T H E F U T U R E O F T H E E U R O ( O R L A C K T H E R E O F )

By Kevin Rejent

COVID-19 HAS EXPOSED DEEP DIVIDES IN THE . CAN THEY BE BRIDGED?

Executive Summary The COVID-19 crisis has laid bare disagreements in the Eurozone regarding nations’ obligations to each other as the continent contemplates the enormous task of economic recovery. Old prejudices in the north developed when southern nations were more fiscally reckless than they are at present have tied the hands of politicians on both sides of the divide. The hardest-hit nations, Italy and Spain, are seeking a joint recovery effort while fiscally prudent nations such as the Netherlands and Germany believe loans to impacted areas are sufficient. Despite token gestures and speeches praising European unity, the great divide remains.

In this article, we look at the issue through the eyes of two nations that best represent the views of their respective “side” of the discussion: The Netherlands and Italy. Divergent economic and cultural priorities have resulted in prejudices and resentment between the populations which must be manifested in the actions of politicians if the politicians wish to remain in power. Without the political ability to overcome these positions, the could be in trouble.

The most likely course for the Euro is to continue some version of the status quo. The members would patch over their differences and hope resentment would die down in the post-COVID era. However, this “easiest” path poses plenty of issues for the fiscally prudent northern nations since the trajectory of European institutions is almost always towards further integration, and potential new Eurozone members much more closely resemble the zone’s southern members. A less likely, but still possible, scenario sees politics in Italy causing it to go down an unfortunate path of reintroducing the Lira as a parallel and eventually redenominating its debt. In this scenario, Greece might also leave the Eurozone, but with the assistance of the remaining Eurozone members. A final scenario sees the Euro broken into three regional under the auspices of the ECB. While this is also unlikely, it would solve some political issues and leave little doubt that the regional Euros meet the requirements of an Optimum Currency Area.

www.MaggioreRisk.com @MaggioreRisk +01 314-412-4161 MAGGIORE RISK PAGE 1

THE PROMISE OF EUROPE As they met on Capitoline Hill to sign the Treaty of Rome in 1957, the leaders of Italy, France, the Netherlands, Belgium, Luxembourg, and West Germany dreamed of a cooperative Europe where continental advancement triumphed over petty national gain. These nations were joined thirty-five years later by six others in Maastricht, Netherlands to bind monetary policy through the Euro. Since then, sixteen more European nations have joined the EU (with the UK subsequently leaving), and nineteen nations now belong to the Eurozone. But now the nations that hosted the signing of the treaties upon which the great European experiment is based, Italy and the Netherlands, embody the continental disagreements on the EU and the Euro that the current COVID-19 crisis has laid bare… disagreements that may lead to the end of the Euro.

It is hard to imagine a world without the Euro, since most level-headed analyst would agree it has been a Recent European History rousing success. However, it has only been in use for eighteen years, and several of those were spent (like…past few months) handling crises in specific nations or Eurozone- With the spread of COVID-19 and subsequent wide. But handle them it has, and history will judge economic crash, European nations have been forced the actions of the kindly, or at east neutrally. Of course, it will never satisfy to consider both national and continental responses everyone, and hindsight provides plenty of hiccups, to achieve the most effective recovery. While there but overall, the ECB has been a force for good in have been some incredible shows of pan-European Europe. It should continue to play a central role in unity, the crisis has also accelerated and deepened the European economy, regardless of the paths intra-continental divides and tested the strength of taken by member states in the post-COVID future. institutions. The fact that Italy and Spain, two frequent targets of fiscally prudent northern Europeans’ derision, were the first and hardest hit on the continent has only complicated matters. MAGGIRORE RISK PAGE 2

When the virus first hit northern Italy, there was could not be more opposed to this, and that some confidence that it could be contained idea was quickly replaced by a proposal to quickly and not cause much disruption outside issue limited-time bonds specifically to aid in of the initially impacted regions Lombardy and recovery: Coronabonds. Once again, however, Veneto. But it crept out of those areas and, northern nations shot down this idea as within a few weeks, forced Italy to lock its edging too close to the mutualization line. citizens into their homes and basically shut Then Spain devised a popular compromise down the economy. Other nations, initially solution that paid for recovery out of future Spain and then France, followed, and the EU budgets instead of debt obligations. This pandemic was now continent-wide and has also stalled, as northern nations would spreading fast. rather promote a package, including loans

with strings attached, that is completely The ECB wobbled in its first COVID-19 test, with unacceptable to the countries in need. President Christine Lagarde initially stating that Therefore, the EU response has been little the role of the ECB was not to minimize the more than solemn talk and unfulfilled bond spread between nations. This caused potential. Italian borrowing costs to shoot up as investors feared the ECB would not come to Italy’s aid. Ms. Lagarde quickly realized the errors of her statement and leapt into action to defend Italy and other nations whose bonds were under pressure. Eventually, the ECB implemented a bond-purchasing program of over $750B, and even started buying non-sovereign bonds, which is similar to the US Federal Reserve’s actions (although on a smaller scale). Thus far, the EBC has done its best to stabilize the Eurozone and provide the monetary foundation for recovery.

In the US, there has also been a multi-trillion- dollar fiscal response to avoid the worst-case scenarios and position the nation for recovery. Europe obviously needs something similar, as the individual nations are not, with a few exceptions, capable of raising the amount of money that will be needed to keep their people fed and working while digging out of the crater left by COVID-19. The first suggestion was the oft-discussed Eurobonds, which would create an attractive new vehicle to mutualize some portion of European debt. The northern nations MAGGIORE RISK PAGE 3

WHAT DOES THIS HAVE WHILE SLIDING TO DO WITH BETWEEN THESE GROUPS HAS THE EURO? GENERALLY BEEN IN When evaluating the overlapping THE DIRECTION OF MORE INTEGRATION, European structures, THEORETICALLY ONE mischievous situations that COULD GO THE OTHER were certainly not contemplated WAY. by their architects come into focus. And while exploiting these cracks in the system would be dangerous, a desperate nation that perceives that it has been abandoned by its fellow Europeans just may take that chance.

As this Venn diagram from the European Council on Foreign Relations demonstrates, Europe is a jumble of institutions and agreements.

A nation can be a member of several European institutions without being required to join others. There are currently nine members of the that are not members of the SOURCE: EUROPEAN COUNCIL ON FOREIGN RELATIONS Eurozone, and four members of (NOT YET UPDATED FOR BREXIT) the EU Customs Union that are not even members of the EU. These institutions craft policy to varyingdegrees of While sliding between these integr ation, but none are more impactful than the ECB groups is challenging and has crafting of monetary policy for the nineteen Eurozone generally been in the direction of members. The system is based upon the work of Nobel more integration, theoretically Prize winner on Optimum Currency one could go the other way. Areas, or geographic areas that would most benefit from sharing a currency, regardless of national borders. According to Dr. Mundell, there are four criteria for an Optimum Currency Area: MAGGIORE RISK PAGE 4

Optimum Currency Area 1. A large, available, and integrated labor which allows workers to move freely throughout the area and smooth out unemployment in any single zone. 2. The flexibility of pricing and wages, along with the mobility of capital, to eliminate regional trade imbalances. 3. A centralized budget or control to redistribute wealth to parts of the area which suffer due to labor and capital mobility. 4. Similar business cycles in the participating regions and timing for economic data to avoid a shock in any one area.

Criteria 1 and 2 are mostly satisfied by the wider THE RIFT European Union’s mandate of free movement of people, capital, and goods between member states. Criterion 3 While the current institutions have done some is somewhat satisfied by the EU, with supplements to things well, rifts have existed from the beginning, member state budgets to promote economic harmony, and the long process of fracturing has accelerated but is also often a primary issue of concern in the in the current crisis. Historically, northern Eurozone. Criterion 4 is more theoretical, and thus the European nations such as the Netherlands, easiest upon which to craft arguments for or against Luxembourg, Germany, Austria, and Finland have the Euro as an Optimum Currency Area. But it is taken southern European nations such as Italy, important to note that the Euro is managed by the ECB, Greece, and Spain to task for irresponsible which only controls monetary policy. is spending, and they’ve often had good reason. left to the individual nations. Thus, the monetary policy However, since the financial crisis of 2008-10, of one Eurozone nation is directly impacted by the these nations have been pretty responsible, and fiscal policy of another. Herein lies the crux of virtually their budget deficits have been consistently every Eurozone disagreement this century. improving. Most of these nations are actually running surpluses when debt service is removed. Further fiscal integration is often discussed as the next step in , with Mario Draghi But Europe’s current financial malaise has nothing campaigning for it in his final speech as ECB President. to do with reckless spending in southern Europe, Despite the appearance of momentum for this idea pre- nor can it be solved by northern European COVID, a deeper look indicates further integration was frugality. It is the result of a calamity that knows unlikely then and even more unlikely now. While the no borders and is not any European nation’s UK was never in the Eurozone, its issues with deeper “fault.” So why the hesitation to fight the European political integration and loss of sovereignty economic impact together, which would absolutely made Brexit inevitable. This concern for sovereignty is benefit everyone? Politically, the Dutch and not contained to the west side of the English Channel. Luxembourgian and, to some extent German, Eurosceptics are sizable blocks in most nations and electorate are deeply suspicious of southern their ranks would swell if citizens saw their countries Europe, and being seen as “giving in” to their run more and more by European entities. For example, requests for money can be politically costly. At the the Gilets Jaune protests are an example of citizens same time, voters in southern nations question the opposing the actions of their own government. How value of a union with “partners” who constantly much more intense would the protests be if they were lecture them about prudence while stacking the protesting actions imposed upon them by European deck against their growth through either central bankers? For these and many more reasons, aggressive tax competition (Netherlands or deeper fiscal integration of the Eurozone economies is Luxembourg) or trade practices (Germany). unlikely, and Europe is stuck navigating the COVID-19 Viewing the political, economic, and social issues crisis under current institutional constraints. through Dutch and Italian eyes clarifies the conflict and provides insight regarding why the Euro is in a precarious position. MAGGIORE RISK PAGE 5

THE DUTCH POSITION

Former Eurogroup President and Dutch Finance Minister Jeroen Dijsselbloem made headlines (negative abroad but wildly positive at home) when he said about southern countries’ indebtedness, “you can’t first spend all your money on drinks and women, and subsequently ask for financial support.” This view was long held but rarely spoken, and is the view of a large share of the Dutch electorate.

Since this is the popular view in the Netherlands, politicians are constrained to act in accordance with this belief. To be seen as acceding to southern needs would be viewed as selling out Dutch pensioners for undisciplined spendthrifts. And this opinion is not without some basis in truth. The Netherlands, along with Germany, Luxembourg, and Austria, have much higher net national savings rates than Italy, Greece, and Spain. The Dutch value financial constraint over immediate quality of life experiences, and do not believe the citizens of southern nations work hard enough or appropriately value saving for the future.

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0 Austria Germany Greece Italy Luxem Netherlands Spain Source: OECD (2020), Household savings (indicator). doi: 10.1787/cfc6f499-en (Accessed on 11 May 2020)

Politicians that may disagree with this sentiment So while it is easy to suggest he stand up for the cannot express that disagreement if they want to nation’s European brethren and convince his people remain in office. Great policy ideas do not benefit to deepen integration, Mr. Rutte and his anyone if their champions are not in office to government must walk the tightrope between doing implement them. And historically, Dutch domestic what they believe is best and what will allow them to financial concerns take precedent over European remain in power (and thus allow them to continue harmony, so placing European well-being ahead of to do what they view as good for several more Dutch priorities is a politically dangerous path. years.)

With a general election scheduled for March 2021, The Dutch want to be a key player in European and potentially earlier if snap elections are called, institutions. They do not want European Prime Minister Mark Rutte cannot afford to be seen institutions to cost them any more than the Dutch as giving away Dutch financial stability in the middle view them as currently costing. Thus, the Dutch will of a global crisis. The far-right PVV and FvD are not take steps to leave the Euro, but their mindset, threats to his VVD-led coalition, and would pounce as demonstrated in their policy positions, may just on any action that could be twisted into a pro- drive other nations out. southern Europe giveaway by Dutch leaders. MAGGIORE RISK PAGE 6

THE ITALIAN POSITION

The Italian perspective is shaped Italy is currently the third-largest by a prevailing view that its economy in the European Union Eurozone partners treat it as a and the Eurozone. Thus, it problem to be managed instead contributes more to the ECB than all nations but Germany and of with the level of respect that France, and is far and away a net the third-largest economy in the contributor to the European group deserves. Italians resent Union. Additionally, Italy and the view that they are shirking other southern nations bear the work and partying the piazzas all brunt of Europe’s biggest crisis night. They are well-aware of pre-COVID: migration. In 2017, the nation’s economic history Italy spent €3.2B on increased and also keenly aware of how naval activity and care of challenging it is to dig out, refugees that landed on its especially when “partners” shores. Despite EU promises to share the burden financially and engage in actions some view as disperse refugees throughout the economic sabotage. Most Union, Italy has received less that Italians understand the value of €1B in support from the EU for EU and Eurozone membership, the care of migrants since 2015, Despite being one of the largest but feel underappreciated and and other nations (except contributors to the EU and ECB and frustrated by paternalistic Germany) have been slow to shouldering more than its share of the treatment from northerners. accept new refugees from the refugee burden for the EU, Mr. southern countries. Dijsselbloem’s attitude that Italians are spending their money on vices is hard to shake. Sure, bad decisions such as the “Baby Pensioni” arrangement that allowed government workers to retire Average Annual Hours Worked by Country with full lifetime pensions in their 30s and 40s needed to be corrected and FRA have left a costly legacy. But Italian governments since the financial crisis DEU have reigned in spending and attempted to reform labor laws to GRC permit more employer flexibility. And

Italian workers are not idle. In fact, ITA they work quite a bit: fourth most LUX hours in the Eurozone at 1,723 per year. This is behind leader Greece’s NLD 1956, but well ahead of the 1,433 hours worker by the average Dutch worker ESP per year and 1,363 worked by an average German. USA

0 500 1,000 1,500 2,000

Source:OECD (2020), Hours worked (indicator). doi: 10.1787/47be1c78-en (Accessed on 04 May 2020) MAGGIORE RISK PAGE 7

Hours worked is not necessarily the best gauge of 42% of Italians have a negative opinion of the EU, productivity, however, as the efficiency of workers in 23% are neutral, and only 35% hold positive opinion the different nations and type of work they are of the EU. Additionally, 35% would like to leave the performing are vital components. German EU, 18% prefer to leave the Euro but not the EU, and manufacturing is among the most technologically 47% would choose to stay in the EU. Anti-EU advanced and efficient in the world, and the well- sentiment in Italy is growing, and failure of the EU educated German workforce creates incredible and ECB to support Italy in near future could push it products for sale throughout Europe and beyond. out of the Euro. These sales create a large trade surplus, meaning the Germans are causing their trading partners to go into debt. Many Europeans believe their unwillingness to adjust the trade strategy violates the spirit, if not the letter, of EU and ECB agreements.

Similarly, Italians and other Europeans refuse to listen to northern European lectures on public debt when those nations’ tax structures greatly contribute to the southern nations’ need to take on debt. The Netherlands, Luxembourg, and Ireland, with a combined 4.4% of the EU’s population, house more than 50% of global foreign direct investment. This is often in the form of holding companies to exploit the favorable tax regimes and corporate law in these three nations. Italian companies will domicile in the Possible Outcomes Netherlands and pay corporate taxes there while When considering how these divides might impact performing almost all operations in Italy. Even the Euro, it is important to begin any analysis with former Prime Minister Silvio Berlusconi has moved an understanding that *nobody* who would the “headquarters” of his Mediaset empire from experience real consequences, financial or Milan to Amsterdam. Thus, the tax haven nations electoral, wants even a partial failure of the Euro. receive the lower corporate taxes but need to Of course, populist politicians like Matteo Salvini provide virtually no services to the taxpayer, while rattle sabers because 65% of the voters for his Lega the nations that must provide services to the party would like to leave the EU; but the financial and industrial giants in Lega’s northern Italian employees of those taxpayers are left without the tax strongholds would certainly do all they could to kill revenue they should have to provide them. any Italeave movement. So there is a strong desire It is often challenging to measure the strength of to patch over any differences and retain the status these opinions, and even harder to determine how quo. But disagreements occur, intentions are citizens would like to act upon the opinions if given misread, ill-advised ultimatums are made, offenses the opportunity. Fortunately, Davide Angelucci and are taken, and history happens. It is therefore no Vincenzo Emanuele recently conducted a detailed certainty that the current structure of the survey of Italian attitudes towards to EU for Centro Eurozone will survive the next decade. The Italiano Studi Electtorali. According to the survey, a COVID-19 crisis has shown that some cracks are shocking 85% believe the EU is not helping Italy in its deeper than previous believed and accelerated the fight against COVID-19. impact of long-term structural issues. It is no longer crazy to believe that the Euro might fail.

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Central to any contemplation of the future of the All EU members except Denmark are technically Euro is the concept of Optimum Currency Areas obligated to adopt the Euro at some point, with discussed above. Whether the Euro or any successor Bulgaria and Croatia already taking the necessary currency can succeed is dependent upon 1) step of joining the Exchange Rate Mechanism integration and mobility of labor, 2) , wage and (“ERM”). The other nations that “must” at some capital flexibility, 3) centralized budgeting to point join the Euro are Bulgaria, Croatia, Czech redistribute wealth to parts of the area which suffer Republic, Hungary, Poland, Romania, and Sweden. due to labor and capital mobility, and 4) similar Viewed through the Optimum Currency Area lens, business cycles throughout the zone. The first two the expansion of the Eurozone will stretch the are basically satisfied through the EU and Customs requirements of budgeting/redistribution and Union. The third is somewhat satisfied by the EU. common business cycles. Since the Euro’s But the fourth requirement leads to much debate introduction, experts including monetary theorists, regarding how much the members’ national political scientists, and econometricians have economies must move in harmony with each other. weighed in on whether the Eurozone is an Optimum With this in mind, and considering current and future Currency Area. The idea of breaking it up, however, economic, political, and social conditions in the has never been seriously discussed because all various European nations, some potential paths are members are relatively affluent and have integrated worthy of discussion. Of course, there are variations financial systems. It may, however, be challenging and complications with all potential paths, including to sell the notion that the business cycles and these; but discussing multiple options before they financial systems in Sofia, Strasburg, Lodz, and evolve will allow smoother resolution of the Lisbon operate in harmony. And if the nineteen complications. current Eurozone economies are finding it challenging to redistribute capital to nations that are lagging now, adding seven new members that are net recipients from the EU compared to only one net EU contributor may prove impossible.

Status Quo Unfortunately for the frugal members that currently exert great sway in the ECB, the potential new When imaging how things might be in the future, it is members are much more like the southern Euro easiest to revert to a future version of the current. members, with Sweden an exception. Thus, the This, however, rarely occurs, as evolution and events frugal nations would be wise to ensure any long- pull the course away from the narrow range of term division in the ECB falls along the lines of “likely” towards somewhere on the very wide range original vs. new member instead of frugal vs. of “possible.” But let’s assume that this time is everyone else. This will require them to give a little different, and the Euro continues in its current form to their current ECB partners, with the Spanish without any substantial change in mandate or course proposal of spending through the EU budget alterations since that is close to what most currently the most palatable plan on the table. stakeholders would prefer. Specifically, the frugal Otherwise the status quo, which is a state of nations are likely operating under the assumption perpetual expansion of European institutions, will that southern nations will accept the best relief cause the frugal nations much more heartburn in package they can get and, after a period of hard the future by causing the same issues to arise feelings, eventually return to business as usual. And during the next global financial crisis, only with that assumption might be correct. more partners seeking financial support.

However, as all European institutions have since the European Coal and Steel Commission in 1952, the ECB is likely to expand and integrate further.

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Italy and Greece Leave Such a move would be bad for the Eurozone, but The Euro catastrophic for Italy. The COVID-19 crisis has shown its leaders that fellow Europeans do not Matteo Salvini will likely be the next Prime believe the nation to be so systemic as to require Minister of Italy as the head of the Lega party, significant financial support in an emergency. With supported by coalition partners Fratelli d’Italia no support coming, Italian banks would face a (Brothers of Italy) and former Prime Minister double mismatch problem of liabilities short-term Silvio Berlusconi’s Forza Italia. Lega and Fratelli in Euros and assets long-term in Lira. The economy d’Italia have been vocal in their , would need a lot of Euros cycling through it, but and while Forza Italia is very pro-EU and Euro, Italy’s trade to GDP ratio is only around 60%, which Berlusconi tries to stay relevant any way he places it dead last in the EU, meaning banks would can, so he would join with these parties in the burn through their Euros quickly. Banka D’Italia hope that issues with other European nations would do everything it could to keep Euros in the would blow over. system, defend the Lira to Euro peg, and keep the

spread on Italian bonds manageable, but it would The coalition would know that it could not just eventually burn through what reserves it possesses leave the Euro, but would feel immense outside of those dedicated to the ECB (including pressure to both stand up to what Italians view nearly €90B in gold) and need to allow the currency as northern European callousness and inject to float. With this action, Italians would lose a some life into the economy hardest hit by significant portion of savings not held in Euros, and COVID-19. Living up to its political promises the economy would deteriorate even further. could cause it to take drastic action:

reintroducing the Lira as a parallel currency for domestic transaction. To give those who spend money in Italy (specifically Italian businesses) an advantage, it would likely peg the value of the Lira (or a certain number of Lira) at something like .95 Euro per Lira. Employers would seek to pay wages in the cheaper currency, but debts would still be owed in Euros. The ECB would almost certainly refuse to recognize the Lira and prohibit banks in the Eurozone from accepting it as payment even though its value would be pegged to the Euro. There could be a silver lining in this scenario, Italian leaders could argue that, unless it is however. Italy could decide to try to take expelled from the Eurozone after being advantage of the crisis to shed its debt and declared a member state in derogation, its become more competitive. It could agree to membership and full participation cannot be expulsion from the Eurozone and fully transition hindered; but the rest of the Eurozone to the Lira. Its populist government might then members would be in no mood for legalities seek to redenominate its debt at the new and do what they could to punish Italian depreciated exchange rate. Much like Argentina behavior. Eventually, tensions would escalate in 2005, Italy would likely offer to swap with Italy halting payments to the ECB and the outstanding bonds for either a bond with a ECB suspending Italy from its bond-purchasing discount rate of around 60% of face value to program. mature at its original maturity date, or a longer-

term bond at 100% value with smaller coupon payments. MAGGIORE RISK PAGE 10

Since it would be burning investors and would pay a without economic warfare. Simultaneously, large premium to access capital markets, Italy would Greece would feel like even more of an outlier in need to be aggressive in creating growth. To do so, it the Eurozone and realize that it is a populist could rely on a key membership it would not shed: the government away from enduring the same fate as European Customs Union. With its cheaper yet well- Italy. Eurozone leaders could use this as an educated workforce, complete access to the opportunity to show how a nation can leave the European market, and a willingness to provide special Euro on friendly terms. The parties would both incentives to boost employment, Italy would be be happy to negotiate a Grexit through which the primed to attract employers looking to operate in the ECB supports Greece’s transition back to the EU at lower costs than those in Eurozone countries. Drachma and keeps its debts payable in Euros. The economic warfare between Italy and the The Drachma is tied to the Euro, and the ECB Eurozone would be vicious, but at least Italy could would agree to provide a certain level of capital provide its citizens some hope. to defend that peg for several years.

The battle between Italy and the rest of the Eurozone would not go unnoticed in the nations that “must” join the Euro, and they would probably be hesitant to enter into a monetary union that cannot be undone

Regional Euros With or Without Italy and Greece Regardless of whether same neighborhood but Italy and Greece leave not the same house. the Euro, COVID-19 is Breaking the Eurozone exposing existential into three smaller but deep divides between closely regulated Eurozone nations that monetary regions under will not be easily the auspices of the ECB overcome. Two camps would both stabilize the of nations led by nations’ monetary policy Germany and France through more regionally- fundamentally disagree appropriate methods and on the role of the ECB contain any events that and integration. arise within those areas. Additionally, if Italy They would be designed to leaves and take advantage of the redenominates its debt, attributes that make them the redenomination risk Eurozone could become much too expensive Optimum Currency Areas, priced into the bonds of for the ECB to manage. Risk would need to be and cultural ties would nations like Spain and localized instead of socialized, and the only facilitate easier resolution Portugal would way to effectively do this would be to break of issues. skyrocket. The spread the Eurozone into Euro regions under the between bonds in the auspices of the ECB: essentially live in the

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Baltic Euro Baltic Euro

The first region, the Baltic Euro, is by far the smallesTt.h eIt fwirostu rlde gcioonns, itsht eo Bf aFlitnilca nEdu,r oE,s itso bnyia f, aLri tthhueania, and Latvia and would be relatively stable as fiscal policy has always sbmeeanll ecsotn. sIet rwvaotuivlde cino nthsiesste o nf aFtiinolnans.d ,F Eusrtohneria, ,if any unforeseen issues arise in this region, assistance from the other Lrietghiuoannsi aw, ialln bde L vaetrvyia e affnedc twivoeu gldiv been rtehlea tsimvealyll stizaeb loef a asid that would be needed to resolve a crisis. fiscal policy has always been conservative in these nations. Further, if any unforeseen issues arise in this region, assistance from the other regions will be very effective given the small size of aid that would be needed to resolve a crisis.

Coastal Euro The next region is the most diverse and potentially most volatile; but share a vision of European unity and fiscal cooperation. France, Spain, Portugal, Malta, Cyprus, and Ireland work well together ., and would make the political commitments necessary to defend each-others’ ability to borrow. They would likely even issue joint bonds to obtain the benefits of pooled risk. They are happy to work with the Germans through the ECB, but are also happy to determine the region’s monetary policy in a more democratic manner. If Italy and Greece remain in the Euro, this is the region they would join, which would skew all of the chart’s numbers towards more debt and higher bond spreads. These nations have cooperated in the EU, so it is fair to assume they would continue to cooperate through this regional Euro.

Central Euro The final region is the Central Euro, consisting of Germany, Austria, the Slovak Republic, the Netherlands, Belgium, Luxembourg, and Slovenia. Belgium’s fiscal policy fits more comfortably with the Coastal Euro, but the investments in and deep connections to the Benelux ideal draws it into this one. Germany and the Netherlands make most decisions in this region; but unlike the entire Eurozone before the breakup, their partners are happy to defer since they greatly benefit from their monetary association with Germany. Sovereign bond spreads between the nations would decline significantly, and the members would be more likely to assist each other in an emergency since they share values and a history of fiscal prudence. MAGGIORE RISK PAGE 12

Coordination

The Regional Euros and non-Euro EU nations would coordinate their exchange rates through an enhanced European Exchange Rate Mechanism (the ERM). Hard feelings would likely exist on all sides; but like divorced couples with common debts, it would be best to work together on a limited basis instead of refighting old battles that do not benefit anyone. Additionally, all nations would remain members of the EU and Customs Union, so there are ample opportunities to work together on continent- wide issues and engage in initiatives between the Euro regions. About Maggiore Risk With analysts, researchers, and experts HARD CHOICES around the world, Maggiore Risk taps into AHEAD local knowledge of countries' political, economic, and social conditions to provide The COVID-19 crisis has forced Europeans to accurate and thorough reports to help your reevaluate what it means to be both their organization stay ahead of the curve. nationalities and European, and exposed their fellow Europeans’ beliefs on that issue. As a result, they Kevin J. Rejent is a Founding Member and have learned that old prejudices linger and, in many Principal with Maggiore Risk. An attorney cases, national well-being trumps continental by trade, he assists insurance, real estate, recovery. Such revelations make the fractures in the Eurozone difficult to mend, and make the professional and financial services industry unthinkable – the end of the Euro – slightly more clients in navigating challenging global possible. The issues exposed by the COVID-19 crisis environments by helping them understand will not disappear, and will almost certainly arise local economic, political, and social again at a most unfortunate time if not properly conditions. Kevin earned a Bachelor of addressed now. Thus, it would behoove leaders on all sides of the debate to honestly confront the Science in Political Science degree from Eurozone’s structural problems before the promise of Arizona State University, a Juris Doctorate Europe fades away. from Saint Louis University, a post- graduate certificate in International Security from Harvard University — Extension, and a Master of Arts in Global Risk from the Johns Hopkins University School of Advanced International Studies in Bologna, Italy.

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