ppt miguel otero causes of the euro crisis

8/2/2019 Ppt Miguel Otero Causes of the Euro Crisis

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European Network Academy(ENA) of Social Movements

Miguel Otero-Iglesias, ATTACSpain

Freiburg, 10 August 2011

(Working Slides)

Causes of the Euro Crisis


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Few Notes on Optimum CurrencyAreas

The Old Robert Mundell (1961)

Pessimistic view on Currency Unions

The problem of dealing with shifts in demand, so

called asymmetric shocks without exchange ratemovements

For this you need:

1) Flexible wages

2) Mobility of Labour 3) Insurance mechanisms

A) Centralised Budget (public insurance)

B) Highly developed capital markets (privateinsurance)


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Few Notes on Optimum CurrencyAreas

The New Robert Mundell (1973)

After the collapse of the Bretton Woods System in1971

Monetary Union is more efficient to cope withtemporary asymmetric shocks than nationalmoneys with exchange rate risk. (The importantthing is integrated capital markets).

In the Flexible Dollar System, huge exchangerate movements can actually cause asymmetricshocks, MU acts as protection.

Since the Werner Report (1970), Europe has tried

to fixed exchange rates (snake in the tunnel,


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The Political Side of the Story 1970s: High inflation and high unemployment

(stagflation)

Bundesbank gains great reputation for keepinginflation under control

This despite the dollar weapon used by the US

ERM becomes de facto a D-Mark zone, Germanyincreases its influence and power in the 1980s

Weaker countries try to regain competiveness through

devaluations: last experience 1992 devaluations,collapse of the ERM

France accepts German reunification only if Germanyagrees to form a monetary union

Germany sees some advantages: more protection


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Different theoretical approaches onEMU

The Monetarist School: lets start with MU andthen we will achieve economic converge andOCA (French position)

The Economic School: First we need economic

convergence and OCA and then we can create

MU (German position)

Introduction of Convergence Criteria:

Inflation needs to be kept under control Debt levels: 3% budget deficit, 60% gross

government debt to GDP

Inclusion in the ERM

Convergence in the interest rates German osition: You cannot have MU without


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Orthodox understanding of the

nature of money Money has three main functions:

Unit of Account

Medium of Exchange

Store of Value

Ortodhox/metallist view: medium of exchange function ispreponderant (Ex. cigarettes in a concentration camp)

Hetherodox/nominalist view: the unit of account function iscrucial (you cannot have money without a political authoritybehind it)

Bankers/investors favour the first, political economistspoint to the latter (especially in times of crisis anduncertainty)

History: Constant struggle between bondholders (creditors)

and Governments (debtors)


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The Creation of an OrphanCurrency

The Euro, probably more than any other currency,represents the mutual confidence at the heart ofour community. It is the first currency that has notonly severed its link to gold, but also its link to the

nation stateWim Duisenberg, President European Central

Bank, 2002

EMU was created with a fully independent central

bank And on top of this the ECB was not given the

lender-of-last resort function (the no bail-outclause)

The idea was to avoid political interference in themanaging of the currency


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Euro-Dollar Exchange Rate


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European Bond Spreads


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European Bond Spreads (II)


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High indebtedness in the

Periphery


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Great Imbalances in the CurrentAccount Balance


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Public indebtedness has been constant


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The problem has been mostly privatedebt


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House prices rocketed


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Inflation Levels in the EZ 1999-2007


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The real exchange rate differs


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Loss of competiveness in theperiphery


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But this is also the case in theUS


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The Real Causes of the Crisis The Appreciation Bias of the Euro = loss of

competitiveness in the periphery

Huge imbalances between surplus countries(Germany, Holland, Finland) and deficit countries

(Spain, Portugal, Italy) Real Estate bubbles, especially in Spain and Ireland

Lack of macroeconomic coordination

Lack of supervision in the levels of private debt, and

asset bubbles

Lack of a centralised budget to overcome asymmetricshocks

Lack of a pan-European debt market (Eurobonds)

Lack of a lender of last resort


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Conclusion

Monetary Union is flawed without political unionbehind it

There needs to be more macroeconomiccooperation to avoid internal imbalances

Germany needs to stimulate internal demand

EZ periphery needs to be more productive andcompetitive

The EZ needs to create a ministry of finance The creation of eurobonds is also necessary

Apart from price stability there needs to be a

growth strategy, especially for the periphery

ppt miguel otero causes of the euro crisis

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