The Euro: A Crisis of the Currency or a Failure of Politics? Paper from the Colloquium: The Politics and Economics of the Euro Crisis, Institute for European Studies, University of Malta, 2 December 2011

Summary: Overall the monetary pillar of the EMU project has worked well so that it is incorrect to speak of a 'euro' crisis though it is at the epicentre of the present crisis. The origins of the problems it is facing have more to do with the economic component, particularly because of the breach of budgetary rules which points to a failure of politics. Hence the solution must be political, namely a strong commitment by governments to achieve balanced budgets and implement structural reforms so as to lay the basis for improved competitiveness, job creation and sustainable growth.

Danish currency wobbles: A positive unintended side effect of the ECB’s QE? CEPS Commentary, 6 February, 2015

In response to the sustained pressure recently experienced by the Danish krone, Denmark may be forced to abandon its 30-year old peg to the euro. If this scenario unfolds, this CEPS Commentary argues that it will be no bad thing for the eurozone.

It’s not just Russia: Currency crisis in the Commonwealth of independent states. Bruegel Policy Contribution 2015/01, February 2015

The currency crisis that started in Russia and Ukraine during 2014 has spread to neighbouring countries in the Commonwealth of Independent States (CIS). The collapse of the Russian ruble, expected recession in Russia, the stronger US dollar and lower commodity prices have negatively affected the entire region, with the consequence that the European Union's entire eastern neighbourhood faces serious economic, social and political challenges because of weaker currencies, higher inflation, decreasing export revenues and labour remittances, net capital outflows and stagnating or declining GDP. •The crisis requires a proper policy response from CIS governments, the International Monetary Fund and the EU. The Russian-Ukrainian conflict in Donbass requires rapid resolution, as the first step to return Russia to the mainstream of global economic and political cooperation. Beyond that, both Russia and Ukraine need deep structural and institutional reforms. The EU should deepen economic ties with those CIS countries that are interested in a closer relationship with Europe. The IMF should provide additional assistance to those CIS countries that have become victims of a new regional contagion, while preparing for the possibility of more emerging-market crises arising from slower growth, the stronger dollar and lower commodity prices.

A parallel currency for Greece. CEPS High-level Brief, 20 May 2015

Greece and its creditors seem to be engaged in a game of chicken: both sides expect the other to yield at the last moment. The game will almost certainly end with each side deviating somewhat from its preferred course. This High-Level Brief discusses how a parallel currency could contribute to a resolution of the conflict. In the author's view, it would be the least-bad option for both sides among three possible options on the table.

The Euro as a Foreign Currency for Greece Friday, 19 June 2015

In contrast to his contribution just a month ago, which examined how a Greek parallel currency to the euro could allow the Greek government to gain some room for manoeuver in fiscal policy while at the same time continuing the adjustment programme demanded by the country’s creditors, Thomas Mayer explores in the present note the question of how the Greek population could still keep the euro after a default of its government. Contrary to general belief, he finds that Grexit and the reintroduction of the euro as a foreign currency would probably be positive for the Greek economy, although its creditors would be hard hit. It is therefore primarily in their interest that default and Grexit are avoided.

Internationalising the currency while leveraging massively: the case of China. Bruegel Working Paper 2015/12, October 2015

This paper reviews the steps that China has taken towards financial reform with a particular focus on capital account liberalisation and internationalisation of the use of the renminbi. • After a slowdown in reform momentum during the global financial crisis, there is a clear push towards reform, especially in terms of RMB internationalisation. • During the same period, though, China’s debt has doubled, reaching levels that are clearly above those of most emerging markets. This increases the risks embedded in financial reform and, in particular, capital account liberalisation. • At this juncture, however, China has no option but to press for reform since the current growth model is no longer working and China urgently needs to better allocate its savings.

Current challenges in EU politics. A perspective from North Rhine-Westphalia. ZEI Discussion Paper C216, 2013

I would like to briefly recapitulate where Europe stands today, and what has been achieved. Because I maintain that in the EU’s 27 Member States we have, despite the failings and shortcomings we all bemoan, reached a level of unity, prosperity and rule of law unheard of in the history of this continent, and possibly of the world. As far as territory is concerned: the European Economic Community started out with six members. The late Bronislaw Geremek, former Foreign Minister of Poland and an eminent historian, used to point out that this, at the time, corresponded in size and shape roughly to the empire of Charlemagne, one of the greatest unified territories the continent has ever known. And yet, a mere 55 years after the Treaty of Rome we have gone far beyond that. Today’s European Union encompasses 27 countries, more than 4 million square kilometers in territory and 500 million people. When it comes to Europe’s policies, at present, all eyes are on the Euro and the future of our common monetary and financial policy. But within our common space, we have achieved so much more than a common currency for a majority of Member States.

Can Europe recover without credit? Bruegel Policy Contribution 2013/03, 15 February 2013

• Data from 135 countries covering five decades suggests that creditless recoveries, in which the stock of real credit does not return to the pre-crisis level for three years after the GDP trough, are not rare and are characterised by remarkable real GDP growth rates: 4.7 percent per year in middle-income countries and 3.2 percent per year in high-income countries. • However, the implications of these historical episodes for the current European situation are limited, for two main reasons: • First, creditless recoveries are much less common in high-income countries, than in low-income countries which are financially undeveloped. European economies heavily depend on bank loans and research suggests that loan supply played a major role in the recent weak credit performance of Europe. There are reasons to believe that, despite various efforts, normal lending has not yet been restored.Limited loan supply could be disruptive for the European economic recovery andthere has been only a minor substitution of bank loans with debt securities. • Second, creditless recoveries were associated with significant real exchange rate depreciation, which has hardly occurred so far in most of Europe. This stylised fact suggests that it might be difficult to re-establish economic growth in the absence of sizeable real exchange rate depreciation, if credit growth does not return.

Central bank cooperation during the great recession. Bruegel Policy Contribution. Bruegel Policy Contribution 2013/08, 20 June 2013

During the Great Recession, central banks went well beyond their normal operations and provided liquidity in unlimited amounts, in foreign currency and to foreign banks. Central bank cooperation took the form of a swap network, and amounted to an episode of global monetary policy. However, though bank cooperation will continue to contribute to global governance, the swap network should not be made permanent and given an institutional basis to provide international lending of last resort. Swaps are a monetary policy tool and should continue to be decided on by central banks like all other monetary policy tools,to avoid impinging on their independence, which a difficult historical process has shown to be the best basis for price stability.

Can the eurozone survive? Jean Monnet/Robert Schuman Paper Series Vol. 12, No. 4, May 2012

From the Introduction. As financial and economic turmoil continues to rock the Eurozone nations and even threatens to undermine the political stability in the region, it may be helpful to recall the circumstances that helped bring about the formation of the European Union and the common currency of the Eurozone. While issues of trade, finance, and economics were at the heart of many of the agreements upon which the European Union was founded, there were larger issues about a shared future for Europeans that went beyond fiscal concerns. As the economic conditions in Europe and the rest of the world appear to have brought the Eurozone to the brink of collapse, the question at hand is whether the strength of the euro and the economies of the Eurozone nations will be able to withstand the forces that threaten not just the economic ties among the nations of the Eurozone and the EU, but that also strain the historical, cultural, and political foundations on which those economic ties were forged.

Framing Banking Union in the Euro Area: Some empirical evidence. CEPS Working Document No. 389, 3 February 2014

Evidence shows that financial integration in the euro area is retrenching at a quicker pace than outside the union. Home bias persists: Governments compete on funding costs by supporting ‘their’ banks with massive state aids, which distorts the playing field and feeds the risk-aversion loop. This situation intensifies friction in credit markets, thus hampering the transmission of monetary policies and, potentially, economic growth. This paper discusses the theoretical foundations of a banking union in a common currency area and the legal and economic aspects of EU responses. As a result, two remedies are proposed to deal with moral hazard in a common currency area: a common (unlimited) financial backstop to a privately funded recapitalisation/resolution fund and a blanket prohibition on state aids.

The EMS Crisis of the 1990s: Parallels with the present crisis? CEPS Working Document No. 393, 28 March 2014

The EMS crisis of the 1990s illustrated the importance of a lack of confidence in price or exchange rate stability, whereas the present crisis illustrates the importance of a lack of confidence in fiscal sustainability. Theoretically the difference between the two should be minor since, in terms of the real return to an investor, the loss of purchasing power can be the same when inflation is unexpectedly high, or when the nominal value of government debt is cut in a formal default. Experience has shown, however, that expropriation via a formal default is much more disruptive than via inflation. The paper starts by providing a brief review of the EMS crisis, emphasising that the most interesting period might be the ‘post-EMS’ crisis of 1993-95. It then reviews in section 2 the crisis factors, comparing the EMS crisis to today’s euro crisis. Section 3 outlines the main analytical issue, namely the potential instability of high public debt within and outside a monetary union. Section 4 then compares the pressure on public finance coming from the crises for the case of Italy. Section 5 uses data on ‘foreign currency’ debt to disentangle expectations of devaluation/inflation from expectations of default. Section 6 concludes.

Policy recommendations for the new European Commission: priorities for stabilising EMU. EPC Discussion Paper, 30 September 2014

The euro area crisis exposed substantial structural flaws in the currency area’s architecture. Addressing these flaws this discussion paper explores the ways in which the European Institutions can re-evaluate and overcome challenges for a more positive European future. To do this, Janis A. Emmanouilidis, Jan David Schneider, and Fabian Zuleeg recommend that the coming European Commission should develop a new framework to assess the real returns to growth of public and social investment, which could open the path for more flexibility on deficits in future. In close coordination with the European Parliament, the Commission should also review the Country Specific Recommendations with a stronger focus on a smaller number of key priorities for each country. The construction of a fiscal capacity should be made a priority in the new political cycle to resolve the absence of a mechanism to provide effective ex ante fiscal risk sharing in the Eurozone. Furthermore, to boost growth, there is a need to encourage private, public and social investment through a European Investment Programme (EIP) in the short term. Finally, the Commission should ensure that the implementation of an EIP is compatible with the long term goals of a fiscal capacity.

Strengthening the euro area. CHALLENGE EUROPE Issue 22. Challenges and new beginnings: Priorities for the EU's new leadership, September 2014

Since 2007, a series of acute crises have threatened the very existence of the euro area. The financial crisis which spilled into the currency union in 2007 was followed by an unexpectedly strong downturn of the real economy. As of 2010, the euro area was confronted with a severe sovereign debt and banking crisis. Despite these troublesome developments, the euro area has proven to have a considerable degree of resilience. In each phase, governance weaknesses were revealed – and national governments together with the EU institutions have designed an impressive series of policy responses in crisis management and institutional innovation. The euro area today is completed by a banking union with a Single Supervisory and a Single Resolution Mechanism. National budgetary and economic policies are more closely overseen and coordinated. With the European Stability Mechanism, the euro area now has a permanent tool in place to manage sovereign liquidity crises and instabilities in the banking sector. Most importantly, the euro area's only true federal institution, the European Central Bank (ECB), has become its most effective crisis manager: with the announcement of its Outright Monetary Transactions (OMT) programme, the ECB finally managed to calm the self fulfilling crisis in 2012. Meanwhile, the announcement of credit easing and quasi-quantitative easing in September 2014 is a move towards reducing financial fragmentation and countering deflation. The euro area in 2014 is hence a lot different from the one in 2007. And yet, further challenges need to be overcome. Prevailing stagnation, fragmentation and problems of legitimacy require a rethink of policies and further governance reform.