The Future of the Euro THE FUTURE OF THE EURO z Edited By MAT THIAS MAT THIJS MARK BLYTH Oxford University Press is a department of the University of Oxford It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam Oxford is a registered trademark of Oxford University Press in the UK and certain other countries Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016 © Oxford University Press 2015 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by license, or under terms agreed with the appropriate reproduction rights organization Inquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this work in any other form and you must impose this same condition on any acquirer Library of Congress Cataloging-in-Publication Data The future of the euro / edited by Matthias Matthijs, Mark Blyth pages cm Includes bibliographical references and index ISBN 978–0–19–023323–5 (hardback : alk paper) — ISBN 978–0–19–023324–2 (pbk : alk paper) 1. Euro. 2. Eurozone. 3. Currency crises—European Union countries. 4. Financial crises—European Union countries. I. Matthijs, Matthias. II. Blyth, Mark, 1967HG925.F87 2015 332.4’94—dc23 2014032884 1 3 5 7 9 8 6 4 2 Printed in the United States of America on acid-free paper For Tony Judt Contents List of Figures ix List of Tables xi Foreword xiii Editors xvii Contributors xix Introduction: The Future of the Euro and the Politics of Embedded Currency Areas—Matthias Matthijs and Mark Blyth SECTION I: The Euro Problem The Forgotten Problem of Embeddedness: History Lessons for the Euro—Kathleen R. McNamar a 21 The Forgotten Financial Union: How You Can Have a Euro Crisis Without a Euro—Erik Jones 44 The Elusive Economic Government and the Forgotten Fiscal Union—Nicolas Jabko 70 The Forgotten Problem of Democratic Legitimacy: “Governing by the Rules” and “Ruling by the Numbers”—Vivien A. Schmidt 90 SECTION II: The Euro Experience The Relucant Leader: Germany’s Euro Experience and the Long Shadow of Reunification—Abr aham Newman 117 viii Contents Europe’s Middle Child: France’s Statist Liberalism and the Conflicted Politics of the Euro—Mark I. Vail 136 The Troubled Southern Periphery: The Euro Experience in Italy and Spain—Jonathan Hopkin 161 SECTION III: The Euro Future Europe’s New German Problem: The Timing of Politics and the Politics of Timing—Wade Jacoby 187 10 European Integration Past, Present, and Future: Moving Forward Through Crisis?—Cr aig Parsons and Matthias Matthijs 210 11 The Future of the Euro in a Global Monetary Context—Eric Helleiner 233 12 Conclusion: The Future of the Euro: Possible Futures, Risks, and Uncertainties—Matthias Matthijs and Mark Blyth 249 Notes 271 Bibliography 297 Index 331 List of Figures 3.1 3.2 3.3 8.1 Greek-German 10-year Sovereign Yield Spread Yield Spreads with Germany, June 2011–June 2012 Net TARGET2 Balance within the Eurosystem Product Market Regulatory Reform in Germany and Southern Europe, 1998–2008 8.2 Government Expenditure in Germany and Southern Europe, 1990–2008 (% GDP) 8.3 Government Borrowing in Germany and Southern Europe, 1990–2008 (% GDP) 53 58 62 165 170 171 334 Index Franco, Francisco, 173 Franz Joseph I of Austria-Hungary, 34 Freddie Mac, 236, 242 Free Democratic Party (FDP—Germany), 87, 132 G20, 51 London Summit April 2009, 52 Gabriel, Sigmar, 194 German Federal Constitutional Court (FCC), 106–108, 122, 124, 188, 190, 198, 208, 260 Germany, 2, 11, 15, 117–136, 169–170, 187–210, 266, 268, 269 banking union, 65 Chinese bond purchases, 246 crisis narrative, 96, 113, 227 crisis role, 4, 5, 12, 53, 107–108, 176–177, 230 ECA, 33 effects of Great Depression, 178 EMS, 220 euro experience, 254–256 euro membership debate, 162 “German problem,” 3, 14 government debt, 237 opposition to banking union, 41, 82, 197 pre-crisis inflation, 105, 227 rearmament, 217 relationship with France, 13, 83–84, 136–138, 144–148, 151–156, 158–159, 232, 257–258 reunification, 3, 12, 137, 221 setting up the ECSC, 217 Target2 position, 62 Glass-Steagall, 32 Glienicker Group, 262 globalization, 3 economic governance, 71–72 export competitiveness, 79 Golden Dawn (Greece), 103, 180, 267 González, Felipe, 163 Great Depression, 37 Great Recession, 1, 48 Greece, bailout, 40, 41, 50, 52–53, 80, 86, 94, 191, 197, 199 Chinese bond purchases, 246 contagion to Spain and Italy, 57, 124 crisis, 12, 148, 151 crisis economic conditions, 131, 176 crisis narrative, 96, 122–123 current account deficit, 55, 79 democratic accountability, 226, 266 euro entry 4, 258 euro-skepticism, 103, 182, 267 German bank lending, 123 government debt, 47, 169–170 Latin Monetary Union, 36 liquidity, 192 political volatility, 103 possibility of euro exit, 140, 183, 269 PSI threat, 54, 199 public institutions, 39, 104, 171, 178–180 risk of poverty, 97 Target2 position, 62 Grillo, Beppe, 103, 180 Gulf Cooperation Council (GCC), 241 Hamilton, Alexander, 32, 251 Hartz IV reforms, 127, 257 Hayek, Friedrich von, 8 HBOS, 49 Henning, Randall,32 Herring, Richard,229 Hollande, Franỗois, 85, 97, 146, 153159, 204, 258, 269 fiscal compact, 87 popularity, 102 support for Eurobonds, 156 Hu Jintao, 244 Hungary, 49, 239, 267 Chinese bond purchases, 246 Index extremist parties, 103 foreign exchange trading, 47 possible euro membership, 269 Iceland, 5, 49 Iglesias, Pablo, 181 India, 268 internal devaluation, 11 International Monetary Fund (IMF), 41, 49, 110, 190–191 critical of Germany, 207 “mistakes” during Greek bailout, 97, 110–111, 117 support from France and Germany, 76 Iran, 267 Ireland, 5, 27, 37, 52 government bank guarantee, 49 bailout, 80, 86 Celtic Tiger, 126 Croke Park deal, 104 current account deficit, 55, 79 German bank lending, 123 liquidity influx, 192 National Asset Management Agency, 265 post-bailout 41 pre-crisis conditions, 96, 105, 122, 227 PSI threat, 54 real estate bubble, 39, 47 Italian General Confederation of Labor (CGIL), 167 Italian Labor Union (UIL), 167 Italian Confederation of Trade Unions (CISL), 167 Italy, 2, 11, 13, 24, 54, 161–184, 268 Articolo 18, 177 contagion from Greece, 57, 124 crisis economic conditions, 131 current account deficit, 79 during crisis, 54–58, 80, 81 ECA, 33–34 EDC, 217 335 euro experience, 254–255 government debt, 40, 41, 47, 122, 237 Latin Monetary Union, 36 LTRO effect, 59 political institutions, 39, 226 political volatility, 103, 266 pre-crisis economic conditions, 145 summer 2012, 61, 196 Target2 position, 62 Izquierda Unida (Spain), 181 Japan, 3, 219, 235–236, 241 devaluation, 27 sovereign debt, 161 Jospin, Lionel, gouvernement économique, 74 Juncker, Jean-Claude, 42, 85, 100, 259, 260 Katzenstein, Peter, 208 Kauder, Volker, 193 Kenen, Peter, 24, 29 Kessler, Martin, 32 Keynesianism, 13 Klaus, Vaclav, 190 Kohl, Helmut, 221, 231, 269 Maastricht Treaty, 3, 224 reunification, 129, 199 Köhler, Horst, 129 Korean War, 217 Lagarde, Christine, 149 Laiki (Cyprus), 65 Lasswell, Harold, 224 Latin Monetary Union, 30, 34, 35–36, 43, 234 Latvia, 49–50, 192, 249 foreign exchange trading, 47 Le Pen, Marine, 100, 267 Lehman Brothers, 28, 37, 48, 52, 178 Lerner, Abba, 6, 269 Lincoln, Abraham, 32, 251 336 Index Lithuania, 249 Lloyds TSB, 49 Long Term Refinancing Operations (LTROs), 5, 17, 39, 40, 58–59, 80, 82, 105, 265 Luo Ping, 241 Luxembourg, convergence, 3 EDC ratification, 217 Target2 position, 62 Maastricht Treaty, 87–88, 94, 143, 163, 216, 220–221, 252 flaws, 11, 238 intergovernmentalist lens, 214 lack of political union, 72 negotiations, 22 “no bailout” clause, 80, 105, 225 signing, 2, 39, 90 Macroeconomic Imbalance Procedure (MIP), 94, 267 Magnette, Paul, 102 McKinnon, Ronald, 24, 29 Merkel, Angela, 98, 107, 117, 148, 151–155, 194, 198, 204, 208, 258, 269 bank rescue plan, 78 conservatism, 200 leadership style, 118 on OMT, 63, 196 opposition to Eurobonds, 87, 202 public opinion,124 re-election, 125,188 Union Method, 99, 254,259 Mitterrand, Franỗois, 137, 220, 221 election and economic policies, 141–142 Maastricht Treaty, 2, 224 Monnet, Jean, 210, 214 Monti, Mario, 56, 58, 81, 97, 103, 177, 179, 180, 190 moral hazard, 4, 12–13, 15, 82, 121, 123–124, 188, 196, 254 link with German reunification, 126, 132, 200 Mundell, Robert, 23, 29 Myner, Paul, 49 North American Free Trade Agreement (NAFTA), 3 National Front (France), 85, 100, 159, 267 Netherlands, 24 CAP, 218 EDC ratification, 217 euro-skepticism, 103 mortgage debt, 47 public sector, 171 support for Germany, 108, 149 Target2 position, 62 New Democracy (ND—Greece), 180 Nixon, Richard, 234, 242 North Atlantic Treaty Organization (NATO), 217 Northern Rock, 48 Norway, 171 Scandinavian Union, 36 Notre Europe, 261 Obama, Barack, 38, 190 Optimum Currency Area (OCA), 7, 23–25, 30, 97, 234 Orbán, Viktor, 102 Organisation for Economic Co-operation and Development (OECD), 118, 149, 165, 171, 190, 194, 207 Organization for European Economic Cooperation (OEEC), 218 Outright Monetary Transactions (OMT), 5, 40, 63–64, 82, 106, 161, 196, 198, 201, 209, 229, 260 Panhellenic Socialist Movement (PASOK—Greece), 178, 180 Papademos, Lucas, 103, 179 Paulson, Henry (Hank), 41, 236 People of Freedom (PdL—Italy), 179 Index People’s Party (PP—Spain), 181 Podemos (Spain), 181 Poland, 239 possible euro membership, 269 Polanyi, Karl, 8, 25 Great Transformation (as applied to currency areas), 26, 42, 43 Political Union, 28, 29, 39, 90–114 Portugal, 41, 52, 148, 164 bailout, 79 bailout request, 54 democracy, 178, 179, 55, 80 German bank lending, 123 liquidity influx, 192, 258 possibility of euro exit, 140, 183, 269 pre-crisis conditions, 170, 175 unemployment, 176 Private Sector Involvement (PSI), 54, 199 Prodi, Romano, xiv, 172, 249, 250, 257, 258 Putin, Vladimir, 267 Quantitative Easing (QE), 4, 38, 106 Rajoy, Mariano, 57, 81, 83 Bankia nationalization, 60, 177 Rehn, Olli, 109–110, 190 Renzi, Matteo, 98, 103, 180–181, 183 Roosevelt, Franklin Delano, 251 Rumsfeld, Donald, 263 Sarkozy, Nicolas, 87, 149–151, 154, 235, 243–244, 257–258 change in crisis narrative, 107 failed re-election 2012, 103 initial reaction to crisis, 75–76, 148 intergovernmental decision-making, 99 outreach to China, 245 Scandinavian Monetary Union, 30, 34, 35–36, 43 337 Schäuble, Wolfgang, 117, 120–122, 132, 154–155, 202 “super-commissioner” idea, 205 Schierack, Michael, 125 Schmidt, Helmut, 190 Schröder, Gerhard, 127, 130, 257 Schuman, Robert, 212, 216–217 Securities Markets Program (SMP), 54, 63 creation, 79, 198 Serbia, 35 Sikorski, Radoslaw, 120, 190 Single European Act (SEA), 216, 219–220, 230, 252 Single Market, 45, 46 Sinn, Hans-Werner, 190, 197 Six-Pack, 90, 94, 107, 108, 196, 267 European Parliament amendments, 111 Slovakia, 108 Slovenia, 35 Social Democratic Party (SPD—Germany), 108, 125, 127–128, 155, 202, 257 Socialist Party (Portugal), 178 Soros, George, 236 Soviet Union, 3, 31 Spaak Committee, 217 Spain, 2, 11, 13, 37, 148, 161–184, 268 banking crisis, 12, 54–58, 60–61, 81, 166 bonds, 40, 41 CAP, 222 Chinese bond purchases, 246 contagion from Greece, 57, 124 crisis economic conditions, 131 current account deficit, 55, 79, 122 EFSF, 80 euro experience, 254–255, 258 German bank lending, 123 LTRO effect, 59 pension agreement, 104 338 Index Spain (cont.) political volatility, 103 pre-crisis budget, 96 real estate bubble, 39, 47, 126, 174 structural deficit calculation changes, 110 summer 2012, 61, 196 Target2 position, 62–63 Trichet letter, 101 unemployment, 128 Spanish Socialist Workers’ Party (PSOE), 178, 181 Sparkassen (Germany), 202 Special Drawing Rights (SDRs), 244, 245 Speciale, Roberto, 172 Stability and Growth Pact (SGP), 73, 90, 94–95, 139, 143, 196, 225 violation of, 74, 147, 157, 164, 193 flexibility, 98 Standard & Poor’s, Greek downgrade, 52 Stark, Jürgen, 80 Steinbrück, Peer, 53, 237 structural reforms, 7, 10 Germany, 13 Sweden, 175, 239 euro referendum, 4 foreign lending, 50 Scandinavian Union, 36 “two-speed” Europe, 268 Switzerland, ECA, 34 Latin Monetary Union, 36 Syriza (Greece), 103, 180–181 Taleb, Nassim Nicholas, 2 Tang Jiaxuan, 245 Targeted Long Term Refinancing Operations (TLTROs), 6 Thatcher, Margaret, 219, 220, 232 Thiers, Adolphe, 160 Tilly, Charles, 31 Treaty of Versailles, 35 Trichet, Jean-Claude, 5, 42, 51, 58, 104, 151 secret letter to Zapatero, 101 Troubled Asset Relief Program (TARP), 38, 39, 76, 118, 239 True Finns, 103 Two-Pack, 90, 95, 108 European Parliament amendments, 111 UK Independence Party (UKIP), 100 Union, Progress and Democracy (UPyD—Spain), 181 United Arab Emirates, 241 United Kingdom (UK), Conservatives, 232 enlargement, 222 EU budget “rebate,” 219 EU exit, 269 euro membership debate, 162 euro opt-out, 4 euro-skepticism, 103, 213 fiscal compact, 81, 259 homelessness, 96 initial reaction to crisis, 75 opposition to banking union, 65 public sector, 171 Scottish referendum, 266 Treaty of Rome, 217 “two-speed” Europe, 268 United States (US), 150, 191, 212, 219, 233–244, 247–248, 255 counterbalance against, 4 ECA, 31–32 foundation, 214, 250, 251–252 initial reaction to crisis, 75 loose monetary policy, 192 public sector, 171 sovereign debt, 161, 238 US Federal Reserve, 38, 105, 234 crisis currency swaps, 239, 250 foundation of, 251 Index US Treasury, 190 Van Rompuy, Herman, 82, 260 economic governance taskforce, 70, 85 Visco, Vincenzo, 172 Wauquiez, Laurent, 149 Weidmann, Jens, 63, 82, 106 Wen Jiabao, 242 Woerth, Eric, 149 World War II, 120, 156, 257 Zapatero, José Luis Rodríguez, 57 secret letter from Trichet, 101 Zhou Xiaochuan, 244–245 339 .. .The Future of the Euro THE FUTURE OF THE EURO z Edited By MAT THIAS MAT THIJS MARK BLYTH Oxford University Press is a department of the University of Oxford It furthers the University’s... about the euro s future The Euro Experience: Mind the Gap The second section of the book turns from the antecedents and generators of these crises to the actual agents key to resolving them These... through the lens of the broader geopolitics of the crisis, asking whether the rest of the world will assist the Eurozone by continuing to accept the euro as a global reserve currency In the concluding