Waking from the Euro Dream by N

FEATURE

Waking from the Euro Dream By N. Graham Allen, FCMA, CGMA, and Mark Kavolius, CIMA®

he forces originally behind the represent an early chapter to a longer the assumption that the status quo will formation of the euro are being story. Th at great minds foresaw the prevail. T supplanted and forgotten in the fundamental fl aws in the EMU long Th e EMU is not built upon a current European economic and politi- before it was formed suggests we should solid foundation of widely accepted cal climate. In this article, we examine carefully consider whether Greece economic principles, and several key the structural challenges facing Europe’s represents a waypoint rather than a tenets, or structural challenges, create a Economic and Monetary Union (EMU) fi nal result. valid argument against its sustainability, and how it never recovered from weak Concern that a longer story might including the following: fi scal enforcement. We also examine the be in the making stems from the man- • Th e EMU is challenged to maintain a remedies needed to ultimately create ner in which the European Union2 single monetary policy built upon 17 a successful single European currency, (EU) has addressed the symptoms of diff erent sovereign fi scal policies; it and we explore the need for urgent the malady that today besets the EMU also lacks a good disciplinary mecha- reform to the EMU. instead of the malady’s root cause. nism for reining in the profl igate In 1980, a charismatic union leader As a result of its March 2012 debt spending of one or more member named Lech Walesa started a labor restructuring, Greece now benefi ts countries. organization known as Solidarność in from a reduced sovereign debt load and • A lack of labor mobility creates Poland’s Gdansk shipyard. At that time, a promise of fi nancial support from the pockets of long-term unemployment no one had any way of knowing that EU, the International Monetary Fund within the EU. In the United States, the formation of Solidarność and the (IMF), and the European Central Bank a common language and culture still subsequent shipyard strike it organized (ECB), so long as it maintains austerity prevail, and labor fl ows relatively would rank among the pivotal moments programs designed to reduce govern- freely between states. In Europe, leading to the collapse of the Soviet ment spending. Nevertheless, Greece’s labor moves less freely, as a result of Union, the removal of the Berlin Wall, economy continues to face fundamental cultural, language, and other barri- and the reunifi cation of Germany. challenges, including sub-par gross ers, a situation that sometimes cre- Today, one may justifi ably ask whether domestic product (GDP) growth, high ates chronic regional unemployment. recent events in Greece are simply unemployment, and rich public pen- • Th e EU lacks an authoritative execu- a Greek tragedy, caused by decades sions. Moreover, sovereign fi scal weak- tive body capable of creating and of irresponsible economic behavior nesses continue to emanate from other executing decisive crisis manage- (falsifying economic data, lax tax col- EMU member countries, including ment policies. lection eff orts, etc.), or if these events Ireland, Italy, Portugal, and Spain. Many are symptomatic of the beginning of the EMU countries face diffi cult economic Unlike the case of the 2008 U.S. end of the EMU.1 prospects, and requests for further credit crisis, where a single treasury support could weigh on the patience of secretary (Hank Paulson) exercised A unifi ed Europe is the result of plans. core members such as Germany and authority to impose changes on the It is, in fact, a classic utopian project, a France. In addition, a changing political banking system, none of the European monument to the vanity of intellectuals, landscape could widen the ideological governing bodies, including the a program whose inevitable destiny is gap among EMU member countries. European Commission (EC), can act failure: only the scale of the fi nal dam- in such a unilateral manner..3 At pres- age done is in doubt. Challenges to an Effective and ent, major decisions can, for example, —Margaret Th atcher Sustainable EMU require the consensus of the EU, the British Prime Minister (1979–1990) While current events and economic IMF, and the ECB, as well as that of realities trigger concern, an understand- the individual member countries. Even Margaret Th atcher’s quote suggests ing of certain historical aspects sur- then, local politics often remain at odds that Greece’s debt restructuring could rounding the EMU’s founding weakens with those decisions, a situation exem-

January/February 2013 41

plifi ed by the confl icting relationship infl uence. As the situation played out Kohl were the two primary public faces between the ECB and the Deutsche and the Soviets settled into economic of the euro. Bundesbank.4 defeat, the failings of communism led to Between the demise of the Berlin Th roughout this article, we refer to the collapse of the Berlin Wall, a critical Wall in 1989 and the signing of the these tenets as the “EMU’s structural event that galvanized support for the Maastricht Treaty in 1992, civil servants challenges.” formation of the EMU. worked at a frantic pace to draw up the terms of the arrangement, buoyed by Foundations of the EMU– On the day the Wall came down … prom- reunifi cation enthusiasm in Germany. Peace through Economic ises lit up the night like paper doves in fl ight. Late in the negotiations, Germany Interdependence —Pink Floyd extracted a high price for retiring its How did the EMU reach the point “A Great Day for Freedom” beloved DM in favor of the euro. First, where its potential collapse even merits Germany insisted on an independent discussion? To answer this question, The Convergence Period, European central bank, whose mandate one has to examine the EMU’s origins 1992–1999 would be to guard against infl ation; this and understand how, why, and when Germany struggled unexpectedly dur- was in confl ict with France’s preference, it was formed. In addition, one must ing the pre-convergence period as it which focused more on monetary understand the history of politics worked to reunify the country follow- policy. Second, and at the last minute, within the EU. ing the fall of the Berlin Wall in 1989. Germany insisted that the central bank Th e German people had internalized a be prohibited from issuing Eurobonds Anyone around here who isn’t confused healthy aversion to infl ation, having that eff ectively could obligate one doesn’t understand what’s going on. seen their country’s economy twice country to pay for the debts of another. —anonymous Belfast citizen, 1970 decimated in the 20th century by In fact, the Maastricht Treaty, in Article hyperinfl ation. Indeed, in the post- 103, Section 1, specifi cally prohibits the Briefl y, the EU’s roots trace back war years, the deutschmark (DM) had EC from becoming liable for the debts to the European Coal and Steel become a symbol of West German of a member country. Perhaps, at the Community (ECSC), established by economic recovery, independence, and time, the Bundesbank already was look- the Treaty of Paris in 1951. Th e ECSC nationalism. Th erefore, in 1990, West ing ahead to the possibility that it might formed a six-nation common market Germans considered it a bitter pill to become Europe’s fi nancial backstop for coal and steel, partially to ensure swallow when, as a condition to the and didn’t like what it saw. Today, the peace among the constituent nations reunifi cation, they agreed to a one-for- clause eff ectively prevents issuance of (France, West Germany, Italy, Belgium, one exchange between the DM and East a Eurobond guaranteed by all member the Netherlands, and Luxembourg). German mark. countries, and some maintain it also Later, the Treaty of Rome, executed Ultimately, the process of European should prohibit the ECB from directly in 1957, built upon the success of the monetary unifi cation was accelerated, purchasing sovereign bonds in the open ECSC and led to the founding in 1958 not so much by the Germans, who had market. Nevertheless, the ECB has pur- of the European Economic Community their hands full with the merging of East chased sovereign debt during the cur- (EEC). Ultimately, the EEC was assimi- and West Germany, but in fact by the rent crisis, to the consternation of many lated into the EU. French, who saw it as an opportunity to critics. Interestingly, the ECB recently Already, without looking too far back expand their infl uence within Europe has worked around the prohibition by into history, we see that peace fi gures and contain a newly unifi ed Germany. expanding its long-term refi nancing as a primary motivation for European France likely abhorred the prospect of operations (LTROs).5 economic cooperation. All the pre-EMU being sidelined by the broader spec- On February 7, 1992, to the sound cooperative markets were supported by trum of European politics. So, while of classical music, all members of the European political elites who believed Germany remained preoccupied with European Union signed the Maastricht that economic ties could lessen the like- its reunifi cation, France provided much Treaty in Maastricht, the Netherlands. lihood of military confl ict. In the 1950s, of the behind-the-scenes political impe- As a condition of joining the the destruction that had been caused by tus leading up to the February 1992 EMU, the Maastricht Treaty required two world wars still was visible through- Maastricht Treaty (a.k.a. the Treaty countries to meet a set of economic out Europe. At the same time, with the on European Union), which formally convergence criteria. One of the criteria Cold War underway, a union among founded the EMU in November 1993. stipulated that long bond yields of European countries also was seen as a Publicly however, France’s François member countries converge. A look good counterbalance to growing Soviet Mitterrand and Germany’s Helmut at government bond yields during

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this period reveals wide discrepan- FIGURE 1: FIVE-YEAR SOVEREIGN YIELDS, 1991−2000 cies in 1992 between Germany and 16.00 weaker countries such as Ireland and Spain (see ﬁ gure 1). Th ereafter, in the 14.00 12.00 period preceding the launch of the Germany actual euro currency, some sovereign 10.00 France yields experienced a rapid decline 8.00 Italy

throughout the decade, almost to the (%) Yield 6.00 Ireland level of Germany’s yields, to meet the Spain 4.00 criteria of the Maastricht Treaty. Th e Greece 2.00 rapid decline in yields created a highly Portugal stimulated economic environment 0.00 for some and began the debt build-up that has become so problematic today. Feb-91Aug-91Feb-92Aug-92Feb-93Aug-93Feb-94Aug-94Feb-95Aug-95Feb-96Aug-96Feb-97Aug-97Feb-98Aug-98Feb-99Aug-99Feb-00Aug-00 Converging yields also implied that a Source: potential default by a member country was highly unlikely, despite the fact that the EMU was never written into the crisis of 1992 should have been a clear bailouts were specifi cally prohibited in Maastricht Treaty. So, speculation today warning that the system was fl awed. the Maastricht Treaty itself in the so- that Greece will be ejected by other called “no bail-out” clause. member countries appears unfounded. Lax Enforcement at the Start As the euro’s launch date approached, Finally, currency appreciation during Weakens the EMU it became clear that some countries the convergence period compounded On January 1, 1999, the euro was born, couldn’t meet the economic convergence some of the basic economic weaknesses weighing in at US$1.18. criteria. In fact, that was the case with faced by certain prospective EMU Following launch of the euro, the Greece, which didn’t join the EMU until member countries. Prospective member spending of each EMU country was 2001 because it still failed to meet the states were required by the European eff ectively controlled by the Stability and requirements in 1999, despite signifi cant Exchange Rate Mechanism6 (ERM) Growth Pact8 (SGP) and policed by the manipulations of its economic data. to peg their currencies to an ever- EC. Th e SGP required member states Moreover, critics contend that many of narrowing band around the European to maintain certain economic criteria, the countries that joined the EMU in Currency Unit7 (ECU), the composition among them a maximum budget defi cit 1999 also weren’t ready. of which was dominated by the DM. equal to 3 percent of GDP. However, by Nevertheless, once the Maastricht Th e problem was that high German 2001, Germany’s annual budget defi cit Treaty was signed in 1992, the path was interest rates, caused by the costs of had reached 3.1 percent GDP. France set. With the treaty in place, complete reunifi cation, were artifi cially boosting also breached the requirement soon with timetable, a prevailing attitude of the value of the DM, and as a result the after, in 2002. Despite these violations, political correctness and enthusiasm ECU. Consequently, some prospective the EC faced enormous political pres- permitted the loose application of con- member states began to suff er from sure (mostly from Th e Economic and vergence criteria to some prospective declining exports and competitiveness. Financial Aff airs Council [ECOFIN], the member economies. By 1997, the appa- Th is eff ect was partially off set by lower democratically elected European council ratchiks in Brussels understood that funding costs, a benefi t of membership. of economic and fi nance ministers) certain countries fell far short of mini- In September 1992, as strains built not to enforce the SGP and levy fi nes mum requirements; but implementation up in the ERM, the U.K. pound sterling required by the pact. From that moment already was set to begin on January 1, came under pressure at the hands of on, France and Germany lost the moral 1999. Th ese countries clearly had not currency speculators, including George high ground, and the SGP was largely met the convergence criteria and were Soros, because the U.K. government seen as ineff ective. going to be challenged from the start. was unable to keep the sterling within Given the momentum behind the the band required by the ERM. On Greece, A Weak Link, Fails. process, however, few in the European September 16, 1992 (Black Wednesday), Who Will Bear the Cost? Parliament attempted to intervene, the sterling fell 17 percent against the Th irteen years after the euro’s launch, and nothing was done. Indeed, the DM, forcing the U.K. government to Greece defaulted, with unemployment climate was so accommodative that a ultimately withdraw the sterling from running at depression levels and its mechanism for ejecting a country from the ERM. With hindsight, the sterling economy in near ruin. To exemplify

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the seriousness of the situation, Greek TABLE 1: EUROPEAN UNEMPLOYMENT RATES Finance Minister Evangelos Venizelos Youth* Total** recently appealed to the Greek people Eurozone (all 17 countries) 20.9% 10.7% to return funds they had previously held Germany 8.6% 5.5% in deposit at the country’s banks. Since France 22.8% 10.1% 2009, €54 billion in funds have been withdrawn but not transferred as remit- United Kingdom 21.8% 8.1% tances abroad. Alarmingly, in the midst Italy 28.2% 9.7% of the crisis, the EC also succeeded in Spain 47.8% 22.9% removing the democratically elected Portugal 29.9% 14.7% Greek prime minister as a condition Ireland 29.9% 14.5% of further funding. Along with more Greece 45.8% 21.7% austerity measures, this has led to an United States 17.5% 8.3% increase in Greece of anti-EU sentiment. Japan 9.3% 4.2% Source: Eurostat Th e light you see at the end of the tunnel * As of 3Q11, except Japan, which is 2010 ** As of 4Q11 is the front of an oncoming train. —David Lee Roth vocalist with Van Halen Austerity Bites boat building and servicing industries, as So far, policies recently put into place to did a similar tax enacted by the United In March 2012, a troika compris- promote growth throughout the chal- States in 1990. Th e measures will only ing the EU, ECB, and IMF approved a lenged EMU countries do not appear partially solve the problem, which is that €130-billion loan package to Greece in to be working, despite encouraging these countries ultimately need to grow exchange for more austerity. In addi- comments from ECB Chairman Mario out of their debt conundrum. tion, Greece simultaneously restruc- Draghi. Indeed, they may be making Th e danger remains that the cumula- tured its fi nances in a deal that reduced things worse. As shown in table 1, tive eff ect of many recently enacted its total sovereign debt obligations by unemployment remains untenably high policies may contribute to signifi cantly approximately €100 billion. Although in some regions (reportedly above 50 lower growth, which could ultimately these actions reduced signifi cant ten- percent among those under 25 in Spain lead to a downward economic spiral sion in fi nancial markets, we believe and Greece in March 2012). At some and worsening sovereign fi scal balances. they represent an intermediate fi x point, if no path to prosperity is articu- Furthermore, the propensity of the rather than a long-term cure, because lated, political extremism may give way richer European countries to continue Greece’s debt to GDP ratio is still esti- to anti-EU sentiment expressed at the to bail out poorer neighbors diminishes mated to be excessive at 164 percent in ballot, threatening the long-term stabil- as their own domestic growth falters. 2012 and 161 percent in 2013. ity of the EMU and possibly the EU. Approximately 70 percent of Germany’s Any agreements between the EU Austerity measures such as layoff s exports go to other parts of Europe, so and its budget-challenged members and reduced pensions for government depression-like conditions elsewhere (Greece, Ireland, Italy, Portugal, and workers, as well as delayed retirements, will aff ect the leading core countries. Spain) will require those countries to cut spending but do not promote growth. Presently, German economic growth reduce debt and ultimately use the For example, Italy’s Prime Minister is forecast to be only slightly positive markets to self-fund. To accomplish Monti now is proposing higher taxes on in 2012; so the outlook remains uncer- this, policies must produce healthy the super-rich, a luxury boat tax, and a tain, as does continued support of the economic growth and increased tax return of property taxes as a way to solve German people for future bailouts if revenue while reducing government Italy’s fi scal crisis. In fairness, he warned things get much worse (see table 2). spending. Th is explains the mandate German Chancellor Angela Merkel that given to the EC-designated technocrat, the EU needs to promote more pro- Other Weak Links Exist Mario Monti, a former European growth policies. Nevertheless, however Since the March 2012 Greek debt commissioner and ex unelected Prime popular these measures are politically, restructuring, attention has rightly Minister of Italy when he was nomi- they likely will lead to deteriorating eco- turned to a number of other weaker nated to lead Italy. Monti was mandated nomic growth. For example, the luxury EMU countries, namely Italy, Portugal, by the EC to “oversee” Italian policies in boat tax ultimately could lead to lower and Spain and their sovereign debt obli- a manner that promotes growth. sales and tax revenue, and layoff s in the gations (see table 3).

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TABLE 2: EUROPEAN GDP AND GDP GROWTH country can again access public bond GDP Growth markets to enable future funding. Th e EU’s current recovery plan assumes 2010 GDP (€ millions) 2011 Actual 2012 Forecast that Portugal attains self-funding status Eurozone 9,191 1.5% (0.3%) (all 17 countries) by 2013. Currently, that assumption Germany 2,499 3.0% 0.6% appears optimistic, at best, in normal- France 1,933 1.7% 0.4% ized market conditions. It is diffi cult to see how sovereign yields can moderate United Kingdom 1,697 0.7% 0.6% while the EMU’s structural challenges Italy 1,549 0.4% (1.3%) continue largely unaddressed. Spain 1,063 0.7% (1.0%) Portugal 173 (1.6%) (3.3%) Possible Solutions Ireland 156 0.7% 0.5% To date, the EU-ECB-IMF troika has Greece 230 (6.9%) (4.4%) implemented the LTROs, provided United States 10,968 1.7% 1.5% funding for the future European Japan 4,122 (0.7%) 1.8% Stability Mechanism9 (ESM), directly purchased sovereign debt, provided TABLE 3: EUROPEAN GOVERNMENT DEBT AS A PERCENT OF GDP loan packages to Greece, and encour- 2008 2009 2010 2011 aged austerity measures throughout Eurozone (all 17 the EU. However, none of those actions 70.1% 79.8% 85.3% countries) directly address the EMU’s structural Germany 66.7% 74.4% 83.2% 81.8% challenges. France 68.2% 79.0% 82.3% 85.2% Some recent measures have United Kingdom 54.8% 69.6% 79.9% 85.2% attempted to address the EMU’s struc- Italy 105.8% 115.5% 118.4% 119.6% tural challenges. For example, the EU Spain 40.1% 53.8% 61.0% 66.0% has proposed legislation to increase the mobility of labor throughout the EU, Portugal 71.6% 83.0% 93.3% 110.1% although language, social, and other Ireland 44.2% 65.2% 92.5% 104.9% barriers could linger. However, any Greece* 113.0% 129.3% 144.9% 159.1% EU-wide labor mobility legislation likely United States** 102.0% will face intense political resistance in Japan*** 208.2% certain countries. Source: Eurostat and CIA World Factbook Additionally, in a move toward fi scal * Or, alternatively, 116 percent in 2020 on a pro forma basis for the March 2012 restructuring. ** Estimated as of 4Q11; $15.36B in total public debt outstanding (U.S. Treasury Monthly Statement of the Public union, the Fiscal Compact (formally, Debt (comprises $10.57B in public debt and $4.78B in intragovernmental holdings (includes Medicare and Social the Treaty on Stability, Coordination Security entitlements))) ÷ $15.06B in 2011 U.S. GDP (International Monetary Fund). *** Estimated as of 4Q11. and Governance in the Economic and Monetary Union; a.k.a. the Fiscal Stability Treaty), an intergovernmental Currently, the ECB’s recent €1 tril- Th e (LTRO) program may have a calm- treaty signed in March 2012 by all 17 lion in long-term fi nancing operations ing eff ect in the short term, but it is a EMU members, legislates that national (LTROs) seems to be holding together calm which could be deceptive. budgets be maintained in balance (a the whole euro ball-of-wax. However, —Jens Weidmann structural defi cit of up to 0.5 percent of the positive eff ect appears to be waning. President, Deutsche Bundesbank nominal GDP is allowable) or at a sur- Recent reports suggest that banks in plus. Violators would face imposition of Italy, Portugal, and Spain have expended Portugal’s situation appears to be structural reforms to ensure compliance much of their portion of the recent among the worst, based on the yield of and fi nes of up to 0.1 percent of GDP. LTRO funds to purchase European its sovereign debt. Portuguese 10-year Defi cits would be calculated under nor- sovereign debt. With funds at the banks government yields continue to refl ect malized growth conditions and would running low and sovereign yields inch- a signifi cant lack of market confi dence. allow governments to run a certain level ing higher, some question who will be Yields at these levels are likely unsus- of shortfall in economic downturns but, the next incremental buyer of these tainable and will need to be signifi cantly by the same token, require surpluses to countries’ sovereign debt. lowered by real market forces before the accumulate in economic boom times.

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Th is mandate attempts to block the behind the euro was a global march for Germany to take a more direct temptation by irresponsible politicians toward a socialist European federalist leadership role in the current crisis. to make commitments that cannot be state, egged on by post-Soviet commu- With a worsening economic climate, met when economic conditions sour nists who still maintained positions of an ugly and more disconcerting aspect of and achieves the appearance of fi scal authority in many European countries. the crisis emerges. Political extremism, at discipline without actually demanding However, a closer examination both ends of the spectrum, is resonating a rigorous no-defi cit policy. Th e Fiscal today reveals that, in fact, each country among voters. For example, Finland’s Compact will become enforceable in appeared to have its own motivation nationalist True Finn party and France’s January 2014 if, by January 1, 2013, at for joining the EMU. French President communist party both have experienced least 12 of the countries’ governments François Mitterrand asserted to U.K. surging popularity. Finally, the economic have endorsed it at the constitutional Prime Minister Margaret Th atcher that center of gravity in Europe is quickly or other equivalent level. Th e potential it was “1914 all over again.” In addition shifting eastward toward Asia and the eff ectiveness of the Fiscal Compact has to France’s fear of the new larger Saxon/ ex-Soviet bloc countries. For example, been questioned already, and critics Prussian Germany, Spain and Portugal Turkey, which has experienced rapid have pointed out that it would not had no desire to return to the oppres- economic growth, is now the sixteenth- necessarily have prevented the current sion of dictatorship from which they richest country in the world on a per crisis. In addition, it appears that had only recently escaped. Germany’s capita GDP basis. Its enthusiasm for enforcement isn’t automatic or even interest was economic, in that it saw joining the EU is quickly waning. within the jurisdiction of an established a unifi ed currency as a method of Given all of this, can the euro agency; any disciplinary action fi rst addressing a weak Italian lira that still survive? Changing attitudes and requires an EU member country to fi le allowed Italian businesses to compete circumstances will force countries to re- a formal claim in the European Court of more eff ectively with Germany’s agri- examine the benefi ts of continued EMU Justice against the off ender. cultural and auto industries (e.g., Fiat membership. Continued participation Despite these positive steps, senior versus Volkswagen). Other countries will require politicians who are able to European politicians still caution that such as Finland were simply happy to articulate the vision of a unifi ed Europe “the Euro crisis is not over; many of the join anything European following years to increasingly skeptical electorates. Th is underlying imbalances and weaknesses of of suppression under Soviet infl uence. still is possible, as the costs of leaving the economies, banking sectors, or sover- Today, however, much of the moti- the EMU at this stage appear punitively eign borrowers remain to be addressed.” vation for joining together in the EMU high. For certain countries, some ana- has been forgotten. Years ago, politi- lysts have predicted an EMU exit could The Times They Are a Changin’ cians who forged the legislation had devalue their currencies by 50 percent At least for the time being, from a experienced fi rsthand the destructive or more and risk violence on the streets. global markets perspective, European eff ects of war; and to them, the peace Also, an increasingly unwilling concerns have faded from center stage. dividend was worth the risks posed by Germany must be prepared to foot the Inevitably, however, we believe the joining a unifi ed European currency. bulk of any costs until EMU members focus will return to Europe—and in par- Almost two generations later, European attain a sustainable economic equilib- ticular to the other distressed countries. politicians are not as infl uenced by the rium. Gone are the days of the “euro In addition, a number of other themes experiences of the past century and at any price.” Further external fi nancial exhibit the potential to impact the sus- instead face new economic realities and help through the IMF and other orga- tainability of the EMU (e.g., presidential an increasingly disenfranchised youth. nizations also could be forthcoming, elections in France and the Irish refer- Perhaps nowhere is change more if the cost to the global economy of a endum on joining the Fiscal Compact). noticeable than in Germany itself. In an European breakup is deemed too high. Perhaps the single most-important ironic twist, German political ambitions So far there has been some evidence observation that comes out of an have been exactly the opposite of that that this could occur. Ultimately, per- historical perspective of the EMU is originally feared. Since reunifi cation, haps it will be the collective fi nancial that attitudes have changed signifi cantly rather than seeking to control Europe, clout of the entire world that will be since the days of Maastricht. With the Germany has preferred to empower engaged in solving the problem. benefi t of almost 20 years of hindsight, it Brussels through increased federalism. is possible today to see things that were Th is has given rise to extraordinary Conclusions and Investment not readily apparent in the heady days of scenes in the European Parliament, Implications the Maastricht signing. It would be easy where senior representatives of once- Looking back, it is clear today that the to conclude that the leading motivation conquered countries actually have asked euro project was motivated more by

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politics than economics. From an eco- As the post-German unifi cation EU member country. Th e members of the nomic standpoint, it’s evident that many enthusiasm that helped cobble the EU EC, responsible for acting in the best interest of today’s 17 EMU members weren’t together in the 1990s wanes, so too of the EU, propose legislation, implement ready for a currency union, and today’s do the benefi ts of a single unifying decisions, uphold treaties, and tend to the economic malaise refl ects this. currency. Moreover, as the rest of the day-to-day aff airs of the EU. In our view, it is too soon to view world grows at a signifi cantly more 4 Th e Deutsche Bundesbank is the central Greece’s debt restructuring as an rapid pace, as is the case to the east of bank of the Federal Republic of Germany. end, in and of itself. Declining GDP, Europe in the ex-Soviet bloc and much 5 Th e Long-Term Refi nancing Operation crippling unemployment, civil unrest, of Asia, the drawbacks of EMU mem- (LTRO) is an ECB program that previ- and a dysfunctional banking system bership will become more polarizing ously provided three-month to one-year (despite the LTROs) all point to further to its members. Th erefore, it appears loans to European banks on a secured economic deterioration and misery for increasingly unlikely that the EMU will basis, at favorable fl oating interest rates. the Greek population under the shadow continue to exist in its present form. In December 2011 and February 2012, the of Brussels and the euro. Th at the same Indeed, we believe there’s a fair chance ECB commenced two LTROs totaling more fate could await other, larger European that the words of Margaret Th atcher than €1 trillion (i.e., signifi cantly larger than countries should be a legitimate con- may prove to be highly prescient. any previous LTRO) and extended the term cern and, in our opinion, discourages of the loans to three years. Funds provided any investment in European sovereign N. Graham Allen, FCMA, CGMA, by the December 2011 and February 2012 bonds, outside of the core countries. is a senior portfolio manager with LTROs were expected to fortify liquidity EMU members such as Spain and Italy Bradford Marzec in Los Angeles, reserves at European banks and indirectly represent a signifi cantly larger fi nancial CA. He was educated in London, support bank purchases of new government challenge than Greece, and are well England, at Harrow and Watford sovereign bond issuance in order to reduce beyond the scope of the proposed ESM. Colleges. Contact him at tension in European fi nancial markets. For the euro to survive, the region [email protected]. 6 Th e European Exchange Rate Mechanism, must quickly enact pro-growth policies introduced in 1979, is a component of the alongside existing austerity measures to Mark Kavolius, CIMA®, is regional European Monetary System designed to prevent further GDP contraction. Going sales director, East Coast, with reduce currency exchange rate volatility. forward, more power needs to be con- Bradford & Marzec in Los Angeles, Prior to the introduction of the euro, centrated in Brussels so that an enforce- CA. He earned a BS in business exchange rates were based on the European able budget process can be centralized. management from the University of Currency Unit (ECU), which was based But just as Solidarność led to the Massachusetts. Contact him at upon a weighted average of the member collapse of a world-dominant political [email protected]. country currencies. After adoption of the system, the failure of Greece’s economy, euro currency, the ERM continues to govern insofar as it required a debt restruc- Endnotes EU member currencies that aren’t part of turing, may be an early sign that the 1 Th e Economic and Monetary Union (some- the EMU by linking them to the euro. European Union is unworkable due times referred to as the European Monetary 7 Th e European Currency Unit (ECU) is a to the varying economic profi les of its Union) technically comprises a three-stage weighted average unit of account based upon member countries. Moreover, even if a framework enacted in the period between the currencies of EU member states that modicum of economic consistency can July 1, 1990, and January 1, 1999. In its haven’t adopted the euro currency. be attained, there is no guarantee that current form, the Economic and Monetary 8 Th e Stability and Growth Pact (SGP) is all the European peoples will accept the Union establishes a single currency, coordi- an agreement adopted in 1997 among the inevitable shift of power to Brussels. nates policy, and establishes a single market 27 members of the EU that facilitates the Ultimately, the choices are clear. If for goods and services among its members. maintenance of a stable EMU by establishing member countries can persuade their 2 Th e European Union is an economic and a system for the monitoring of members’ respective electorates that the EMU is a political affi liation of 27 European countries fi scal positions to ensure that they essentially good thing, further unifi cation policies working together to maintain a common maintain the original convergence criteria. will have to be enacted to achieve a market for goods and services. Only 17 EU Th e SPG includes provisions for warnings more workable model. To the extent a member countries share the common euro and sanctions, if needed. workable model is not achieved, coun- currency. 9 Th e European Stability Mechanism (ESM) tries may choose to exit the EMU; in 3 Th e European Commission is the unelected is a permanent €700-billion rescue fund the case of Greece, this likely will occur executive body of the European Union launched in 2012; it is designed to succeed if the bailout spigot is shut off . comprising one representative from each Continued on page 51

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manage internally its coalition politics serve as a proof of identity and address, any- through astute political acumen, correct where in India. Any individual, irrespective IMCA Educational regional economic imbalances through of age and gender, who is a resident in India Programs Calendar inclusive growth, and nip nationalistic and satisfi es the verifi cation process laid uprisings in the bud to attain long-term down by the UIDAI can enroll for Aadhaar. CONFERENCES internal harmony. Th e Government of India intends to route April 28–May 1, 2013 subsidy to intended benefi ciaries using this IMCA 2013 Annual Conference R. Rajagopal is senior vice president, identifi cation. For more details, visit http:// Seattle, WA Investments & Head Advisory, Kotak uidai.gov.in/. Mahindra (UK) Ltd., Singapore July 15–16, 2013 IMCA 2013 Summer Institute Branch. He earned a bachelor’s degree Disclaimer: Th e writer is a strategist Philadelphia, PA in science and an MBA, both from with the Kotak Mahindra Group. Th ese Nagpur University, India. Contact views are his own and not that of the October 7–8, 2013 him at [email protected]. Kotak Mahindra Group. Th is material IMCA 2013 Advanced Wealth Management Conference should not be construed as an off er to Chicago, IL Endnotes sell or the solicitation of an off er to buy 1 See http://in.reuters.com/article/2012/07/05/ any security in any jurisdiction where December 9–10, 2013 india-investment-fdi-un-idINDEE86407 such an off er or solicitation would be IMCA 2013 Winter Institute Phoenix, AZ C20120705. illegal. We are not soliciting any action 2 See Fact Sheet on Foreign Direct based on this material. Investments into February 10–11, 2014 Investment: April 2000 to March India are subject to the geographical, 2014 New York Consultants 2012, Industrial Policy & Promotion, political, economic volatility, and social Conference New York, NY Government of India. http://dipp.nic.in/ issues specifi c to India. English/Publications/FDI_Statistics/2012/ Kotak Mahindra Inc. is the U.S. May 5–7, 2014 india_FDI_March2012.pdf. registered broker-dealer arm of the Kotak IMCA 2014 Annual Conference Boston, MA 3 Unique Identifi cation (known as “Aadhaar”) Group and is a member of FINRA/SIPC. is a 12-digit individual identifi cation For further information, contact April 27–29, 2015 number issued by the Unique Identifi cation [email protected]. IMCA 2015 Annual Conference Las Vegas, NV Authority of India (UIDAI) on behalf of To take the CE quiz online, the Government of India. Th is number will visit www.IMCA.org. CIMA CLASSES March 4–8, 2013*** April 8–12, 2013* Allen–Kavolius April 8–12, 2013** June 24–28, 2013*** Continued from page 47 October 14–19, 2013*

the temporary European Financial Stability information obtained from sources CPWA CLASSES Facility, which expires in 2013. believed to be reliable and in good June 24–28, 2013* faith, but we do not represent that it September 30–October 4, 2013* Disclaimer: Th is report is prepared for is accurate or complete and it should information purposes only. It does not not be relied upon as such. Opinions CIMA CERTIFICATION EXAM consider the specifi c investment objec- expressed are our current opinions as TESTING MONTHS tive, fi nancial situation, or particular of the date appearing on this material February, May, August, November needs of any recipient. Bradford & only and are subject to change without Marzec, LLC is not soliciting any action notice. Past performance is not indica- based upon this report, and the report tive of future results. Copyright 2012, *The University of Chicago Booth School is not to be construed as an off er to Bradford & Marzec, LLC. No part of this of Business sell or solicit investment management publication may be copied, photocopied **The Wharton School, Philadelphia or any other services. Th e information or duplicated in any form or any means *** The Wharton School, San Francisco and opinions contained herein have without Bradford & Marzec’s prior been compiled or arrived at based upon written consent.

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