-2009 is first and foremost a banking crisis, caused by risky innovations, in a context of uncontrolled financial liberalization and globalization. It was not caused by rising public debts and deficits. However, it did cause a sharp deterioration in public finances, due to support for banks, failing tax revenues and policies to support activity. From the end of 2008, the financial markets speculated on the break-up of the zone. The financial crisis has been prolonged into a crisis of public debt in the Eurozone. The crisis has led to a sharp rise in the public deficits and debts. Public debt is expected to reach levels not seen in fifty years.

According to the Commission, the crisis has caused a sharp fall in potential growth. The Commission has revised its estimates, even for the pre-crisis period, raising the output gap for the euro area for 2007 from -0,2% to 2,5%, potential growth for the area would only be 0,9% per year on average from 2008 to 2010 instead of 2,1%. The structural public deficit of the area would have been 1,9% of GDP in 2007 and would reach 5,1% of GDP in 2010.

According to some observers, this crisis has revealed many flaws in the Euro’s production. Some of them are as follows. A common monetary policy conceived with the European Central Bank confined to monetary stability (inflation dogma and prohibition of direct lending to states), the absence of common budgetary, economic or fiscal policy (on the contrary, deregulation and fiscal competition set the states against each other). And finally, the lack of specificity of the Eurozone in the general functioning of the European Union, although there is a Eurozone, there is no coordination between countries and no solidarity between states. What was highlighted about the Euro was that it allowed for low and uniform interest and exchange rates and this is precisely what asked the differences between the economies and encouraged some countries to go to a massive debt, creating bubbles (like estate agencies in Spain for example).

In the end, the attempt to converge the economies reinforced the divergence of the economies and favored the creation of two Europes: Northern and Southern.

What Will Happen to the European Union?

The consequences of the crisis and the difficult recovery of several countries in the region, steered the scholars to question the future of the common currency in Europe. During the crisis, the International Monetary Fund (IMF), the OECD and the Commission pushed governments to undertake large fiscal support programs. Now, these international institutions are pushing governments to undertake restrictive policies, while growth has not returned to the Eurozone.

Countries should return to their pre-crisis levels of public debt would lead to high interest rates that would crowd out investment and harm growth. But households want to hold a higher level of public debt because they need assets to finance their retirement and equities have proved too risky an investment. The sharp increase in public debt in the crisis has not been accompanied by a rise in interest rates and on the contrary, short rates are very low and long rates in line with the growth rate. A public deficit that supports growth, with interest rates as low as possible, cannot be accused of crowding out investment.

The IMF is asking developed countries to undertake restrictive policies of an additional 0.8 percentage points of GDP each year, without discussing the implications of this strategy on activity. If the multiplier of a generalized revival is 2, this means that growth will be reduced by 1.6 percentage points per year, public balances will not improve (since the fall in activity will reduce tax revenues), debt ratios will increase due to the economic slowdown. International organizations are calling for adjustment to be made by cutting public spending rather than raising taxes, without comparing the social utility of public spending and the spending of taxpayers hit by higher taxes, and without taking into account their impact on demand. They call for budgetary rules and independent fiscal policy committees. Yet the crisis has shown that fiscal policy cannot be rule-based and must be driven by a determined political power, which a committee of experts will never be.

From the end of 2008, financial markets started to speculate on the debts of European countries. Overall, the sharp rise in global debts and public deficits did not lead to increases in long-term interest rates, as the markets believed that money rates would remain low for a long time and that there was no risk of inflation or overheating. But the markets have realized that there is a flaw in the organization of the Eurozone. While governments of other developed countries cannot go bankrupt because they can always be financed by their central bank, the countries of the Eurozone have given this possibility. As a result, speculation was triggered in the most fragile Member States, namely Greece, Spain and Ireland, which had experienced strong growth before the crisis, but which had to change their growth model because of the crisis.

Financial markets risk completely paralyzing fiscal policy. In the past, when a country’s demand was too weak, the central bank lowered its interest as much as possible, the State increased its deficit, the low level of interest rates prevented the public debt from increasing too much, the mistrust of the markets resulted in a drop in the exchange rate, and therefore gains in competitiveness which helped to support activity. The risk is that later, a country from the Eurozone will no longer be able to increase its deficit, for fear that the markets will cause interest rates to rise, under the pretext of a risk premium. We cannot allow the financial markets to speculate on the bankruptcy of states. Therefore, the risk of state bankruptcy must be zero, the central bank must always be obliged to finance the states, even in the Eurozone. The European authorities and member countries were slow to react, not wanting to give the impression that member countries were entitled to automatic aid from their partners and wanting to punish Greece for not having respected the Pact. However, the European authorities indicated to the markets that they were providing unlimited support, first to Greece and then to all the countries under threat. In return, the threatened countries had to announce unprecedented budgetary austerity programs, which would condemn them to a sharp decline in activity and a long period of recession.

The Future of the Euro

Social protection expenditure since 2008 in the European Union reveals significant contrasts particularly East-West. The impact of the crisis and the changes in social policies are still visible. Indeed, the crisis made it possible to impose major cuts in social spending (like pensions and healthcare), which is the Commission’s permanent objective. But the risk here is to jeopardize the social cohesion and forcing households to save their pensions and healthcare system with the financial institutions responsible for the crisis.

According to Joseph Stiglitz, the single currency, if it remains in its current form, threatens the future of Europe, “the European project is too important to be sacrificed on the cross of the Euro”. Insofar, as the economy is intimately linked to politics, the Euro crisis can be explained above all by political blockages that prevent the progress that is indispensable for a more harmonious functioning of the economic and monetary union (to reform the structure of the Eurozone). For Joseph Stiglitz, the failures of the Eurozone are attributable to a combination of two factors. The first one is the failure of what he calls a ‘flawed ideology’, being the economic theories and the general conception of the economy that have guided economic policy choices so far. The second one is the lack of deep political solidarity between member countries, which has led to the paradoxical result that the victims are the guilty ones (example of Greece).

The Euro was founded on the promise of prosperity and political integration, and for Stiglitz neither of these goals has been achieved. The macroeconomic performance of the Eurozone has been particularly poor. Moreover, economic integration has gone much faster than political integration, which has led to a break-even point, in the framework of the monetary union of Europe that has not, by any means, eliminated its democratic deficit. In particular, he insists that this poor performance, due to the prolonged recession, not only weighs on future potential growth, but also leads to suffering and disappointment, especially for the younger generations, who are confronted with the full effects of the crisis. It is therefore not surprising to see the electoral progress of populist and sovereign parties that reject Europe (for example the illiberal turn that Hungary and Poland are taking).

Stiglitz’s ideas are followed by most of the politicians and economists. They criticized the rush to austerity being imposed on Greece, among others, suggesting it would be counterproductive by depressing growth and the competitive imbalances between Eurozone members would be impossible to overcome. They suggested the ultimate consequence of the crisis would be a much smaller eurozone with Germany at the center and countries such as Greece, Portugal, Italy and Ireland on the outside.

The 2008 crisis was inevitable, and this kind of crisis can happen again if no concrete measures are put in place to face them. Especially, with the sanitary crisis the world is facing today. But in the future to reduce the impact of such a crisis or to avoid it, will be the creation of a political integration within the European Union. Indeed, the European Union is suffering from a democratic deficit, and to reduce it could help to avoid any crisis in the future. This political integration could also slow down the wave of populism that Europe is facing.