International Political Economy Series

Series Editor: Timothy M. Shaw, Visiting Professor, University of Massachusetts Boston, USA and Emeritus Professor, University of London, UK The global political economy is flux as a series of cumulative crises impacts its organization and governance. The IPE series has tracked its development in both analysis and structure over the last three decades. It has always had a concentra- tion on the global South. Now the South increasingly challenges the North as the centre of development, also reflected in a growing number of submissions and publications on indebted Eurozone economies in Southern Europe. An indispensable resource for scholars and researchers, the series examines a variety of capitalisms and connections by focusing on emerging economies, companies and sectors, debates and policies. It informs diverse policy communi- ties as the established trans-Atlantic North declines and ‘the rest’, especially the BRICS, rise.

Titles include: Daniel Dăianu, Giorgio Basevi, Carlo D’Adda and Rajeesh Kumar ( editors ) THE EUROZONE CRISIS AND THE FUTURE OF EUROPE The Political Economy of Further Integration and Governance Karen E. Young THE POLITICAL ECONOMY OF ENERGY, FINANCE AND SECURITY IN THE UNITED ARAB EMIRATES Between the Majilis and the Market Monique Taylor THE CHINESE STATE, OIL AND ENERGY SECURITY Benedicte Bull, Fulvio Castellacci and Yuri Kasahara BUSINESS GROUPS AND TRANSNATIONAL CAPITALISM IN CENTRAL AMERICA Economic and Political Strategies Leila Simona Talani THE ARAB SPRING IN THE GLOBAL POLITICAL ECONOMY Andreas Nölke ( editor ) MULTINATIONAL CORPORATIONS FROM EMERGING MARKETS State Capitalism 3.0 Roshen Hendrickson PROMOTING U.S. INVESTMENT IN SUB-SAHARAN AFRICA Bhumitra Chakma SOUTH ASIA IN TRANSITION Democracy, Political Economy and Security Greig Charnock, Thomas Purcell and Ramon Ribera-Fumaz THE LIMITS TO CAPITAL IN SPAIN Crisis and Revolt in the European South Felipe Amin Filomeno MONSANTO AND INTELLECTUAL PROPERTY IN SOUTH AMERICA Eirikur Bergmann ICELAND AND THE INTERNATIONAL FINANCIAL CRISIS Boom, Bust and Recovery Yildiz Atasoy (editor ) GLOBAL ECONOMIC CRISIS AND THE POLITICS OF DIVERSITY Gabriel Siles-Brügge CONSTRUCTING EUROPEAN UNION TRADE POLICY A Global Idea of Europe Jewellord Singh and France Bourgouin ( editors ) RESOURCE GOVERNANCE AND DEVELOPMENTAL STATES IN THE GLOBAL SOUTH Critical International Political Economy Perspectives Tan Tai Yong and Md Mizanur Rahman (editors ) DIASPORA ENGAGEMENT AND DEVELOPMENT IN SOUTH ASIA Leila Simona Talani, Alexander Clarkson and Ramon Pachedo Pardo ( editors ) DIRTY CITIES Towards a Political Economy of the Underground in Global Cities Matthew Louis Bishop THE POLITICAL ECONOMY OF CARIBBEAN DEVELOPMENT Xiaoming Huang ( editor ) MODERN ECONOMIC DEVELOPMENT IN JAPAN AND CHINA Developmentalism, Capitalism and the World Economic System Bonnie K. Campbell ( editor ) MODES OF GOVERNANCE AND REVENUE FLOWS IN AFRICAN MINING Gopinath Pillai ( editor ) THE POLITICAL ECONOMY OF SOUTH ASIAN DIASPORA Patterns of Socio-Economic Influence Rachel K. Brickner ( editor ) MIGRATION, GLOBALIZATION AND THE STATE Juanita Elias and Samanthi Gunawardana (editors ) THE GLOBAL POLITICAL ECONOMY OF THE HOUSEHOLD IN ASIA Tony Heron PATHWAYS FROM PREFERENTIAL TRADE The Politics of Trade Adjustment in Africa, the Caribbean and Pacific David J. Hornsby RISK REGULATION, SCIENCE AND INTERESTS IN TRANSATLANTIC TRADE CONFLICTS Yang Jiang CHINA’S POLICYMAKING FOR REGIONAL ECONOMIC COOPERATION

International Political Economy Series Series Standing Order ISBN 978–0–333–71708–0 hardcover 978–0–333–71110–1 paperback You can receive future titles in this series as they are published by placing a standing order. Please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address, the title of the series and one of the ISBNs quoted above. Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England The Eurozone Crisis and the Future of Europe The Political Economy of Further Integration and Governance

Edited by

Daniel Dăianu Professor of Economics, National School of Political and Administrative Studies, Bucharest, Romania

Giorgio Basevi Professor Emeritus of International Economics, University of Bologna, Italy

Carlo D’Adda Professor Emeritus of Economics, University of Bologna, Italy

and Rajeesh Kumar Researcher, School of International Studies, Jawaharlal Nehru University, India Editorial matter and selection © Daniel Da˘ianu, Giorgio Basevi, Carlo D’Adda and Rajeesh Kumar 2014 Individual chapters © Respective authors 2014 Softcover reprint of the hardcovre 1st edition 2014 978-1-137-35674-1 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2014 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN 978-1-349-47060-0 ISBN 978-1-137-35675-8 (eBook) DOI 10.1057/9781137356758 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data The Eurozone crisis and the future of Europe : the political economy of further integration and governance / Daniel Da˘ianu, Professor of Economics, National School of Political and Administrative Studies, Bucharest, Romania; Carlo D’Adda, Professor Emeritus of Economics, University of Bologna, Italy; Giorgio Basevi, Professor Emeritus of International Economics, University of Bologna, Italy; Rajeesh Kumar, Research Fellow, School of International Studies, New Delhi, India. pages cm. 1. European Union countries – Economic conditions – 21st century. 2. Global Financial Crisis, 2008–2009 – Political aspects – European Union countries. 3. Financial crises – European Union countries. 4. Eurozone. 5. Monetary policy – European Union countries. 6. European Union countries – Economic policy. I. Da˘ianu, Daniel, author, editor of compilation. HC240.E894 2014 337.1942—dc23 2014019305

Contents

List of Figures vii List of Tables ix Acknowledgements xi Notes on Contributors xii

1 Introduction 1 Daniel Dăianu and Rajeesh Kumar

2 Overview: Analytics of the Euro Area Crisis 9 Giorgio Basevi and Carlo D’Adda

Part I Economic Imbalances and the Euro Area Crisis

3 The Diversity of Debt Crises in Europe 25 Jerome L. Stein

4 European Sovereign Debt Crisis and the Euro 40 Julius Horváth and Martin Šuster

5 Economic Policies and the Debt/GDP Constraint: The European Challenge 60 Radu Vranceanu

6 Current Account Imbalances in the Eurozone: Causes, Remedies and the Role of the ECB 83 Karlhans Sauernheimer

Part II Crisis Management in the Euro Area: The Interplay between Politics and Economics

7 The Euro Crisis and German Primacy 109 Jonathan Story

8 The Power of Ordoliberalism in the Eurozone Crisis Management 126 Brigitte Young

v vi Contents

9 Italy and the Euro 138 Carlo D’Adda

10 Turning a Small Problem into Catastrophe: The Case of Greece 154 Kunibert Raffer

11 The Eurozone Crisis: A Perspective from and Impact on Asia 170 Pradumna B. Rana and Michael R. Blomenhofer

Part III The Euro Area: Looking into the Future

12 The EMU Is No One-Way-Street: Back to the Roots! 191 Bodo Herzog

13 Changing Welfare States and the Euro Crisis 213 Anton Hemerijck

14 The Long-term Implications of the Euro Crisis for European Integration: A Deeper Union or Fragmentation? 239 Francesco Nicoli and Fabian Zuleeg

15 The Euro Area: Repairing a Flawed Design and Its Policy Arrangements 259 Daniel Dăianu

16 Afterword: Summing Up: The Crisis and Europe’s Future 279 Rajeesh Kumar and Daniel Dăianu

References 284 Index 301 List of Figures

3.1 SI and CA curves 35 3.2 Populist scenario 36 4.1 Long-term interest rates on Euro area sovereign debt (%), 1995–2007 and 2008–2012 42 4.2 Fiscal performance in selected Euro area countries 43 4.3 Evolution of net international investment position and credit 44 4.4 Current account in selected Euro area countries 45 4.5 Unit labour costs and productivity 49 5.1 Average inflation rate in the Euro area 63 5.2 Euro area (changing composition) 10-year Government benchmark bond yield 63 5.3 Government gross public debt and primary fiscal balance in industrial economies as a percentage of GDP 65 5.4 10-year Government bond yield 66 5.5 Public debt in the EU-25 and the Euro area as a percentage of GDP 67 5.6 Greece: public deficit as a percentage of GDP and annual growth, 2000–2012 68 5.7 Debt trajectories, risk and timing of default 72 6.1 Current account balances as a percentage of GDP, three-year averages 94 6.2 Current account balances as a percentage of GDP, 2010–2012 95 6.3 Unit wage cost in selected Eurozone countries , 1999–2009 and 1999–2013 96 6.4 Population projections for Europe, USA and Japan, 2010–2060 98 6.5 Target balances, 1999–2012 103 6.6 Target balances, 31 August 2012 103 8.1 Current account surplus and deficit countries (1991–2010) as a percentage of GDP 128 8.2 Current account surplus, Germany and China 129 11.1 Developing Asia: exports by region 181 11.2 Eurozone – monthly imports from Asia 182 11.3 Eurozone outward remittances 185

vii viii List of Figures

11.4 Average growth rate of Asia 186 12.1 CDS spreads for MFI in the Euro area and United States 192 12.2 Current account in billion US$ of selected Euro area countries, 2000–2010 193 12.3 Private sector deficit-to-GDP for selected countries in 2007 194 12.4 Unit labour costs of selected Euro area countries 195 12.5 Productivity and labour costs 196 12.6 Euro area debt by holders and by maturity in 2010 201 12.7 Debt-to-GDP from 1997 to 2010 and deficit-to-GDP in 2010 202 12.8 Fiscal rule indices and fiscal performance, 2009 206 13.1 Employment/population ratio, 1980–2006 220 13.2 Employment protection, 1987, 1997, 2007 221 13.3 PISA reading scores (age 15), 2000, 2003, 2006 222 13.4 Early school leaving 222 13.5 Gini coefficient 1997, 2007 223 13.6 Child risk of poverty 223 13.7 Public social expenditures and GDP per capita 224 13.8 Public social expenditures and public deficits as a percentage of GDP 225 14.1 Per adult wealth and debt growth rates; adjusted Eurozone average, 2001–2011 241 14.2 Relative unit labour costs, 2000–2010 243 List of Tables

2.1 Populist scenario 12 2.2 Growth-oriented scenario 12 2.3 Euro area, labour productivity and competitiveness 2000–2011 14 3.1 Government structural balance as a percentage of GDP (SBGDP) 26 3.2 Current account/GDP 27 3.3 External debt position, end of 2009 27 3.4 Banks and governments: debtor and creditor by country 29 3.5 NATREX dynamics of exchange rate and external debt: two basic scenarios 34 3.6 Summary data, 1998–2010 36 3.7 Residential property prices in EU countries, annual per cent change, new and existing houses 37 3.8 GDP deflator, per cent change from year ago 38 4.1 Sovereign bond yields in December 2012 55 5.1 Public debt, public deficit and growth in the EU-27 countries 69 6.1 Scoreboard 2010 91 6.2 Unemployment rate Germany, 2001–2012 97 9.1 Italy, government borrowing, government debt and net external debt as GDP percentage 139 9.2 Euro area, competitiveness indicators and their changes 140 9.3 Italy, government borrowing, government debt and net external debt as GDP percentage 141 9.4 Euro area, debt-to-GDP ratio: percentage points addition, 2007–2011 142 9.5 Euro area, growth, labour productivity, employment, 2000–2011 143 9.6 Euro area, competitiveness indicators 144 11.1 Similarities and differences between the Latin American debt crisis, the Asian financial crisis, the subprime mortgage crisis and the Eurozone crisis 173 11.2 Outward FDI flows from EU 183

ix x List of Tables

11.3 Asia’s exposure to US and European banks 183 11.4 Growth rates in Asia 187 12.1 Government debt-to-GDP in the Euro area 200 12.2 Debt-to-GDP for Euro area countries 201 12.3 Panel regression of GDP growth and debt holding 204 Acknowledgements

The editors feel that they have a great obligation towards Jerome Stein, who passed away in February 2013 without seeing this volume finished. His contributions to the financial debt crises and his many provocative questions were an invaluable stimulus towards realizing this volume. He called our attention to the role that external debt plays in such crises, in addition to government debt, and to the fundamentals that cause both. He argued that fiscal repression without real depreciation of the domestic currency in the weak Euro countries may lead to the worst of all possible worlds. We wish to remember him not only as a great scholar, but also as a friend who was highly endowed intellectually and rich in humanity, a lover of what is beautiful and morally good.

xi Notes on Contributors

Giorgio Basevi is Emeritus Professor of International Economics, Department of Economic Sciences, University of Bologna, Italy. Michael R. Blomenhofer graduated with an MSc in International Polit- ical Economy from the S. Rajaratnam School of International Studies, Nanyang Technological University, Singapore, and currently works for Kroll, a global risk consultancy, in Singapore. Carlo D’Adda is Emeritus Professor of Economics, Department of Economic Sciences, University of Bologna, Italy. Daniel Dăianu is Professor of Economics at the National School of Polit- ical and Administrative Studies (SNSPA) in Bucharest, and Chairman of the Romanian Economic Society, Romania. Anton Hemerijck is Dean of the Faculty of the Social Sciences and Professor of Institutional Policy Analysis, VU University Amsterdam, Netherlands & Centennial Professor in the Department of Social Policy, London School of Economics and Political Science (LSE). Bodo Herzog is Professor of Economics, ESB Business School, Reutlin- gen-University, Germany. Julius Horváth is Professor, Department of Economics & Department of International Relations and European Studies, Central European Univer- sity, Hungary. Rajeesh Kumar is Researcher at the Centre for International Politics, Organization and Disarmament, School of International Studies, Jawa- harlal Nehru University, New Delhi. Francesco Nicoli is a Ph.D. researcher at the University of Trento and a former Programme Assistant at the European Policy Centre, Brussels. Kunibert Raffer is Associate Professor, Department of Economics, University of Vienna, Austria. Pradumna B. Rana is Associate Professor of International Political Economy at S. Rajaratnam School of International Studies, Nanyang Technological University, Singapore.

xii Notes on Contributors xiii

Karlhans Sauernheimer is Professor Emeritus, Faculty of Law and Economics at Johannes Gutenberg-University, Mainz, Germany. Jerome L. Stein (Late) was Professor, Department of Applied Mathe- matics and Emeritus Professor of Economics at Brown University, USA. Jonathan Story is Emeritus Professor of International Political Economy and the Shell Fellow in Economic Transformation, Emeritus, INSEAD, Fontainebleau, France. Martin Šuster is associated with Research Department, National Bank of Slovakia, Bratislava. Radu Vranceanu is Dean for Research and Professor of Economics at ESSEC Business School, Paris, France. Brigitte Young is Professor of Political Science and International/ Comparative Political Economy, Institute for Political Science, Univer- sity of Muenster, Germany. Fabian Zuleeg is Chief Economist at the European Policy Centre, Brus- sels, Belgium.