Inside the Euro Crisis

Praise for INSID E THE E URO CRISIS DJANKOV SIMEON PETERSON INSTI TUTE FOR INTERNATI ONAL E CONOMI CS “ In his book Inside the Euro Crisis, Simeon Djankov goes a long way toward deepening our understanding of the recent troubles in the eurozone and contributes greatly to the discussion of Europe’s path toward reform.” —ANDERS BORG, finance minister of Sweden “ Simeon Djankov has written an extremely interesting book on the eurozone and on the reforms in his native Bulgaria. The book reflects Djankov’s unique combination of superb analytical skills and the experience of successful policymakers.” — LESZEK BALCEROWICZ, former deputy prime minister and finance minister of Poland and former president of the National Bank of Poland INSID “ This book is essential reading for students of European institutions and for everyone who wants to understand the difficulties European politicians encountered in the dealing with the eurozone crisis. INSIDESID What makes it unique is the Eastern European perspective on the euro area.” — JÖRG ASMUSSEN, deputy social minister of Germany, former member of the Executive Board, European Central Bank, and former deputy finance minister of Germany E THE “ Simeon Djankov was uniquely placed to observe the crisis in Europe. His background as an economist at the World Bank and his function as finance minister in a member state of the European Union outside the euro area gave him the opportunity to observe from the inside and the outside E THE simultaneously. His account is meticulous and analytically sound and has profound insights into the strengths and weaknesses of the European architecture. The book is to be recommended to academics CRI URO and readers interested in policy issues of a currency union that is still evolving rapidly.” EURO — THOMAS WIESER, president of the Economic and Financial Committee of the European Union and of the Eurogroup Working Group SIS SIMEON DJANKOV, visiting fellow at the Peterson Institute for International Economics, was deputy prime minister and minister of finance of Bulgaria from 2009 to 2013. In this capacity, he represented his country at the Ecofin meetings of finance ministers in Brussels. Prior to his cabinet appointment, Djankov was chief economist of the finance and private sector vice presidency of the World Bank. In his 14 years at the Bank, he worked on regional CRISISSIS trade agreements in North Africa, enterprise restructuring and privatization in transition AN EYEWITNE SS ACCOUNT economies, corporate governance in East Asia, and regulatory reforms around the world. He is the founder of the World Bank’s Doing Business project. He was also principal author of the World Development Report 2002. Djankov is rector of the New Economic School in Russia and a visiting lecturer at Harvard University’s Kennedy School of Government. He was associate editor of the Journal of Comparative Economics from 2004 to 2009 and chairman of the Board of the European Bank for Reconstruction and Development in 2012–13. He is also a member of the Knowledge and Advisory Council at the World Bank. He has published over 70 articles in professional journals. He obtained his doctorate in economics in 1997 from the University of Michigan at Ann Arbor. 1750 Massachusetts Avenue, NW Washington, DC 20036–1903 (202) 328-9000 Fax (202) 659-3225 SIMEON DJANKOV www.piie.com INSIDE THE EURO CRISIS AN EYEWITNE SS ACCOUNT SIMEON DJANKOV PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS Washington, DC June 2014 Simeon Djankov, visiting fellow at the Peter- Copyright © 2014 by the Peterson Institute for son Institute for International Economics, was International Economics. All rights reserved. deputy prime minister and minister of finance No part of this book may be reproduced or of Bulgaria from 2009 to 2013. In this capac- utilized in any form or by any means, elec- ity, he represented his country at the Ecofin tronic or mechanical, including photocopy- meetings of finance ministers in Brussels. ing, recording, or by information storage or Prior to his cabinet appointment, Djankov was retrieval system, without permission from the chief economist of the finance and private sec- Institute. tor vice presidency of the World Bank. In his 14 years at the Bank, he worked on regional For reprints/permission to photocopy please trade agreements in North Africa, enterprise contact the APS customer service department restructuring and privatization in transition at Copyright Clearance Center, Inc., economies, corporate governance in East Asia, 222 Rosewood Drive, Danvers, MA 01923; and regulatory reforms around the world. or email requests to: [email protected] He is the founder of the World Bank’s Doing Printed in the United States of America Business project. He was also principal author 16 15 14 5 4 3 2 1 of the World Development Report 2002. Library of Congress Cataloging-in- Djankov is rector of the New Economic School Publication Data in Russia and a visiting lecturer at Harvard Djankov, Simeon. University’s Kennedy School of Govern- Inside the euro crisis / Simeon Djankov. ment. He was associate editor of the Journal pages cm of Comparative Economics from 2004 to 2009 ISBN 978-0-88132-685-7 and chairman of the Board of the European 1. Monetary policy—European Union coun- Bank for Reconstruction and Development in tries. 2. Debts, Public—European Union coun- 2012–13. He is also a member of the Knowl- tries. 3. Financial crises—European Union edge and Advisory Council at the World Bank. countries. 4. Banks and banking—European He has published over 70 articles in profes- Union countries. I. Title. sional journals. He obtained his doctorate HG230.3.D583 2014 in economics in 1997 from the University of 330.94—dc23 Michigan at Ann Arbor. 2014009203 PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS 1750 Massachusetts Avenue, NW Washington, DC 20036-1903 (202) 328-9000 FAX: (202) 659-3225 www.piie.com Adam S. Posen, President Steven R. Weisman, Vice President for Publications and Communications Cover Design by Sese-Paul Design Cover photo by © Rao Aimin/Xinhua Press/Corbis Printing by Versa Press, Inc. This publication has been subjected to a prepublication peer review intended to ensure analytical quality. The views expressed are those of the author. This publication is part of the overall program of the Peterson Institute for International Economics, as endorsed by its Board of Directors, but it does not necessarily reflect the views of individual members of the Board or of the Institute’s staff or management. The Peterson Institute for International Economics is a private, nonprofit institution for the rigorous, open, and intellectually honest study and discussion of international economic policy. Its purpose is to identify and analyze important issues to making globalization beneficial and sustainable for the people of the United States and the world and then to develop and communicate practical new approaches for dealing with them. Its work is made possible by financial support from a highly diverse group of philanthropic foundations, private corporations, and interested individuals, as well as by income on its capital fund. For a list of Institute supporters, please see www.piie.com/supporters.cfm. Contents Preface ix Overview of the European Union’s Organizational xiii Structure 1 Introduction 1 How the Crisis Unfolded: Seven Tipping Points 2 My First Impression from Ecofin 4 The Euro and Its Weaknesses 9 Lessons from the Euro Crisis 12 About the Book 15 Disclaimer 18 2 My Work in Bulgaria 19 Forming the Government 20 Bulgaria’s Euro Ambitions 23 Greece: Our Difficult Neighbor 23 The Most Difficult Times 25 Reform Momentum 27 Mid-Term Elections 29 Restarting the Economy 30 Falling Out of Favor 31 Next Parliamentary Elections 32 3 Birth of the Euro 35 The Euro Crisis Starts in Iceland 36 Early Skeptics of the Euro 36 V Origins of the Euro 39 Early Troubles 42 Theory behind the Euro 45 How the Facts Differed from Theory 47 4 Search for Fiscal Discipline as Crisis Mounts 49 Lack of Leadership in Brussels 49 Irish Worries 51 Limitations of the Stability and Growth Pact 54 Using the Pact to Punish Profligates 57 Attempts to Strengthen Fiscal Discipline 60 The United States as an Example? 61 5 First Greek Bailout and Europe Wobbles into 2010 63 First Tipping Point 64 Setting Up Some Missing Institutions 66 2010 Begins on an Up Note 67 Volcano Builds Camaraderie at Ecofin 70 New Financial Facility Unveiled 71 France: “Increase Taxes” 72 Romanian Finance Minister Sacked 73 Theory of a Euro Holiday 74 Cyprus Almost Goes on Holiday 75 The Euro without Germany? 76 6 Deauville Blunder and Perils of 2011 79 Second Tipping Point 80 Irish Worries Redux 81 Portugal: Headed for Trouble 82 Northern Euro: Another Good Idea in Theory 85 7 Portuguese Bailout and ESM-Eurobond Debate 89 National Elections: Getting in the Way 90 Faulty Portuguese Statistics? 92 A Nervous Summer 94 Calls for Higher Taxes, Again 96 Third Tipping Point 97 Eurobonds: A Possible Solution? 97 Red and Blue Eurobonds 99 The Green Paper 100 Eurozone Ministry of Finance 103 8 Ongoing Turmoil, Sprouting Theories of Euro 105 Devaluation Fourth Tipping Point 105 Berlusconi Resigns 106 VI Approving the Fiscal Compact 107 Papademos Takes Over in Greece 110 Theories on Euro Devaluation 112 9 Progress toward Fiscal Union 119 Fifth Tipping Point 120 Outright Monetary Transactions 122 Steps toward a Banking Union 123 Toward a Fiscal Union 125 European Monetary Fund 130 10 Banking Union 133 Draghi Takes the Helm 134 ECB Takes Center Stage 135 Draghi Calls for Structural Reforms

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