Index

Action Committee for the United States of banking union Europe, 40 Draghi and, 134–35 Alert Mechanism Report, 58, 59n as work in progress, 146–47 Almunia, Joaquín, 61, 67, 164 Barnier, Michel, 61, 123 Alternative für Deutschland, 37 Barroso, Manuel, 11, 50, 133 Anastasiades, Nicos, 6, 149, 152 Belgium, 38 Asmussen, Jörg, 134–35, 145, 166 BELLs. See also ; Estonia; ; austerity measures, 168–69 Austria, 38 GDP growth, 157f Bentley mafia, 31–32 bailouts Berlusconi, Silvio, 95, 105 of Cyprus, 4, 149–50 resignation, 106–07 and government debt increases, 135 Bernanke, Ben, 82 of , 3, 63–78, 94 blue/red bond approach, 102 of , 111 Borg, Anders, 7, 71, 91, 166 temporary impact of, 120 Borisov, Boyko, 19–20, 69 Balcerowicz, Leszek, 22, 41, 53 electoral strategy, 29 proposed model for BELL countries, Bosnia, 167 155–58 Bremen summit, 41 Baltics, absence of support for, 66 Brüderle, Rainer, 97 Bank for International Settlements, 69 budgets Bank of Cyprus, depositors’ losses, 152–53 control of, 56 Bank of England, 35, 139 coordinating national, 125–26 larger asset purchase programs, 137 obsession about constraints, 9 bank stress test, 73 Bulgaria, 18 banking crisis in 1990s, 122 agricultural producers, 31 banking supervisor, 123–24 austerity measures, 114 Ecofin decision on single, 3–4, 5 Balcerowicz proposal for, 155–58 as, 140–42 budget deficit for 2009, 25–26 final touches, 144–46 cohesion funds, 14 network of national, vs. centralized, 147 deficit reduction in 2011 and 2012, 5 and non- country, 144 Ecofin report on, 59–60

199 © Peterson Institute for International Economics | www.piie.com economic and monetary union convergence delaying tactics, 12 criteria, 2013, 167f Delors, Jacques, 9, 40 economy, 2009–2011, 156 ambitions, 23 absence of support for, 66 in European Union, 1 liquidity in, 36 exports of goods and services, rejection of euro entry, 44 2009–12, 30f tax proposal and, 96 financial transaction tax and, 96 devaluation theories, Krugman on, 115–17 five-year credit default swap rate, 24f Dijsselbloem, Jeroen, 126, 151–53 former secret police, 26 “double majority” principle, 143 government formation, 20–22 Draghi, Mario, 107, 108–09, 166 Greek bank subsidiaries in, 63 and banking union, 67, 134–35 Greek problems impact on, 64–66 call for structural reforms, 139 mid-term elections in 2011, 29–30 on ECB results, 3, 137–38 Moody’s credit rating, 5 in Ecofin meetings, 133 parliamentary elections in 2013, 32–33 on euro, 45–46, 120 political system corruption, 33 on eurobonds, 100 reform momentum, 27–29 restarting economy, 30–31 ECB. See European Central Bank (ECB) Economic and Financial Affairs Council of the capital controls, in Cyprus bailout, 151 European Union (Ecofin), 1 CDS (credit default swap), 24–25 banking supervisor decision, 3–4, 5 Central Bank of Cyprus, 152 differing political interests within, 82 Claessens, Stijn, 103 failures, 168 Coelho, Pedro Passos, 146, 151 first impressions, 4–8 cohesion funds, 13–14 impact of meeting attendance, 7 Committee of European Banking Supervisors, informal meetings, 70 73 lack of support for, 164 Competitiveness Pact, 83–84 macroeconomic imbalance procedure, consumer price inflation rates, 2007–12, 116f 58–60 cost cutting, 22 market reaction to decisions, 71 credit default swap (CDS), 24–25 meetings, 4, 119, 133 crisis management mechanism, Merkel and economic crisis, US blamed for, 51–52 Sarkozy on, 79 economies of scale, 46 , economic and monetary union education proposals, 126 convergence criteria, 2013, 167f electricity bills in Bulgaria, 32 customs head, appointment in Bulgaria, 22 in EU, 96 Cyprus, 38, 141 ERM II ( Mechanism II), 2, 167 bailout, 4, 149–50 Maastricht Treaty on, 41 collapse, 12 Estonia, 38 debt in, 116 Balcerowicz proposal for, 155–58 elections, 6 entry into eurozone, 166 and European Union, 75–76 euro adoption, 5 liquidity in, 36 economic and monetary union convergence and security for euro, 167 criteria, 2013, 167f euro financial transaction tax and, 96 agreement on total debt of candidate, 43 GDP growth, 157f Cyprus and, 76 Czechoslovakia, break up of monetary union, devaluation theories, 112–18, 165 74–75 problems with, 113–15 early skeptics, 36–39 de Larosière Group, 52–53 efforts to strengthen, 165 Deauville, France, 3 exchange rate, 36 declaration, 2010, 79 exchange rate, 1999–2014, 37f

200 inside the euro crisis © Peterson Institute for International Economics | www.piie.com Germany and, 76–78 integrated supervision of, 134 agreement on Cyprus bailout, 4 introduction, 38 and Ecofin, 164 northern version considered, 85–88 excess deficit procedure, 26 origins, 39–42 financial transaction tax proposal, 72, 96 reforms needed, 10–11 lack of leadership, 49–51 theory behind, 45–46 plan for central budget proposal, 60–61 weaknesses, 9–12 , six pack, 106 euro crisis European Economic Community, 38 in Iceland, 36 European Financial Stability Facility (EFSF), lessons from, 12–15 3, 71–72, 92, 109 onset of, 35 European Insurance and Occupational reform opportunities, 158 Pensions Authority, 66 euro crisis tipping points, 2–4 European Monetary Fund, 130–32 Cyprus bailout, 150–51 European Monetary Mechanism, 40 ECB commitment to eurozone, 120–21 European People’s Party (EPP) Group, 7–8 Greek problems impact on Bulgaria, 64–66 European Redemption Fund, proposal for, 99 private sector participation, mistake of European Securities and Markets Authority, introducing idea, 80 66 single banking supervisor, 142–44 European semester, 125–26 Slovakia approval of eurozone rescue fund European Stability Mechanism (ESM), 108, expansion, 97 166, 168 euro-dollar foreign exchange spot rate, 108f attitude during adoption, 12 euro holiday, 74–75, 165, 169–70 capital reserves, 129–30 , 91 funding issues for Spain, 119 eurobonds, 89, 97–100, 165, 169 and, 89 repayment, 101 private sector participation, 81 , agreement on Cyprus bailout, 4 Regling as chief executive, 43 European Banking Authority, 66 European Union European Central Bank (ECB), 1, 35 crisis summit in 2011, 97 agreement on Cyprus bailout, 4 and Cyprus, 75–76 allotment to banks, 108 exports of goods and services, 2009–12, 30f as banking supervisor, 140–42 Fiscal Compact, 98 bond purchase program, 95 future of, 12 buyback scheme for Greece, 110 tax harmonization, 15, 169 commitment to eurozone, 120–21 , purchase of euro-denominated Convergence Report 2012, 5 covered bonds, 54 decisiveness of, 134 eurozone and euro crisis resolution, 135–38 current account balances Governing Council, 143 and real effective exchange rates, 77f inflation prevention, 85 in southern rim, 2011–13, 10f interest rate reduction, 52, 154 disadvantage of entering, 47 lending rates, 36 ECB commitment to eurozone, 120–21 long-term refinancing, 137 future of, 12 one-country, one-vote principle, vs. GDP growth per quarter, northern, eastern, weighted vote, 143–44 and southern rims, 83f Outright Monetary Transactions program, home bias of investors, 62 122 imports, 113 purchase of Portuguese debt, 84 labor costs, 2011, 39f refinancing operations, 66 net wealth in, 38 responsibility for banks, 143 pension expenditures, 2002–11, 162f southern rim funding requests, 139 policy creation to save, 4 stabilizing role of, 166 productivity growth gap within, 113

INDEX 201 © Peterson Institute for International Economics | www.piie.com total government spending, 1999–2012, Germany, 38 127f competition globally, 13 trade since creating, 47 consumer price inflation rates, 2007–12, unemployment 116f in 2012, 110 electoral politics, and ECB pressure on quarterly rate, 2011–13, 121f Cyprus, 150 Eurozone Ministry of Finance, 103 and euro, 76–78 Exchange Rate Mechanism II (ERM II), 2, 167 in eurozone, 124 Maastricht Treaty on, 41 exposure to Greek debt, 69 exchange rates, flexible, 46 financing reunification, 98 exports of goods and services, Bulgaria and government spending, 127 EU, 2009–12, 30f leadership role, 12 Eyjafjallajökull volcano (Iceland), eruption, 70 nominal unit labor costs, 2001–10, 16f opposition to eurobonds, 97–98 Fekter, Maria, 107–08, 166 resistance to ESM, 131–32 financial transaction tax, 122 sovereign debt level, 43 proposal, 72, 96 Gitnir (Iceland bank), 35 Finland, 38 government deficit, ratio to GDP, Maastricht banking crisis in 1990s, 80 Treaty on, 41 electoral campaign in 2011, and Portugal Greece, 23–25 bailout, 90–92 10-year bond yields, 2010, 68f parliamentary elections, 6 bailout, 63–78 Fiscal Compact, 126–29, 166 budget cuts for, 110 approving, 107–10 package weaknesses, 94 new rules in, 128 budget deficit, 2–3 signing, 109–10 consumer price inflation rates, 2007–12, fiscal devaluation, 117–18 116f fiscal discipline, attempts to strengthen, 60–61 current account deficit 2012, 9 fiscal policy, 166 debt in, 116 fiscal responsibility, 169 debt-to-GDP ratio, 2006–12, 64f fiscal union, 125–30 decision to test eurozone leaders’ resolve, European semester, 125–26 105–06 European Stability Mechanism (ESM), election in 2012, 111 129–30 in eurozone, 38, 47, 70 Fiscal Compact, 126–29 five-year credit default swap rate, 24f reasons for delay, 56–57 impact on Bulgaria, 24, 64–66 flexible exchange rates, 46 loan request from European Union and foreign exchange spot rate, euro-dollar, 108f IMF, 69 France, 38 need for structural reforms, 71 credit ratings, 109 nominal unit labor costs, 2001–10, 16f current account deficit 2012, 9 Papademos government, 110–11 elections, 6 pension reforms in 2010, 161 exposure to Greek debt, 69 private debt, 1999–2012, 141f Fiscal Compact and, 129 public deficit, 63 fiscal devaluation in, 117 referendum on bailout plan, 3 and taxes, 72–73 reforms, 159 Friedman, Milton, 37, 46 Greek banks, subsidiaries in Bulgaria, 63 fund transfers, size of, 14 Green Paper, 100–102 Guindos, Luis de, 8, 112, 119 G-7 countries, 35 Harmonized Index of Consumer Prices Gaspar, Vítor, 8, 9, 160 (HICP), Maastricht Treaty on, 41 GERB (Citizens for European Development of health care, Bulgarian reforms, 28–29 Bulgaria), 19 Higher Academic Committee (Bulgaria), 28 German Council of Economic Experts, 99 Hollande, François, 61, 98, 129, 139

202 inside the euro crisis © Peterson Institute for International Economics | www.piie.com and southern rim countries, 38–39 absence of support for, 66 Juncker-Tremonti approach, 102 crisis, 52 economic and monetary union convergence Karamanlis, Konstantinos, 4, 24 criteria, 2013, 167f Katainen, Jyrki, 7, 12, 54, 81, 166 punishment for breaching rules, 58 anger against Germany, 70 Stability and Growth Pact rules and, 11 in Finnish electoral campaign, 90 Kohl, Helmut, 42–44 Iceland, 35 Kosovo, 167 banking sector collapse, 8 Krugman, Paul, 76, 115 eurozone entry, 47 IMF emergency financing for, 52 labor costs, 113–14 inflation, ECB efforts to prevent, 85 in eurozone, 2011, 39f integrationists, 10 in Irish business sector, 38 interest rates nominal unit in Germany, Greece and ECB cut in, 52 Portugal, 2001–10, 16f long-term, Maastricht Treaty on, 41 labor markets, 37 Interior Ministry (Bulgaria), 31 labor mobility, 47 internal imbalances indicators, 59 labor regulation reforms in Greece, 159 international financial system, G7 Lagarde, Christine, 15, 70, 80 commitment to protect, 35 Laiki Bank, 150, 152 International Monetary Fund (IMF), 50 Landsbanki (Iceland bank), 35 advice on stimulus spending, 65 Latvia, 5, 38, 156–57 agreement on Cyprus bailout, 4 Balcerowicz proposal for, 155–58 emergency financing for Iceland, 52 crisis, 52 Ireland, 38 eurozone entry, 47, 166 budget deficit, 2006–13, 53f liquidity in, 36 credit rating, 53, 95 and security for euro, 167 crisis in 2010, 80 Lehman Brothers, 35 ESM and, 131 lev (Bulgarian currency), euro to back, 25 growth model, 53–54 Lewandowski, Janusz, 7 public debt, 81 liquidity, Draghi’s announcement of recession, 52 unlimited, 134 risk of bank runs, 51–54 Lisbon Treaty, 5 , 38 Lithuania debt ratio, 43 Balcerowicz proposal for, 155–58 economic contraction, 111 banking, 143 financial conditions, 112 economy, 2009–2011, 156 Fiscal Compact and, 129 liquidity in, 36 fiscal devaluation in, 117 Luxembourg, 38 government debt ratio, 3 pension reforms in 2010, 161 Maastricht Treaty, 38, 41, 76–77 private debt, 1999–2012, 141f Macedonia, 167 reform attempts in, 159–60 Malta, 38, 59, 143 tax changes, 163 mandatory retirement age, 28 Merkel, Angela, 3, 70, 77, 78, 97, 150 Janša, Janez, 153, 154 declaration on crisis management Juncker, Jean-Claude, 10, 40, 166 mechanism, 79 on accepting help from IMF, 130 New Year’s address, 2013, 123–24 and banking union, 141 talks to save euro, 85 and EFSF creation, 71 Montenegro, 167 on ESM, 131 Monti, Mario, 10, 106–07 as eurozone head, 12, 18 government reforms, 158, 160

INDEX 203 © Peterson Institute for International Economics | www.piie.com Moody’s credit rating private debt, 1999–2012, 141f for Bulgaria, 5, 29 public debt, 2004–12, 55f for Slovenia, 154 public debt and budget deficit, 93f Moscovici, Pierre, 15 reforms, 160 Mundell, Robert, 45–46 slump from capital inflows, 45 national budgets, coordination procedure, statistic corrections on budget deficit, 125–26 92–94 national supervisors network, vs. centralized tax and customs authority, 163 banking supervisor, 147 private sector debt, vs. public debt, 140 net wealth in eurozone, 38 in Spain, 1999–2008, 142f Netherlands, 38, 59 private sector participation, 79 parliamentary elections, 6 mistake of introducing idea, 80 New Democratic Party (Greece), 24 productivity growth gap, within eurozone, 113 northern euro idea, 85–88, 165 public debt, vs. private sector debt, 140 in Spain, 1999–2008, 142f optimal currency area, 45 Osborne, George, 7, 82, 143 Radičová, Iveta, 3, 12, 168 Outright Monetary Transactions program, Rehn, Olli, 50, 60, 61, 82 138 external imbalances and competitiveness overtime pay, Greek reforms, 159 indicators, 58–59 overvaluation, 114 , 73 absence of support for, 66 Papaconstantinou, George, 67, 70, 94 crisis, 52 Papademos, Lucas, 36–37, 106 economic and monetary union convergence Papandreou, Georgios, 2, 3, 63, 94 criteria, 2013, 167f admission of problems, 64–65 eurozone entry, 47 bailout plan referendum plans, 105 ruble zone, break up, 74 Party of European Socialists, 8 Russia pensions Cyprus request for help from, 150 Bulgarian reforms, 28–29 relations on energy projects, 4 expenditures in eurozone, 2002–11, 162f reforms, 161–62 Sarkozy, Nicolas, 3, 51, 79, 130 Sarris, Michalis, 150, 151 economic and monetary union convergence Schäuble, Wolfgang, 88, 166 criteria, 2013, 167f and action on Spain, 119 GDP growth, 157f and banking union, 123, 145 referendum on euro, 167 and “core Europe” idea, 86 Portugal, 38, 82–85 on public debt crisis, 124 10-year bond prices, 2011, 91f on single banking supervisor, 5 in 2013, 124 Schröder, Gerhard, 9, 43 bank problems, 111 Schulz, Martin, 131, 142, 144 competition globally, 13 Securities Markets Program, 136 constitutional court ruling against austerity German opposition, 137 program, 151–52 Šemeta, Algirdas, 61, 72 credit rating, 90, 95 Single Resolution Mechanism, 140 crisis in 2011, 89 Single Supervisory Mechanism, 146–47 current account deficit 2012, 9 Slovakia, 3, 38 deficit, 54 approval of eurozone rescue fund early retirement legislation, 161–62 expansion, 97 economic troubles, 90 Slovenia, 38, 153–55 eurozone entry, 47 bad loans of state-run banks, 154 financial conditions, 112 fiscal devaluation in, 117 government debt ratio, 3 GDP growth, 157f nominal unit labor costs, 2001–10, 16f public debt, 155

204 inside the euro crisis © Peterson Institute for International Economics | www.piie.com sovereignty issues, 56 Treaty on European Union, 75 Spain, 38 Treaty on Stability, Coordination and bank bailout, 111 Governance, 57–60, 126. See also Fiscal constitutional amendment on balance Compact budget requirement, 128–29 Trichet, Jean-Claude, 50, 67, 69, 95, 147 consumer price inflation rates, 2007–12, in Ecofin meetings, 133 116f leadership role, 134 cost of borrowing, 111 pressure to follow US example of increased current account deficit 2012, 9 liquidity, 82 elections in 2011, 94 financial assistance from eurozone, 120 Ukraine, crisis, 52 government debt ratio, 3 unemployment private debt, 1999–2012, 141f in France, 55 tax reforms, 163 insurance in US, 62 Stability and Growth Pact, 42, 106 quarterly rate in eurozone, 2011–13, 121f limitations, 54–57 in Spain, 2012, 120 stability bonds, 100 unified currency zone, questions about, 1 Standard and Poor’s, on Bulgaria’s investment united Europe, 12 perspective, 27 Strauss-Kahn, Dominique, 65–66, 70, 94, 130 economic tests on euro, 44–45 structural funds, 47 and financial transaction tax, 73 allotments, 11 United States, 61–62 structural reforms credit rating cut, 95 by BELLs, 158 inflation in late 70s, 40 Draghi’s call for, 139 US Federal Reserve, 35 need for, 9 larger asset purchase programs, 137 subprime mortgages, 8 quantitative easing programs, 122 university education reform, 27–28 absence of support for, 66 banking crisis in 1990s, 80 Van Rompuy, Herman, 10, 13, 68 and euro, 37–38 report on creating fiscal capacity for liquidity in, 36 European monetary union, 60 tax proposal and, 96 Venizelos, Evangelos, 3, 94, 105 Swiss National Bank, 35 Switzerland, exposure to Greek debt, 69 Wieser, Thomas, 18, 107, 166 World Bank tax harmonization, 15, 110, 169 crisis response team, 49 tax policy, 57 Doing Business report 2013, 9 tax reforms, 162–63 World Bank/IMF meetings, 145 tax structure, devaluation through change, 117–18 Yugoslavia, Friedman as advisor, 46 Teixeira dos Santos, Fernando, 89, 90 trade, since eurozone creation, 47 zone of monetary stability, 41

INDEX 205 © Peterson Institute for International Economics | www.piie.com © Peterson Institute for International Economics | www.piie.com