10 Years of the Euro: Stability and Performance As a Global Currency

GHENT UNIVERSITY

FACULTY OF BUSINESS AND ECONOMICS

ACADEMIC YEAR 2012 – 2013

10 years of the euro: stability and performance as a global currency

Master’s thesis made in pursuit of the title

Master of Science in Toegepaste Economische Wetenschappen: Handelsingenieur

Bram Steurtewagen

Under supervision of

Prof. Dr. Michael Frömmel

Permissions clause The undersigned states and acknowledges that the contents of this master’s thesis may be used and reproduced for all intents and purposes, given that proper citation is used.

Bram Steurtewagen

Preface

In this preface I would like to express my gratitude towards Nora Srzentic, who has supported me throughout this thesis project. Many thanks also go towards Jan Smets, Director of the National Bank of Belgium, who gave me the opportunity to conduct an interview and to get in contact with multiple other sources.

Bram Steurtewagen Ghent, July 2012

Abstract

The euro has celebrated its 10th birthday as legal tender. However, the evolution from financial crisis to sovereign debt crisis for the EMU has had a serious impact on the currency. This thesis aims to analyze the old governance framework and its performance and then compare it to the new governance framework. To achieve this comparison, the Kopits‐Symanski criteria for fiscal policies are used and Inman’s criteria for strong or weak fiscal rule. The data for this analysis is gathered from interviews with experts and analysis of current research. This research finds that the newly instated framework has indeed improved according to the proposed criteria and that the initial results for the effect of the new EMU pillars are positive. It concludes by giving a future scenario analysis for the EMU based on expert opinions.

Dutch abstract

De euro vierde recent zijn tiende verjaardag als wettelijk betaalmiddel. Nochtans heeft de snelle opeenvolging van financiële en schuldencrisis zijn sporen nagelaten op de EMU en de munteenheid. Dit onderzoek beoogt de oude regelgeving en de prestaties ervan na te gaan en ze te vergelijken met de nieuwe regelgevingen. Om deze vergelijking te doen opgaan, wordt er gebruik gemaakt van de Kopits‐Symanski criteria en Inman’s criteria voor een sterk of zwak fiscaal beleid. De data voor deze analyse werd gehaald uit reeds bestaand onderzoek, de EuroSTAT databank en gesprekken met experts. Dit onderzoek vindt dat het nieuwe ‘governance framework’ inderdaad een verbetering meebrengt en dat het effect ervan op de EMU pijlers positief is. We sluiten deze dissertatie af met een analyse van verschillende toekomstige scenario’s voor de EMU.

Table of Contents

PERMISSIONS CLAUSE ______1

PREFACE ______2

ABSTRACT ______3

DUTCH ABSTRACT ______3

TABLE OF CONTENTS ______4

TABLE OF FIGURES ______6

TABLE OF GRAPHS ______6

TABLE OF ABBREVIATIONS ______7

1. INTRODUCTION ______8

2. THE EUROZONE ______10

2.1. INTRODUCTION TO THE EUROZONE AND THE EURO ______10

2.2. INTRODUCTION TO THE FINANCIAL AND SYSTEMIC EURO‐CRISIS. ______11

2.3. KPI’S OF THE EUROZONE & EURO‐POLICY ______13

2.4. CONCLUSION ______18

3. THE EUROPEAN CENTRAL BANK ______19

3.1. THE ECB POLICY ______19

3.2. ECB POLICY DURING THE CRISIS ______20

3.3. MONETARY SUB‐PILLAR: EUROPEAN FINANCIAL STABILITY FACILITY AND EUROPEAN STABILITY MECHANISM. ______22

3.4. MONETARY ISSUE: TRANSLATION OF MONETARY EASING INTO CREDIT. ______24

3.5. MONETARY SUB‐PILLAR 2: EUROPEAN SYSTEMIC RISK BOARD ______24

4. THE STABILITY AND GROWTH PACT (SGP) ______25

4.1. HISTORICAL BACKGROUND ______25

4.2. CONTENTS OF THE ORIGINAL SGP ______26

4.3. ISSUES AND EXPERIENCES LEADING TO THE 2005 REFORM ______27

4.4. STRENGTHS & WEAKNESSES OF THE REFORMED SGP ______29

4.5. APPRAISING THE SGP ACCORDING TO THE VARIOUS CRITERIA ______32

5. EURO PLUS , THE EUROPEAN SIX PACK AND THE TSCG ______38

5.1. BACKGROUND ______38

5.2. EUROPEAN SIX PACK ______38

5.3. EURO PLUS [42] ______43

5.4. TREATY FOR STABILITY, COORDINATION AND GOVERNANCE (TSCG OR FISCAL COMPACT) ______44

5.5. COMPARING THE NEW GOVERNANCE FRAMEWORK WITH THE KOPITS‐SYMANSKI CRITERIA. ______46

5.6. COMPARING THE FRAMEWORK TO INMAN’S CRITERIA ______48

5.7. ROADMAP FOR THE COMPLETION OF THE EMU ______50

5.8. CONCLUSION ______50

6. CHALLENGES FOR THE EU OVER THE NEXT FEW YEARS ______52

6.1. FUTURE SCENARIOS FOR THE EUROZONE ______52

6.2. CHALLENGES ______57

7. CONCLUSION ______62

7.1. ANALYTICAL SUMMARY ______62

7.2. CONCLUDING STATEMENT ______63

8. NEDERLANDSE SAMENVATTING ______64

REFERENCES ______65

Table of Figures

Figure 1: Inflation rates of Eurozone (EU17) P13 Figure 2: Global Reserve Currencies P14 Figure 3: Nominal unit labour costs (EMU avg) P15 Figure 4: Monetary transmission mechanism P20

Table of Graphs Table 1: Unemployment data within the EMU P17 Table 2 : ESM shareholders P23 Table 3: Strenghts and weaknesses of the Reformed SGP P29 Table 4: Kopits‐Symanski criteria for the original SGP P34 Table 5: Kopits‐Symanski criteria for the reformed SGP P35 Table 6 : Inman’s criteria applied to the original SGP P37 Table 7: EC Framework scoreboard P41‐42 Table 8: Kopits‐Symanski criteria applied to the new framework P46 Table 9: Inman’s criteria applied to the new framework P48 Table 10: Key factors shaping the future of the EMU P53

Table of abbreviations

EMU ‐ Economic and Monetary Union of the European Union

EC ‐ European Commision, where European Council is implied, it will be written in full

SGP ‐ Stability & Growth Pact

EDP ‐ Excessive Deficit Procedure

ECB ‐ European Central Bank

GDP ‐ Gross Domestic Product

ESM ‐ European Stability Mechanism

EFSF ‐ European Financial Stability Facility

EU ‐ European Union

EU+ ‐ Members of the EMU that have agreed to the EU plus pact

EU17 ‐ The 17 countries within the EMU that currently use the euro, these are also referred to as the “stage three EMU” states.

EU27 ‐ The full 27 countries currently in the EU, also equal to all of the member states in the EMU

OCA / OCR ‐ Optimal Currency Area / Optimal Currency Region

1. Introduction In May 2012, the euro celebrated its 15th birthday, as it marked the month in which the first pieces of the euro coins were minted and the month of the final round of negotiations surrounding the euro [1]. In addition to this, it celebrated the 10th anniversary of the roll‐out of euro banknotes and coins as legal tender in cash transactions [2]. There were, apart from the casting of a commemorative coin, no celebrations planned. This was in stark contrast with the fireworks and light shows from 2002 which introduced the euro with a bang. It is also a step down from the confidence with which the euro was introduced.

So the world’s record holder for longest running monetary union without a full political union did not devote a day of celebration to the euro. In today’s general media, the word “euro” has become much associated with the word “crisis” and there are a lot of criticisms on Eurozone policy [3]. Due to the financial crisis, the Greek problem (or in general the solvency crisis), general distrust regarding the euro among the population has risen, as stated in the Eurobarometer [4]. Foreign sovereign investors and stakeholders have expressed their concerns about current affairs and are urging European leaders to take concise actions to solve the current issues. Chinese investors are calling the current crisis “a symptom of policy failures and deficiencies in fiscal policy coordination” [3]. Clearly, the current currency crisis is linked to some inefficiencies behind it, so to evaluate the performance of the euro as a currency, we also have to scrutinize the EMU as a policy‐maker.

This study will first examine how the euro has performed. It will measure this by appraising some performance indicators and policies. As an added structural tool to this, the policies will be positioned into a matrix composed of the three basic pillars: monetary policy, budgetary policy and fiscal policy. This matrix will also make a distinction between national and supra‐national levels of legislation.

Afterwards, the new governance measures and innovative policies imposed by the Eurozone will be appraised as good/bad reactions to the issues the EMU is facing and if the EMU is working on solving the common criticisms on each item. In short, we will look at the evolution the euro and its main pillars have been through. This will be assessed based on information before, during, and after the crisis. The clear distinction between national and supra‐national in our matrix is a necessity, as all

European nations still operate as sovereign nations under EU coordination and it is, for many, unthinkable to render their sovereign responsibilities and governing power into the hands of the EU.

Summing up, aiming to examine the euro will inevitably lead to examining the policies behind it. By zooming in on the 3 main pillars, their history and providing some performance indicators, it is possible to examine the past and present situation. By looking at the extensions made to these pillars during the current crisis(or the lack thereof) and by looking into the effectiveness of these measures, we can appraise the newly composed EU governance. Attempts to assess the quantitative impact of all the reforms up until now (SGP, SGP2005) have proven hard but concluded they are effective. [5]

To conclude the dissertation, future scenarios for the euro and challenges it is still facing will be listed based on unanswered criticisms,rising global trends and expert opinion. The dissertation would also like to remind the reader that macroeconomics is a question of balance. Not only the balance between supply and demand or revenues and costs, but also the balance within these factors. Good governance is about finding the right path at the right time to solve imbalances.

2. The Eurozone

2.1. Introduction to the Eurozone and the euro The euro is currently the official legal tender in 17 different sovereign nations. These are (in order of joining): Belgium, Germany, Ireland, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal, Finland (1999), Greece (2001), Slovenia (2007), Cyprus, Malta (2008), Slovakia (2009) and Estonia (2011).

To join the EMU (The Economic and Monetary Union), these nations had to meet the ‘convergence criteria’, also known as the ‘Maastricht Criteria’ which were agreed upon in 1992. These criteria are exchange rate stability, a low and stable inflation, balanced public finances, and a stable long‐term interest rate.

All nations within the EMU are subject to the monetary policy imposed by the European Central Bank (the ECB), but the fiscal policy (public revenues and expenditures) remains the responsibility of the individual national authorities. For this leg, however, the Stability and Growth pact (or SGP) was installed to ensure that the different fiscal policies lead to convergence.

EMU members also have full control over their national structural policies, but have agreed to co‐ ordinate them in order to achieve common economic goals. There were however, no actual agreements or treaties ratifying this. The EMU itself states that “Against the background of the current debt crisis important measures to improve the economic governance in the EU and the euro area in particular have been taken. EU member states have strengthened the Stability and Growth Pact, introduced a new mechanism to prevent or correct macroeconomic imbalances and are increasingly coordinating structural policies. These are crucial steps to strengthen the "E" ‐ the economic leg ‐ of the EMU and to ensure the success of the euro in the long run.” [6]

Over the course of the following chapter, more insight is offered about the Eurozone. Followed by a list of some Key Performance Indicators put forward by the ECB, the general media, critics, and zealots. The most important ones will be discussed in order to visualize its present state and current

direction, with a minor emphasis on how Europe is behaving during the current global economic crisis as it is a swift way to assess the euro’s and EMU’s performance up until, during, and after the financial crisis.

2.2. Introduction to the financial and systemic euro‐crisis. The financial crisis begun as the American sub‐prime crisis unraveled, strengthened by the FED’s loose‐fitting monetary policy. Unusually low interest rates set by the FED were responsible for accelerating the housing boom which eventually led to a housing bust. John Taylor argues a scenario where the interest rate follows the actual expected value for the economic situation and concludes that there would have never been a housing boom or bust if the FED did not keep the interest rates that low. These effects were further amplified by the sub‐prime mortgages and excessive risk taking. [7]

Taylor [7] also finds it necessary to note however, that excessive risks are tightly linked to the monetary policy decisions as there is a lot of cheap capital looking for returns. In the case of the housing price boom, this made possible cheap loans to buy housing. As prices did not reflect the actual market value, but were bubbling, foreclosures and delinquencies were low. This in turn led to even more loans for houses as everyone was paying back their loans and there was apparently no solvency problem with the general public, obscured by the rising house prices. The cycle was broken when the price bubble burst and the return on the housing plummeted.

This effect was further amplified by complex securitization structures of which the risk was underestimated by rating agencies. Taylor blames this on lack of competition, poor accountability or, most likely, an inherent difficulty in assessing risk due to the lack of transparency and the intrinsic complexity. Taylor makes an anecdotal comparison of these securities to a card game. “It led to what might be called the “Queen of Spades problem” corresponding to the game of Hearts. In the game of Hearts you don't know where the Queen of Spades is; you don't want to get stuck with the Queen of Spades. Well, the Queens of Spades—and there are many of them in this game—were the securities with the bad mortgages in them and people didn't know where they were. We didn't know which banks were holding them 14 months ago, and we still don't know where they are.” [7]

When the financial crisis hit in August 2007, it came due to an upward correction of interest rates. Households and companies defaulted on their loans and banks subsequently had to be ‘bailed out’. However, liquidity was not the main issue. Results of the study by Taylor [7] suggest that it was a counterparty risk issue. Printing money or providing liquidity was not going to be a solution, but fundamental problems would have to be solved in regards to risk and transparency.

By October 2008, the crisis had worsened. A serious credit crunch, large spillovers and global policy not adequately reducing risk led to a financial crisis of proportions as never seen before. It took until December 2008 to prioritize actions in the financial world. Improving transparency, reviewing valuation, better risk management, improved infrastructure, external review of rating agencies and enhanced liquidity risk management were all issues needing to be tackled according to Ackermann [8]. Policy eventually removed toxic risks from the financial institutions’ balance sheets and financial institutions slowly returned to their daily tasks. For Europe however, this was not the end of the crisis.

In the autumn of 2009, the global financial crisis transformed into the sovereign debt crisis. It started with the Greek issue. Greece had since withdrawn from international bonds markets and the other GIPS, Ireland, Portugal and Spain, have felt intense market pressure on their bonds as well. The reaction of European policy makers will be discussed further in the following chapter, but one can already sense there is a lot of political and economic capital on the line. [9]

2.3. KPI’s of the Eurozone & Euro‐policy

2.3.1. Inflation First we will discuss inflation in the Eurozone since its inception, as this is the key metric the ECB has put forward in its strategy.

Figure 1: Inflation rates of Eurozone (EU17) [10]

HICP, Jan 1st 2002 ‐ Now 5

0 2001 2003 2004 2005 2007 2008 2010 2011 2012

‐1

Source: EuroSTAT [10]

From Figure 1 we can deduct that in the period from 2002‐2007, the Eurozone has done well in achieving inflation rate close to 2%, albeit mostly not below this 2%. The post 2009‐graph on inflation, with some of the new measures already in place and some faith in the ECB restored returns to the pre‐2007 stable situation. In conclusion we can say that, on average, the ECB has succeeded in keeping its inflation target.

2.3.2. Euros as a global reserve currency The euro can be considered a major global reserve currency, behind the USD. Current numbers estimate the euro being around 24.9% of all international exchange reserves. It peaked in 2009, at the pinnacle of the financial crisis, just before the sovereign debt crisis, at 27.6%. Rising far above the initial sum of all original EMU members.

Figure 2: Global Reserve Currencies

100%

90%

80% 27.60% 24.90% 70% Other 60% Pound sterling 50% French franc

40% German mark Euro 30% US dollar 20%

10%

Source: IMF [11]

Just before the European sovereign‐debt crisis, the euro was seen as a currency that could overtake the USD in importance in this market by a multitude of economists [12], among which Alan Greenspan. This behavior can easily be seen as a vote of confidence in this currency, as it stresses both the economic importance of euro‐transactions, as well as belief in the continued existence of the euro.

The implications/effects of having a globally used reserve currency are:  More business for EMU banks and financial institutions: It is reasonable to assume that EU banks have a comparative advantage in trading euros over offshore banks.  Political power and prestige: Causality flows in both directions, more power means more trust in a currency while more of your currency used in reserves means a bigger international voice.  Convenience for the EMU residents: It is more convenient for exporters, importers, borrowers and lenders to be able to deal in their own currency.  Larger fluctuations in demand: This is an extra risk for the ECB as the internationalization of the euro makes it harder to control the monetary supply.  Responsibility: Actions from the governing monetary instance of the EMU, in this case the ECB, have reflections on world markets. Decisions made with the best interest of the EMU at heart, might not have the best of influences on the world’s monetary reserves. Prime example here would be the American ‘abuse’ of the Bretton‐Woods system.  Increase in the average demand of the currency: This is largely China’s biggest current currency problem, a huge inflow of capital would cause the currency to appreciate and would render exporters less competitive on world markets. In the case of the Eurozone, we can safely make an analogy with export‐based Germany and say that it is in its best interest to keep the exchange rate rather low.

2.3.3. Unemployment Rate Europe has been historically ambiguous regarding unemployment figures on three fronts. As pointed out by Blanchard [13], high unemployment in Europe is a post‐1970 phenomenon, unemployment until the end of the 1960’s was low and was often referred to as ‘The European unemployment miracle.’ When this trend reversed however, a second ambiguity arose: France, Germany, Italy, and Spain face a steadily rising unemployment and it remains very high. In the UK and the Netherlands, unemployment increased until the early 1980s but has decreased since then. In Denmark and Sweden, unemployment has remained consistently low.

There is lot of research on Europe’s rising unemployment that notes labor market rigidities as a main cause with two notable causes for these rigidities. One is government focusing not enough on structural improvements (i.e. education), another is union pressure focusing too much on short term benefits and not on structural improvement. It is known that southern continental Europe is politically and ideologically averse towards economic liberalism in the labor market. An added effect of these rigidities is that European unemployment reflects long duration rather than flows. Which is inherently more risky and points to structural issues.

Adding the labor market rigidities and labor mismatch to an economic crisis, fear for a downward spiral emerges. A solution to the crisis is needed to incite growth and thus lower unemployment. Although numerous unions have recently expressed their urge for structural improvement in the labor market and, as we will later discuss, the new ‘Euro Plus’‐pact urges the abolishment of wage indexation. Not all countries have yet implemented the ‘Euro Plus’‐pact and the actual reactions to proper wage ‘shock’‐therapy remains unknown. Figure 2 shows us that all parties have grown mostly accustomed to year on year increases in unit labor costs, be it through added taxes or wage increases.

Unemployment figures from the period of 2000‐2013 show us the same story as most of the indicators. The EMU had, relative to the other parts of the world, less issues with the initial kick of the crisis (the financial part) than with the second kick (the sovereign debt crisis).

Figure 3: Nominal unit labor costs (EMU avg)

Unit labor costs Annual % change 10 8 6 4 EU 2 US 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 ‐2 ‐4 ‐6

Source: OECD [14]

There is also a third ambiguity/performance gap concerning unemployment within the EU. The EU17 is in worse shape than the EU27 where the last year has not brought an increase in unemployment. Especially in the case of youth unemployment has the EU17 not been able to keep up with the EU27. (see Table 1)

Table 1: Unemployment data within the EMU Location Unemployment delta 2012‐2013 [10] EU27(minus EU17) ‐0,3% EU17 +11,11% EU27(minus EU17)(Youth) ‐1.5% EU17(Youth) +8.8% Source: OECD [14]

2.3.4. Impact of the euro on stability and volatility Just before the financial crisis, S. Gerlach and M. Hoffman conducted research to assess the impact of the euro on macroeconomic volatility and the volatility of real consumption growth. They found that, while the global volatility had also fallen for reasons unrelated to the EMU, countries within the EMU experienced an even sharper decline in volatility. This means that the EMU has indeed made a difference. Intra‐EMU volatilities have almost disappeared completely and while research could not directly indicate a drop in volatility between EMU and non‐members, it does suggest that outsider economies have become more stable as an immediate consequence of the EMU as well. [15]

Other independent research show intra‐EMU trade increases of 8‐24% [16] which naturally brings a decrease in volatility.

An ECB study showed a positive change in response time to external impulses and thus also a quicker adjustment and return to equilibrium after the introduction of the euro. [17]

2.4. Conclusion From this chapter, we conclude that the euro has performed well in the period before the crisis (1999‐2007). The data during the crisis, suggest that the initial impact of the crisis, being the financial crisis(2007‐2008), had the least effect on the euro compared to the other important currencies. However, the financial crisis has revealed some structural flaws in the EU17’s policies and this has severely hampered the euro’s image and performance. The financial crisis led to the cascading sovereign debt crisis (2009‐ ?) in which the EU17 seems to be stuck. The rest of this paper will now focus on the current policies and the new policies that have come into effect(or are coming into effect as some are still being ratified in the member states) to see if they solve the structural issues detected and to see if research agrees that Europe’s future lies in “more Europe” or “less Europe” (we have already noted blame being put on Europe for their unemployment situation and there are rising concerns that countries might have been better off without the euro, i.e. the Netherlands [18])

3. The European Central Bank

3.1. The ECB policy

Monetary Budgetary Fiscal

NATIONAL Overrules

SUPRANATIONAL Main governing instance

The ECB is placed on the ‘supranational’ level of the ‘monetary’ policy. It also overrides all national monetary policies of the EMU countries as a fully independent central bank. The ECB’s role in the EMU is to coordinate the monetary supply, which in the current economy is mostly done through the manipulation of the interest rate. As of April 2013, these are: Marginal lending facility: 1.5%, Deposit facility rate: 0.0% [19]. How the interest rate affects price levels within the economy is explained in Figure 4.

The ECB formally has only one objective: price stability. Price stability is defined as keeping the inflation rate under, but close to 2% over a medium term. The ECB’s monetary policy strategy is as follows: “The Governing Council of the ECB has to influence the level of short‐term interest rates to ensure that price stability is maintained over the medium term, where Price stability is defined as a year‐on‐year increase in the Harmonized Index of Consumer Prices (HICP) for the euro area of close to but below 2%” [20]

So it is the ECB’s delicate task to find a “one fits all”‐monetary policy and to avoid having a “one fits none”. In light of the fact that there is no federal Europe, the ECB is always going to have to make a balanced decision for all sovereign states. From a pure economic point of view, this is always going to be a burden to bear for the very weak and the very strong member states. An interest rate that is too low will burn out the high‐end of the spectrum and an interest rate that is too high will put weaker economies even further down. This is one of the main critiques against the EMU as whole. Some even call the current EMU crisis a balance of payments crisis which is always going to occur in the EMU due to this “one‐fits none”‐policy. [18]

Figure 4: Monetary transmission mechanism

Source: ECB [21]

3.2. ECB policy during the crisis During the financial crisis, the economic productivity, inflation, money supply and credit supply faced negative influences. To achieve price stability, the ECB lowered the main interest rate from 4.25% in October 2008 to 1% in May 2009. The ECB has shown it is capable of deciding with the necessary flexibility during the crisis(2007‐2009) [22]. Banks worldwide struggled due to the interbank illiquidity. The ECB in essence has only one sole monetary instrument, the interest rate. Because of the financial crisis, it had to take into account some new variables influencing its efficiency and effectiveness.

The ECB does not, under normal circumstances, have a goal to support growth in the EMU nor does it use any instrument other than the interest rate. Even though it is known that lower interest rates 20

increase private investments and incentivize the economy. In the case of the witnessed illiquid interbank markets, the ECB decided to drastically lower the interest rate to improve interbank and private lending. But this lower interest rate did not affect the tight lending standards commercial banks had set up for business and households nor did it influence the EURIBOR to the same effect, as found by Linzert and Abassi. [22] Coming back to the transmission mechanism in Figure 4, this debilitates the ECB’s influence on price developments.

The overnight deposits on the ECB balance sheet show, with the previously mentioned Deposit facility rate of(April 2013) 0%, that it has become an interbank marketplace. Before the crisis, this instrument was avoided as it offered little return, now however, the overnight deposits with the ECB amount to 135,5 billion euro(April 2013) as banks look for a safe haven for their excess liquidity. This is very high for pre‐crisis terms, however post‐crisis it has proven to be low. One key moment here was the 12th of July 2012 when the ECB decided to change the overnight deposit rate from 0.25% to 0%, this cut the overnight deposits from €808.5bn to €324.9bn. The measure was clearly successful in promoting interbank trades. It is noteworthy here, that in common media, this metric is also used to show how much money is flowing into the economy but there are studies that show this metric is not a proxy for the credit supply in the EMU due to the ECB and the commercial banks operating in a closed system [23]. The study shows that there is more risk implied in money that is held (and not being spent) by the general public and other sovereign debt holders than money held by the central bank. This entire situation also showed that the ECB’s decision to act as a temporary interbank marketplace was indeed just that. The ECB has no ambition to remain in this intermediary position and has shown decisiveness and feel for the economic needs of the moment. The aforementioned study by Linzert and Abassi [22] also found that the non‐standard measures taken by the ECB, being the unlimited liquidity provision at a fixed rate, accounts for up to an 80 basis point decline in EURIBOR rates. Moreover, they found that the communicative success of the ECB also significantly reduced the impact of the interest rate uncertainty on EURIBOR rates after October 2008. They conclude their research by saying that a loss in effectiveness of monetary policy through interest rate channels was compensated by the specific and effective use of liquidity operations to affect money market rates. The ECB indeed has adequate governance and tools at its disposal to conduct effective monetary policy, also in times of crisis. Mario Draghi said the “ECB would do

whatever it takes to save the euro” on July 26th of 2012 and this shows in the non‐permanent measures taken. However, as the central bank will not make these measures permanent and a financial support structure is needed, the monetary union required a different type of support pillar.

3.3. Monetary sub‐pillar: European Financial Stability Facility and European Stability Mechanism. The European Stability Mechanism was founded in reaction to the sovereign debt crisis, as the ECB at that time did not have a permanent lending (‘bailout’) mechanism for its member states. On the 16th of December 2010, the European Council agreed on a two line amendment to Article 136: “The member states whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality." [24]

This entails that a member state can now access extra funding if the crisis it is suffering from has the ability to destabilize the entire Eurozone. This also led to the creation of the European Financial Stability Facility. This facility had a mandate to ‘safeguard financial stability in Europe by providing financial assistance to euro area member states within the framework of a macro‐economic adjustment program.’ [25] This institution issued bonds or other debt instruments on the capital markets. It could also intervene in the primary and secondary bond markets. The EFSF however, was a temporary mechanism. In October 2010, it was decided to evolve the EFSF into a permanent mechanism known as the European Stability Mechanism, the ESM came into force in October 2012, two years after the decision to implement it. From this moment on, the EFSF stopped granting credit and only concerned itself with the maintenance of the outstanding positions.

The ESM can provide permanent support by [26]:  Granting ‘straight loans’ to the countries in difficulties  Opening a credit line as a precautionary measure  Refinancing financial institutions through loans to governments  Buying up bonds of a member state in primary and secondary markets  Up to a global maximum of €500 billion (however €700 billion is available for running affairs)

It can call upon this capital through 3 different procedures:  General capital calls which are a normal procedure through the Director and the Board of Governors.  Replenishment capital call to cover losses due to a non‐payment by a subscribing country or losses in the paid‐in capital. They can also be invoked to maintain a 15% ratio between paid‐ in capital and the lending capacity of the ESM.  Emergency capital calls are for an accelerated pay‐in of capital to avoid defaults of ESM payments to creditors. ESM shareholders have seven days to deposit the required capital in all cases and this is non‐ negotiable

The ESM participation can be found in Table 2 Table 2: ESM shareholders

Country ESM Key% Capital Country ESM Key% Capital Subscription Subscription Austria 2,78% 19,48 Ireland 1,63% 11,4 Belgium 3,48% 24,34 Italy 17,91% 125,39 Cypros 0,20% 1,37 Luxembourg 0,25% 1,75 Estonia 0,19% 1,3 Malta 0,07% 0,51 Finland 1,80% 12,58 Netherlands 5,72% 40,02 France 20,38% 142,7 Portugal 2,51% 17,56 Germany 27,14% 190,02 Slovakia 0,82% 5,77 Greece 2,81% 19,71 Slovenia 0,43% 2,99 Spain 11,90% 83,32 Source: ESM [26]

In essence, this facility will aim to be a permanent liquidity provision at a fixed rate for countries in crisis and will intervene when financial institutions are at risk of defaulting. The ESM aims to deliver the funding within three to four weeks after the initial request. This timeline includes the expert reports by the ECB, EC and IMF and the support from the ESM is only granted when there is a workable support program worked out by the expert team and the member state (see the Irish EFSF case).

3.4. Monetary issue: translation of monetary easing into credit. The monetary easing policy by the ECB, although effective, has not been as efficient for all countries alike. A very recent study by Christophe Blot and Fabien Labondance [27] showed that there are multiple heterogeneities within the European financial system. Their findings on the interest rate ‘pass‐trough’ were interesting: while they found that the EMU pre‐crisis was plagued with multiple heterogeneities, they also found that these have partially disappeared during the current crisis. They do however note that the remaining discrepancies on private lending within the EMU should be monitored closely. This vision is shared by Jan Smets (Director of the National Bank of Belgium) and Peter De Keyzer (Chief economist BNP Paribas Fortis). According to conversations with the latter two, the EMU’s monetary policy should also intervene within the financial world, they note the ‘BASEL III’‐ framework as an increased restriction on the entire financial world but also that these extra restrictions do not specifically cater to the current European problem: the interest rate spreads within the EMU for public and private investments are too high. There is also too much of a difference in translation speed from ECB rate decision to private credit supply and proper governance seems appropriate to eliminate these issues.

3.5. Monetary sub‐pillar 2: European Systemic Risk Board Established on 16 December 2010, the ESRB was tasked with the oversight of the financial system within the Union to contribute to the prevention or mitigation of systemic risks within the Union. It takes into account macro‐economical evolutions to ensure a smooth function of the financial markets. The ESRB has the following task description [28]:  Determine, collect and analyze all the relevant and necessary information  identify and prioritizing systemic risks  issue warnings where systemic risks are deemed to be significant  issue recommendations for remedial action in response to the risks identified  issue a confidential warning addressed to the Council and providing the Council with an assessment of the situation  monitor the follow‐up to warnings and recommendations  coordinate its actions with those of international financial organisations, particularly the International Monetary Fund (IMF) and the Financial Stability Board (FSB) as well as the relevant bodies in third countries on matters related to macro‐prudential oversight

4. The Stability and Growth Pact (SGP)

Monetary Budgetary Fiscal

NATIONAL All have their own policy

Budgetary restriction on SUPRANATIONAL governments

Over the course of the next chapter, we will explain the Stability & Growth pact. It is important to understand both the historical background of this pact as well as the measures described within. One needs to understand the spirit in which the pact was written and the ideas and culture behind the legislation to properly grasp this document. This knowledge is also needed to understand the evolution it has made before, during, and after the crisis. Furthermore, it enables one to understand the violations and most of the criticisms that we will discuss later in this chapter.

4.1. Historical Background The original stability and growth pact from 1997 originated from the convergence criteria set in the treaty of Maastricht. It set the maximal amount of budget deficit at 3% GDP and a maximum debt level of 60% GDP. These restrictions could, in theory, not be circumvented but in practice the EMU made exceptions to this rule if the debt ratio declined in an ‘adequate fashion’ and approached the reference value at an ‘appropriate speed’. Specific definitions for these two factors were not given. These criteria became the cornerstone of the EMU. Together with the Excessive Debt Procedures (or EDP’s for short), it had to ensure a continuous stability in government budgets. Non‐conformance to these measures would result in a corrective procedure in which the European Commission could trigger the EDP’s and decide on corrective actions that a nation would have to take. If these measures were ignored or not followed however, the EC could impose fines.

The SGP came into existence out of fear that ‘fiscal fatigue’ would arise as soon as the monetary union was established (this was indeed the case as we notice in hindsight). In 1995, the German government worked towards setting budgetary guidelines and budgetary discipline in stone. They made sure that this discipline would continue throughout the entire lifespan of the monetary union. The propositions were soon supported by the smaller member states. This unique German position 25

was heavily influenced by their post‐WWII inflationary crisis in which the ‘stability’ of a currency was a rather inexistent concept. Germany had to be convinced that the new currency would offer the same stability and global credibility as their hard‐earned mark (see Figure 2). This shows that the actual content, but not the spirit, of the Stability and Growth pact was more guided by a fear of unsustainable debt levels spiraling out of control rather than the idea of ‘sustainable long term governance’.

The pact was ratified, but under the EMU’s assumption that the ‘stability’‐pact proposed by Germany would become a ‘stability and growth’‐pact by itself. At that time, it was deemed obvious that stability would lead to a balanced growth scenario. Geert Langenus argues this assumption was made in a certain economic climate that led to over‐optimism on this matter and that sustainable growth should have been a more prominent part of the Stability and Growth pact. [29]

4.2. Contents of the original SGP The Stability and Growth pact is a framework to bring together all independent sovereign fiscal policies inside the Eurozone. It was put in place for the protection and the maintaining of financial stability within the Economic and Monetary Union. In its original form it consisted of two main branches, a preventive branch and a dissuasive branch (European Council, [30]).

 Preventive branch The preventive branch of the SGP obliges the EMU‐states to submit annual financial plans, these plans should show how they intend to maintain a viable fiscal position and are scored by the European Commission and Council. There are two main policy instruments contained within the preventive branch. The main monitored indicators by the original SGP are the Government debt level in %GDP, which needs to be kept under 60% and the ratio of government budget deficit to GDP must not exceed 3%. If any of these restrictions are violated or if countries are on a course that will lead them to violate them, “The Council, on the basis of a proposal by the Commission, can address an early warning to prevent the occurrence of an excessive deficit. Using the policy advice, the Commission can directly address policy recommendations to a member state as regards the broad implications of its fiscal policies”

 Dissuasive branch “The dissuasive part of the Pact governs the excessive deficit procedure (EDP). The EDP is triggered by the deficit breaching the 3% of GDP threshold of the Treaty. If it is decided that the deficit is excessive in the meaning of the Treaty, the Council issues recommendations to the member states concerned to correct the excessive deficit and gives a time frame for doing so. Non compliance with the recommendations triggers further steps in the procedures, including for euro area member states the possibility of sanctions.” (European Council, [30]).

4.3. Issues and experiences leading to the 2005 reform The 2005 reform was triggered by a failure to apply the Excessive Deficit Procedure to Germany. When cyclical deficits made it impossible for Germany to comply, the European Commission saw itself legally obliged to continue with the EDP process. This led to a legal dispute between Germany, supported by France, and the European Commission. The dispute led to a credibility‐crisis for the SGP on account of enforceability as pointed out by Oksanen [31]. This also provided an opportunity to review the SGP. To clarify, it were not the other criticisms or the admitted loopholes in the treaty that led to the 2005 reform.

One of the main results of the reform was that it allowed for recommendations by the EC to be revised and deadlines for EDP’s to be extended should negative macroeconomic events occur. It also included some improvements and clarifications on short and medium‐term budget management to get rid of pro‐cyclical fiscal measures. It specified that from then on the budgetary deficits should be judged in cyclically adjusted terms. This change partially answered the pro‐cyclical critique from the academic world but only looked at fixing the pro‐cyclical bias during an economic downturn. There was no early warning mechanism installed nor did it account for macroeconomic shocks outside of the normal cycle.

The European council noted that “it wanted to safeguard the sustainability of public finances in the long run, to promote growth and to avoid imposing excessive burdens on future generations” [32]. This statement was later copied into EMU government’s budgets. This meant the revised SGP included provisions for implementing structural reforms, such as pension reforms and made parts of these investments exempt from the strict deficit rule.

An additional critique that was tackled in the reformed SGP was the fact that the expressed medium‐ term objectives for all countries in the original SGP were considered arbitrary (De Grauwe, 2003 [33]) and did not cater enough the individual needs of countries. Therefore, the revised SGP of 2005 made the general ‘balanced budget requirement’ into MTO’s: country‐specific objectives that were subject to possible revisions. [34] Thus the reformed SGP entered into play. Most researchers argued it was brought along by wrong motives, but most of them applauded the EMU for their efforts made to ameliorate the pact. This was however not the end to the critiques on the SGP.

4.4. Strengths & Weaknesses of the reformed SGP

Table 3: Strenghts and weaknesses of the Reformed SGP Strengths Weaknesses The SGP shows that the Eurozone commits to both the There is a general sense of incredibility of the euro and a long‐term vision. arbitrary criteria posted in the pact (De Grauwe (2003) & Buiter(1993)). This notion is strengthened by the fact that not all criteria are numerically defined. The exceptions in the reformed pact of 2005 make it There are still no early warning mechanism in more flexible and allow incentivizing economic growth. good days nor any ‘rainy‐day’ funds. The SGP should encourage governments to think about No clear distinctions are made between long long‐term stability and spending, rather than mass‐ lasting and one‐off measures. Of course, there are spending on the short term. This can be seen as a very some methodological difficulties in measuring the democratic advantage towards both the other nations scope of ‘one‐off measures’ and a clear definition as well as the nation’s own population. would be needed in advance. 'The SGP is a political totem, a symbol that euro‐using Some EU member states, like the UK and countries will not cheat each other.' ‐ The Economist, Denmark, are an active and influential part of the 24 October 2002 European Union but opted out of the third stage of the EMU and cannot be fined. This can severely hamper euro credibility.

This is further hampered by the fact that Greece, as a full member, has already manipulated its data on entry in 2003.

Portugal and Italy entered the EMU while not being fully compliant to the Maastricht Criteria.

Strengths Weaknesses One cannot argue that a commitment to growth and In 2011, only 6 of the EMU countries did not have stability is not a good measure per se. Policies should a running EDP against them, bringing the question aim to reach the long‐term sustainable debt levels. of proper guidance during the crisis years.

But even outside of crisis years, there are a lot of offences to the rule. There are apparently not enough incentives for running a proper fiscal policy.

Some studies propose the ‘looseness’ of the SGP as a By letting violators like France and Germany slip, strength and argue that cyclical issues can only be dealt the European Commission has shown that there is with by breaking away from the SGP in the short term. no actual enforcement of the SGP so it is easy to question the usefulness of the pact. A certain degree of ‘automatisation’ is needed to solve this.

The reformed SGP allowed for more flexibility by The 3% rule of the original SGP now came with a having more targeted allowed deficit ratios plethora of exceptions that were all under heavy debate. Partisan review boards, the politicians who are judging the countries in the European Commission are the same politicians or political parties that made the budgets in the first place.

One of the most mentioned criticisms on the SGP is the enforcement procedure against nations provided within the pact. [35] These provisions failed in the following ways: first off, the European Commission needed to put the procedure into motion by a vote (this procedure is called an Excessive Deficit Procedure, or EDP in short). This partisan review board already meant that some nations might be less prone to enforcement than others. Secondly, the ECOFIN (what does this short name mean) Council needed to vote as well to advance the EDP, this vote however was easily vetoed out by violators and ‘potential’ violators of the pact as a qualified majority is easily attained by a handful

of large countries put together. This is what happened with the violations by France and Germany mentioned earlier.

The second most apparent argument says that the SGP is considered a ‘blunt axe’. It is, as a policy, not intelligent enough to make a distinction between proper and bad governance decisions or between cyclical and structural deficits. Some economists even propose the SGP actually strengthens cyclical swings. So all in all the SGP is not a ‘smart tool’ as the following quote by Romano Prodi makes clear: “I know very well that the stability and growth pact is stupid. The pact is imperfect. We need a more intelligent tool and more flexibility.”

These loopholes in the SGP led to a wave of budgetary imbalances when the business cycle was less favorable. The EDP’s watered down considerably, especially in relation to the stronger countries and in the eve of the financial crisis in 2007, the euro‐countries had, on average, a structural budgetary deficit of 1.9% GDP, while the average sovereign debt was still 66% GDP [36]. The crisis also showed that these values are not always representative for a nations situation, Ireland and Spain had no issues whatsoever to meet the SGP’s criteria back then. There were however, some other clear macroeconomic imbalances in these countries that led to their current crisis.

From these critiques stems the need to make the SGP more ‘intelligent’. Nothing is said about how the EMU should go about creating this intelligence. Be it by promoting more austerity measures or increase public spending, by setting new fixed or floating targets or by selecting different criteria. Even just focusing on growth during slumps and stability during peaks can already address one of the criticisms. It is very clear that the tool needs to be more decisive, easier to invoke and needs to cater more the specific needs of the EMU’s countries at a certain point in time. One must also bear in mind that the SGP’s motivation was in fact correct. Both research and empirical results from the private sector have shown that sustainable debt levels need to be pursued in order to have a proper company/government. Sustainable debt levels ensure investments for current and future stakeholders. As such, the budgetary policy constraint ideal behind the SGP was not incorrect [33].

4.5. Appraising the SGP according to the various criteria

4.5.1. The Kopits‐Symanski criteria Kopits and Symanski have identified a number of criteria to assess fiscal rules, these exigent criteria require the following: well‐defined, transparent, simple, flexible, consistent and adequate rules that are adequately relative to a final goal and are underpinned by structural reforms. [37] The definition of the separate criteria are as follows:  Well‐defined: a well‐defined fiscal rule is first and foremost a necessity for effective enforcement. The constraint of the indicator, the institutional coverage and the exception clauses all need to be well‐defined.  Transparency: includes, but is not limited to: accounting conventions, forecasting and reporting. Policy criteria have to be set and appraised to common best practice standards.  Simplicity: high visibility policies and easy to interpret guidelines are a necessity.  Adequacy: fiscal rules have to be adequate in relation to the proposed goal.  Enforceability: fiscal rules need to be enforceable. The enforcement must be equal for all member nations.  Consistency: good policy is consistent internally and with other policies within the entity.  Structural reforms: long term fiscal policies should plan to improve structural aspects.

It needs to be noted that these criteria were developed for sovereign nations’ fiscal policies, using them to evaluate a union like the EMU is going to run into obvious limitations. 4.5.2. Inman’s criteria Inman also puts forward criteria of compliance and makes an assessment of strong and weak fiscal rule based on these criteria. [38] His four criteria are as follows:

 Rule: Review timing (ex ante vs. ex post) Inman states that for a fiscal rule to be strong, there should be an ex post, not ex ante review of the indicators used. This entails that members should be judged on their actual performance rather than on their budget or forecasted performance

 Override: Majority rule (allowed vs. not allowed) Inman evaluates the degree of how easy a fiscal rule can be overridden by a vote in legislature. Main impacting factors here are the amount of votes required and a case is made for constitutional fiscal policies to be stronger than statutory.

 Enforcement: Enforcer (partisan vs. independent), Access (open vs. closed), Penalties (small vs. large) Enforcement has 3 sub‐categories, first a distinction must be made between either partisan or independent review. Independent review entails that the enforcing party is not connected to the fiscal policy makers. Main reason for supporting independent review is that a partisan review board cannot be expected to adhere to the letter of the fiscal rules due to the conflicting interests. Secondly, for an effective enforcement the review panel must be open and accessible to citizens and institutions alike. This is to allow all affected parties to point to violations of the set rules. Lastly, the sanctions must be significant if one of the rules is violated. This rule‐category matches up to the Kopits‐Symanski criterion of enforcement.

 Amendment: Process(degree of simplicity) According to Inman, when amending rules comes with a high cost, adhering to the policy becomes a more attractive solution than trying to get around them by opting for their adaptations

Again, the character of the EMU affects the basic features of these criteria. Buti, Eijffinger and Franco [39] “find review timing particularly more important in a supra‐national context, given the higher risks of moral hazard and the higher difficulty in monitoring the policy announcements.” On top of this, the supra‐national context makes it a lot harder to make the review panel publicly accessible.

4.5.3. Implementation of the criteria The common implementation test of these criteria is to put them in a grid and give them a subjective quality mark, followed by clarification of the quality mark. The original SGP is already thoroughly discussed in literature, so we will just copy the Inman criteria matrix from research by Buti, Eijffinger and Franco [39] and refer to their clarifications on the grid:

Table 4: Kopits‐Symanski criteria for the original SGP Ideal Fiscal rule EU fiscal rules pre‐2005 1. Well defined ++ 2. Transparent ++ 3. Simple +++ 4. Flexible ++ 5. Adequate relative to final goal ++ 6. Enforceable + 7. Consistent ++ 8. Underpinned by structural reforms + Legend: +++ very good, ++ good, + fair Source: Buti, Eijffinger and Franco [39]

For the reformed SGP of 2005, we construct the same table and add/subtract a point where necessary, changes are indicated in bold.

Table 5: Kopits‐Symanski criteria for the reformed SGP Ideal Fiscal rule EU fiscal rules post 2005 (change) 1. Well defined ++ (‐1 and +1) 2. Transparent ++ (‐) 3. Simple ++ (‐1) 4. Flexible +++ (+1) 5. Adequate relative to final goal ++(‐) 6. Enforceable 0 (‐1) 7. Consistent ++ (‐) 8. Underpinned by structural reforms + (‐) Legend: +++ very good, ++ good, + fair, 0 bad Source: adapted from Buti, Eijffinger and Franco [39]

This verdict for the reformed SGP stems from the chosen method of selecting the matrix by Buti, Eijffinger and Franco as a baseline and then removing one point for an unsolved criticism or a status quo in terms of progress (i.e. solution made, but not up to par), and adding one point for a resolved criticism. If no changes were needed, we record a status quo.

On account of the pre‐2005 rules, the most notable strong point in accordance with the proposed criteria is simplicity. The EU fiscal rules were very simple and enjoyed a high level of visibility. Most EU citizens have heard about the SGP and understand the two main criteria of the SGP. There are however inadequacies in enforceability and structural reform. The doubts already expressed in previous chapters about the partisan review board and the implausibility of sanctions being imposed on ‘EU‐carrying’ sovereign nations come up in these criteria as well. Analyzing the structural reform planning (like tax and spending reforms), the SGP is lacking. The actual implementation of these reforms fall well outside of the original SGP.

One must again consider the background against which the EMU has had to make the pact in order to get a full picture of the implementation against these criteria. Firstly, given the lack of a full political union, it is not an easy task creating a policy within the intergovernmental framework that is the EMU. This implies that all policies written down within the pact had to be as neutral as possible towards the political viewpoints and social preferences of the member states. As any EMU citizen knows, these views differ greatly between the member states. There is no ‘one‐fits‐all’ policy that pleases all countries and their populations equally. Secondly, there are trade‐offs to be considered between various criteria. Simplicity vs. flexibility, simplicity vs. adequacy, and flexibility vs. enforceability. These trade‐offs are again influenced by the multi‐national nature of the EMU.

Moving on the reformed SGP, it would seem that the EMU has mostly focused on rebalancing the trade‐offs discussed above. Simplicity is traded in for more flexibility, definition is first increased in function of enforceability but is also decreased for not further defining the mentioned loopholes on the pre‐2005 SGP. More flexibility and lack of proper definition of criteria like ‘required convergence speed’ cause the enforceability of the post‐2005 pact to be practically inexistent. For the implementation of the Inman criteria, we refer to the same base article as for the Kopits‐ Symanski criteria’s implementation. [39]

Table 6 : Inman’s criteria applied to the original SGP

Specification Weak fiscal rules Strong fiscal rules EU rules

Rule Timing for review Ex ante Ex post Ex post Override Majority Rule Allowed Not allowed Not allowed Enforcement Enforcer Partisan Independent Partisan Access Closed Open Closed Penalties Small Large Large Amendment Process Easy Difficult Difficult

Source: adapted from Buti, Eijffinger and Franco [39]

The reformed pact of 2005 does not entail any changes against these criteria. The authors also note, together with Beetsma and Bovenberg [40], that the success of the ECB lies in its independence in enforcing the monetary policy. Thus the authors agree that an independent fiscal enforcer instead of the current partisan review board would have significantly more authority and leverage in the case of supra‐national rules.

5. Euro Plus , The European Six Pack and the TSCG

5.1. Background So in light of the ‘European Debt Crisis’ and the common criticism on the SGP, the European governing instances decided to introduce a number of measures, also known as the European six‐ pack, to attempt and make the SGP more intelligent. We would like to refer to the new Roadmap for the completion of the economic and monetary union proposed by the European Council on the 14th of December 2012. In the European Six‐pack, the EMU recognizes it is a unique set‐up due to the monetary union with a high degree of fiscal decentralization. The EMU refers to its Euro Plus and TSCG goals as new, sorely‐ needed, fiscal policy guidelines. It also recognizes that the non‐enforcement of the current SGP has been a serious issue and points to overoptimistic growth expectations and data manipulation as the main reason. It acknowledges that the current SGP had its shortcomings (e.g. lack of definition of ‘convergence‐speed’) and was built around underestimated structural shortages [36].

5.2. European Six Pack

Monetary Budgetary Fiscal

Fixes lack of discipline Ignores deficits from structural improvements NATIONAL or ‘force majeure’

New restrictions and SUPRANATIONAL enforcements

Four of the six new governance measures in the EMU’s six‐pack concern the budgetary leg and are as such improvements to the SGP. They heavily alter both the preventive and dissuasive branch of the SGP. It also adds decision procedures to which the budgetary policies of all EU‐member states will have to adhere to.

5.2.1. Preventive measures One of the most important issues during the implementation of the SGP was that preventive measures, which are focused on achieving a balanced budget (pre‐2005) or the specific MTO (post‐ 2005) failed to incur any budgetary discipline. The obligation to attain a ‘safe’ Medium‐Term budgetary Objective, remains existent next to the definition of an ‘appropriate speed’ with which this Objective needs to be attained. This entails a yearly decrease of the structural deficit by 0.5% GDP or >0.5% GDP for countries that have either a debt level of over 60% GDP or face heightened continuity risks. This will now be assessed, not only from an analysis of the structural deficit, but also from the change in expenditures. In this light, the EMU introduced ‘sustainable expenditure growth’.

To calculate this ‘sustainable growth’, a reference growth rate of the GDP is used. However, this reference growth differs for states who have already achieved their MTOs and those who have not. In the first case, the expenditure growth cannot exceed the potential GDP‐growth. In the second case, expenditure growth must be strictly lower than the potential GDP‐growth. The actual amount is deduced from the required set convergence speed towards the MTO. In both cases, the cyclical factors are removed from the budget and there are also correctional factors for budgetary impact of taken measures (i.e. tax raises allow for higher potential expenditure growth while tax cuts limit the potential expenditure growth).

Failing to adhere to the MTOs leads to a warning and later, to sanctions. However, only ‘significant’ deviations from these MTOs can be sanctioned. This is in order to account for unforeseeable circumstances out of a sovereign control which can have a big impact on a balanced budget trough a very negative effect on the business cycles. A last point is that the pact now also accounts for short term deficits if these were made in order to attain long‐term stability with structural improvements.

5.2.2. Dissuasive measures In the new policy, the required ‘convergence speed’ is now defined, and as such enforcements are possible. However, under the new treaty, an ‘Excessive Debt Procedure’(EDP) will not be instantly invoked. The EC will have to make a report in which the current affairs are evaluated. In this report, the EC will have to account for a list of ‘relevant factors’, among which macro‐economic influences and business cycle factors. An example of a scoreboard for the new framework can be found on the next pages, with 2010 data retrieved from EuroStat [10] and the EC [32]. The scorecard clearly indicates there is still a lot of work to be done inside the EMU. In addition to the fixed scoring indicators, the member state is allowed to point to factors which it deems relevant and the EC has to take these into account as well as in the assessment. This indicator‐based surveillance mechanism is called the ‘Macro‐economic Imbalance Procedure’ or MIP.

Of course the scoreboard is merely a snapshot of the situation at a certain point in time, the EC also needs to take into account changes of the metrics over the years when selecting countries for further inspection. Sometimes countries are selected that break the threshold on two indicators, whilst some countries that are in the red on four indicators are not selected for thorough evaluation. The Commission does however make a full report and does not need to attribute the same weight to the each indicator for different member states.

At the end of May 2012, the European Commission completed a thorough evaluation of 12 member states which were deemed to be in transgression. They came to the conclusion that there are macro‐ economic imbalances that still need to be dealt with and followed up. The Commission reports that these imbalances are in the process of leveling out, which outs itself in lower deficits on the current account and the convergence of unit labor costs. They do however find the reduction of these imbalances to be a proper and urgent challenge for the EMU. [41]

Table 7: EC Framework scoreboard

Credit Avg 3y Net Change in real stream of Private Governm Unempl current change in % of Country Name investment effective private sector debt ent Debt oyment account unit labour cost position exchange rate sector in in %GDP in %GDP rate in % GDP %GDP

Tresholds ‐4% ‐35% ‐5% ~ +5% ‐9% ~+9% 15% 160% 60% 10%

Belgium ‐0,6% 77,8% 1,3% 8,5% 13,1% 233% 96,0% 7,7%

Bulgaria ‐11,1% ‐97,7% 10,4% 27,8% ‐0,2% 169,0% 16,0% 7,5%

Czech Republic ‐2,5% ‐49,0% 12,7% 5,1% 1,7% 77,0% 38,0% 6,1%

Denmark 3,9% 10,3% 0,9% 11,0% 5,8% 244% 43,0% 5,6%

Germany 5,9% 38,4% ‐2,9% 6,6% 3,1% 128% 83,0% 7,5%

Estonia ‐0,8% ‐72,8% 5,9% 9,3% ‐8,6% 176% 7,0% 12,0%

Ireland ‐2,7% ‐90,9% ‐5,0% ‐2,3% ‐4,5% 341% 93,0% 10,6%

Greece ‐12,1% ‐92,5% 3,9% 12,8% ‐0,7% 124% 145,0% 9,9%

Spain ‐6,5% ‐89,5% 0,6% 3,3% 1,4% 227% 61,0% 16,5%

France ‐1,7% ‐10,0% ‐1,4% 7,2% 2,4% 160% 82,0% 9,0%

Italy ‐2,8% ‐23,9% ‐1,0% 7,8% 3,6% 126% 118,0% 7,6%

Cyprus ‐12,1% ‐43,4% 0,8% 7,2% 30,5% 289% 62,0% 5,1%

Latvia ‐50,0% ‐80,2% 8,5% ‐0,1% ‐8,8% 141% 45,0% 14,3%

Lithuania ‐2,3% ‐55,9% 9,1% 0,8% ‐5,3% 81% 38,0% 12,5%

Luxemburg 6,4% 96,5% 1,9% 17,3% ‐41,8% 254% 19,0% 4,9%

Hungary ‐2,1% ‐112,5% ‐0,5% 3,9% ‐18,7% 155% 81,0% 9,7%

Malta ‐5,4% 9,2% ‐0,6% 7,7% 6,9% 212% 69,0% 6,6%

Netherlands 5,0% 28,0% ‐1,0% 7,4% ‐0,7% 223% 63,0% 3,8%

Austria 3,5% ‐9,8% ‐1,6% 8,9% 6,4% 166% 72,0% 4,3%

Poland ‐5,0% ‐64,0% ‐0,5% 12,3% 3,8% 74% 55,0% 8,3%

Portugal ‐11,2% ‐107,5% ‐2,4% 5,1% 3,3% 249% 93,0% 10,4%

Romania ‐6,6% ‐64,2% ‐10,4% 22,1% 1,7% 78% 31,0% 6,6%

Slovenia ‐3,0% ‐35,7% 2,3% 15,7% 1,8% 129% 39,0% 5,9%

Slovakia ‐4,1% ‐66,2% 12,1% 10,1% 3,3% 69% 41,0% 12,0%

Finland 2,1% 9,9% 0,3% 12,3% 6,8% 178% 48,0% 7,7%

Sweden 7,5% ‐6,7% ‐2,5% 6,0% 2,6% 237% 40,0% 7,6%

United Kingdom ‐2,1% ‐23,8% ‐19,7% 11,3% 3,3% 212% 80,0% 7,0%

Source: European Commision and OECD [10] [14]

5.2.3. Sanctions First point of notice is that financial sanction stemming from the six‐pack can be put on any of the EMU countries, not just on tier three member states (sanctions from other pacts vary by subscribing parties). Secondly, adjustments made during the current phase have all had the common goal of improving the automated character of these procedures. To achieve this, a strict time schedule has been imposed on the sanction procedures. From infraction to warning and policy advice, the maximum time is five months, this can be further decreased to three months if the infraction is deemed ‘urgent’ by the EC. When the member state does not comply with these recommendations, a sanction can be imposed in the form of an interest bearing deposit or a lump sum which can amount to 0.2% of the GDP of the previous year. There is also an extra sanction for reporting misleading or manipulated data, for which the maximum amount is also 0.2% of the GDP.

5.3. Euro Plus [42]

Monetary Budgetary Fiscal

NATIONAL

New European SUPRANATIONAL coordination

The euro plus pact grew from the need of fiscal coordination over the EU regions. It emphasizes four main strategic goals:

 Increasing competitiveness: The pact makes a point of abolishing wage indexation, as it deems the expensiveness of labor in the Eurozone one of the main causes of its current unemployment problem (see Figure 3 and Table 1). As a secondary reason, it points towards labor mismatches so in order to combat these, Euro plus members agreed on improving education and infrastructure. A third way of increasing competitiveness within the EU is the much known issue of high labor costs, so decreasing these labor costs will also help competitiveness.

 Increasing employment Creating extra jobs is also important for the EU+ members, however, the measures suggested to achieve this are the same as those stated above, lowering labor costs, improving education, etc.

 Sustainable public finances o Sustainable health care o Sustainable pension plans o Under the new SGP guidelines

 Achieve financial stability

The Euro Plus pact was signed by all of the stage three EMU member states and the “Plus” refers to the other EMU countries that wished to opt in. These countries are: Denmark, Poland, Latvia, Lithuania, Bulgaria, and Romania. It is in essence an answer to the critique of the SGP not offering actual measures and not being focused enough on the spirit of sustainability and on removing harmful imbalances between the member states

5.4. Treaty for stability, coordination and governance (TSCG or Fiscal Compact)

Monetary Budgetary Fiscal

NATIONAL

Binding rules for all subscribing nations, which extend beyond New European SUPRANATIONAL the stage 3 EMU nations coordination

At the TSCG core is another expansion to the SGP, but it also specifies internal roadmaps for the agreeing countries to address structural issues that are threatening the balanced budget. The pact contains nine explicit measures for more fiscal integration of the members and is mostly a sharper implementation of the six‐pack. The TSCG can actually be seen as the base treaty that certifies all the measures outlined above by referencing them and expanding on them.

 Balanced budget rule The first specification of the Treaty dictates that the budget of all member states shall be balanced or in surplus. The annual structurally adjusted deficit of a member state cannot exceed 0.5% of GDP for members with government debt levels above 60% GDP. member states that have a low long term sustainability risk and have deficit levels significantly below 60% GDP can have a structural deficit of 1% GDP.

 Convergence speed (the ‘Schuldenbremse’ or debt brake rule) member states that exceed 60% of GDP in government debt levels have to reduce it at the pace of 5% annually. This rule is an amelioration and redefinition of the SGP’s ‘adequate convergence speed’. For countries which currently have a running EDP against them, this rule will only be applied 3 years after their current EDP expired. This means that for example Belgium will only have to comply with the new debt brake rule by 2015 and Greece by 2020.

 Automatic correction mechanism This mechanism is to be defined by each member state separately, but the mechanism has to comply with the guidelines stated in the EC Directive from 2012. This Directive also makes a case for installing a national fiscal correction mechanism within the member nations that will operate independently from the government. This seemingly small leg of the pact has a potentially huge impact on the ‘Enforcer’ leg of the Inman criteria. Independent corrective institutes improve this leg greatly.

 Correction of deficit/debt deviations Deviations will immediately be corrected by the automatic correction mechanism unless caused by macro‐economical events outside of a member’s state control.

 Economic Partnership programs Agreements on letting a research commission from the EC help support the member state in detailing the necessary structural reforms so that the excess structural deficit can be eliminated.

 Debt issuance coordination All signing parties agree to first pass capital borrowing plans through the EC as to improve timing and synchronize timings of bond issuance.

 Link to the ESM member states are obliged to support the ESM which has already came into existence as mentioned earlier in the paper.

 Implementation and coordination of policies improving competitiveness, employment and financial stability This commits subscribing states to following the guidelines within the Euro Plus pact.

 Meetings for ongoing policy governance Bi‐annual euro summits must ensure proper governance at all times and the continuation of it. This also allows catching trends early and having a pro‐active rather than a reactive policy.

5.5. Comparing the new governance framework with the Kopits‐ Symanski criteria. We now appraise the newly proposed framework against the Kopits‐Symanski criteria, with the relative changes towards the post‐2005 situation.

Table 8: Kopits‐Symanski criteria applied to the new framework Ideal Fiscal rule EU fiscal rules post 2012(change) 1. Well defined ++ (+1) 2. Transparent ++ (‐) 3. Simple + (‐1) 4. Flexible +++ (+1) 5. Adequate relative to final goal +++(+1) 6. Enforceable ++(+1) 7. Consistent ++ (‐) 8. Underpinned by structural reforms +++ (+1) Legend: +++ very good, ++ good, + fair

The new framework is more defined than the post‐2005 SGP. Vague definitions of ‘convergence speed’ and non‐automation of sanctioning procedures are now dealt with.

In regard to transparency and simplicity, the addition of new rules has made the pact more complex and harder to explain than the original ‘golden rule’ of the SGP. There is now also room for member state input, which will probably be the most difficult dimension of the new framework to put into practice unambiguously. However, these additions made to the pact are well‐defined. Also, non‐ exhaustive, but elaborate list of possible metrics is provided. All in all, the pact remains at the same level of transparency and there is a commitment to revising the framework and criteria at least every 4. This revision policy is supported by the bi‐annual summits proposed in the Euro Plus pact.

As touched upon in the previous paragraph, flexibility of the pact has remained high and has actually increased in terms of further recognizing cyclical fluctuations in a budget. However, one must realize that for satisfying the policy needs of an ever‐expanding EMU, there is always an intuitive trade‐off to be made between flexibility and simplicity. More rules means less simplicity, a simpler policy means less exceptions and vice versa.

Adequacy in relation to the final goal is of course easier to evaluate after a certain period has passed and after the measures have rolled out. However, it is clear that the EMU has learned a lot from empirical data during the crisis and has listened to common critiques on their foundations. As the goal of the EMU fiscal rules is ensuring budgetary caution, the government deficit limit ensures annual fiscal discipline and there is also room for structural investments in the newly proposed framework, even if they bring a deficit with them. Finally, the need for a less pro‐cyclical bias has been addressed.

On account of enforceability, there have been major leaps in automatization as well as in making the sanctions more intelligent and robust. The additional extra sanctions that have been put in place to further reduce moral hazard problems (incentives for creative accounting or false reporting) also add to the proper attribution of responsibility in the member states. The same doubts can be uttered as with the former versions of the European fiscal rule: “will these measures be enforced equally?“ The currently proposed automatization and laid out execution steps, which pass through both the European Commission and the Council certainly imply this. On top of that, in the light of the financial crisis and the level of commitment of the member states, it would be a severe reputational cost to interfere with the workings of this procedure.

A good fiscal rule has to be internally consistent and consistent with the surrounding framework. As this framework was entirely designed around the improvements to the SGP and the needs of the EMU at this time, there are little inconsistencies. All of the new measures refer back to themselves and stress the importance of the framework as a whole. This thorough development of a full governance framework also brings with it the necessary structural reforms, strengthened by the commitment to constant revision and bi‐annual summits. One could argue that the infringement of sovereign rule by the EMU policy is inconsistent with the ‘Lisbon Treaty’, but in light of the chosen path of a more integrated Europe for a better common future it is equally fit to put this argument aside.

5.6. Comparing the framework to Inman’s criteria Based on a study of the USA, Inman postulates four criteria for compliance: timing for review, overriding, enforcement and amendment. The following table is adapted from Inman [38] and Eijffinger and de Haan [43]:

Table 9: Inman’s criteria applied to the new framework

Specification Weak fiscal rules Strong fiscal rules EU rules (with new framework)

Rule Timing for review Ex ante Ex post Ex post Override Majority Rule Allowed Not allowed Not allowed Enforcement Enforcer Partisan Independent More independent Access Closed Open Closed Penalties Small Large Large Amendment Process Easy Difficult Less Difficult

According to that research, a fiscal rule can only be effective if there is an ex post, not ex ante deficit accounting. member states in the new EU framework are reviewed on the basis of their realized performance, not on the basis of their forecasted deficit. The time schedule for approving and filing of the data is also precisely defined. It can be concluded that for the review timing aspect, the EU policies are representative of a strong fiscal rule.

The ‘override’ criterion concerns if there is a possibility of the fiscal rule to be temporarily suspended or overridden by majority vote. Within the new framework and from taking into account the revisions to national constitution in the TSCG, there is a very tight constraint on EU policy changes. In most cases, unanimity is needed to change regulations.

For an enforcement of a policy to be defined as good, there has to be a politically independent review panel. As the same politicians who are responsible for national politics are also involved in the enforcement of the framework criteria, it is not independent but partisan. Another criterion under this title is openness of the reviews. As there are not many EU citizens or institutions involved in the review, the framework is classified as weak fiscal rule. It is however less partisan than the previous pact as the process flow within the legislation now passes through both the Council and the Commission during enforcement procedures. However, the TSCG requires the inmplementation of an independent and automated correction mechanism, this indepent institution should bring a huge leap forward. In regard to the sanctions, there are sufficiently large and enforceable penalty procedures within the new framework. The application process has also been shortened and streamlined.

Amendment of the rules is, while costly and mostly under the requirement of a unanimous vote, not excluded. There is however a review procedure planned for the framework every 4‐6 years. The study by Buti, Eijffinger and Franco [39] also mentions that, with a lack of a federal government, one has to stress the reputational and moral effects of not following the pact. And they conclude that the EMU fiscal rules already performed quite well, except with respect to the enforcement of the policy rules.

5.7. Roadmap for the completion of the EMU The EMU states that “the consolidation of the EMU lies in completing its architecture and pursuing differentiated, growth‐friendly and sound fiscal policies”. [44] This process will continue to build on the current in‐place institutional and legal framework, following the study of Buti, Eijffinger and Franco where they claim that a total rework from the ground up of the European framework was not necessary, but a good adaptation of the current in‐ place framework. [39] In the total framework explained in this chapter, the EMU has attempted to make this happen. This is why the EMU makes it a top priority to implement the six pack, the TSCG and the Euro Plus pact. They also attribute attention to the attribution of responsibility within the EMU, towards households and companies alike [44]. There is also a realization that a more integrated financial framework is needed next to the new fiscal and budgetary legs.

5.8. Conclusion Important to note is the following minor critique: a lot of the current measures are based on empirical results. However informative these results might be in helping to understand the factors driving EMU divergence and the current crisis, it still leaves policy makers without a proper theoretical framework in which to create their policy [9]. It is comparable to a doctor combating the symptoms and possible causes of the disease, rather than actually finding a cure.

It became clear from the previously mentioned criticisms and solutions, that the major macro‐ economic imbalances in some of the member states had accumulated and that they were not addressed by the original SGP [36]. These imbalances culminated when Greece had to demand help from the ECB and the IMF. A consensus existed that a sound framework for governance was a prerequisite for successful and sustainable fiscal policies in EMU and that a leap in this regard was needed. [45]

In the newly set governance framework, the EMU took the required leap, together with a call for responsibility within the member states. In reference to the changes made to the SGP back in 2005, the current amendments are a step in the right direction. However, where there used to be one policy, there are now a plethora of rules and guidelines that might not make it more transparent. To add to the complexity, initiatives invade the national budgetary and fiscal aspect and also impose

intergovernmental measures. This proposed invasion of sovereign power caused for the TSCG to be rewritten and confined to the restrictions in the ‘Lisbon treaty’, largely in the reaction to UK criticism, showing that structural changes which take away sovereignty from the member states are still hard‐ earned victories for the pro‐European EMU states.

It is clear that the EMU will now be better armed towards macroeconomic shocks with a more intelligent and broad governing policy that is internally consistent. Combining this fact with the concluded stability of the monetary leg and the extra intervention support added to that leg, the Eurozone appears to be in good shape as soon as all of the mentioned treaties are ratified in the member states.

6. Challenges for the EU over the next few years

6.1. Future scenarios for the Eurozone In literature, there is an increasing interest in different scenarios for the future of the Eurozone [46].  Short term 1: ‘Muddling through’ (negative impact framework)  Short term 2: ‘Muddling through’ + Recovery (positive impact framework)  Short/Long term 1: Break‐up of the EMU  Short/Long term 2: Full union, political union following the monetary A selection of these four is made as it would seem likely that the short‐term future of the EMU would lie in the ‘muddling through’ scenario, with long term scenarios being a break up or a completion of the fiscal union of the EMU. It is also possible however that one of the long‐term scenarios becomes apparent in the short term. Because of this, we will discuss all scenarios from the same base time. These scenarios assume the current economic climate to be fixed over the medium term and as such, do not take into account a global economic resurgence.

Within these scenarios there are of course unknown variables, the EMU could achieve full fiscal union as a smaller entity but it could also ‘muddle through’ to the next crisis period. This is why we only opt to discuss two long‐term options. Completion of the fiscal union or break‐up, everything in between could still be perceived as ‘muddling through’. If taken into account that the EMU of today does not necessarily have to be the EMU of tomorrow regarding member count or composition, these two long‐term scenarios cover almost all of the possible outcomes. This black vs. white distinction was already made clear back in 1941, when British prime minister Clement Attlee uttered the words “Europe must federate or perish”. His words were treated as folly back then and the confederate European structure which has existed and grown from the end of WWII up until today has proven him right. His words prove correct once again today. In conversations with Jan Smets (Director of the National Bank of Belgium) and Peter De Keyzer (Chief economist BNP Paribas Fortis), these 2 long term scenarios were confirmed. These specialists attributed the main outcome of the EMU to political will within the member states and not to economic factors or possible structural issues.

These scenarios stem from an analysis of external and internal (both national and supra‐national) key factors shaping the EMU’s future, these are adapted from M. Rodrigues [46]:

Table 10: Key factors shaping the future of the EMU Dimensions Monetary Monetary‐ Budgetary Fiscal Political Financial

National Interest rates Credit provisions Deficit/GDP Unit Labor National Inflation rates Bail‐outs Debt/GDP cost resistance Government Unemploy to Europe Spending ment rate Growth rates Public debt spreads European ECB ESM/EFSF ‘Six‐pack’ Euro Plus EU Fiscal TSCG authority factor International IMF Interbank‐lending G20 G20 G20 G20 Rating agencies IMF Exchange rates IMF G20 Capital flows Source: adapted from ‘Mapping future scenarios for the Eurozone’ [46]

6.1.1. Scenario 1: ‘Muddling Through’ (negative) This is the scenario where the current crisis continues on, despite the new governance framework and the EMU roadmap remains uncompleted because of this. There are no political shifts in the major EMU countries. There are no more failures of any banks, but there have been drastic downsizings and access to financial resources remains unstable due to this.

There are some defaults or exits for the countries with large imbalances and risks remains within the EMU. This causes borrowing and lending costs to diverge further for the member states and makes it harder for them to comply with the new criteria. The ESM, the newly imposed monetary sub‐pillar provides support, but the imbalances within the countries remain and the ESM and ECB are hard‐ pressed to keep up with the monetary leaks. Eventually, the IMF or G20 intervenes and decides on limited support with very strict conditions and the EMU’s dependence on support from international partners increases.

The member states struggle to maintain the growth plan. This causes economic growth and unemployment to diverge further. Deficits increase for some member states, while the surplus in others further increases. The new surveillance mechanisms are triggered and put downward pressure on the already troubled member states as these states lack the growth to properly introduce the improvements and are already struggling to meet the requirements, as the revised SGP puts further downward pressure and it leaves little room for supporting public and private investments. Balancing the budget is far off for member states due to the low growth and the implementation of the new framework is halted or impeded by the growth shortcomings.

Depending on how much the negative effect is attributed to failing European or local governments, pro‐European or counter‐European movements emerge in the member states. Depending on the pressure and leverage these parties can exert, the long term scenario is selected: Break‐up scenario in case of distrust in the European measures as they have proven to aggravate the situation (likely) and the scenario with completion of the roadmap and the further integration of the EMU which is deemed to have acted as a proper governing institute(unlikely).

6.1.2. Scenario 2:’Muddling Through’ + Recovery (positive) The current crisis is halted by the new governance framework and the EMU works further along the roadmap to completion. There are some political shifts in the major EMU countries. There are no more failures of any banks and the new governance has led to a reduced risk of defaulting and better interest rates for all member states.

There is no default or exit for the countries which currently have large imbalances and risks, while all EMU member states are facing reducing risks. This causes borrowing and lending costs to converge and makes it easier for them to comply with the new criteria. The ESM, the newly imposed monetary sub‐pillar provides support in the initial phases and remains vigilant after the crisis has been managed.

The member states maintain the growth plan in which unemployment and growth converge across the members. This in turn leads to a decrease in deficits for all member states. The new surveillance mechanisms remain in place and put the intended pressure on governmental reform and balanced budgets. Balancing the budget in the growing and recovering economy is a short‐term goal for member states due to the implementation of the new framework.

Again depending on how much the positive effect is attributed to European or local governments, pro‐European or counter‐European movements emerge in the member states. Based on the pressure and leverage these parties can exert, the long term scenario is selected: Break‐up scenario in case of distrust in the European measures when they would be perceived as superfluous (unlikely) and the scenario with completion of the roadmap and the further integration of the EMU which is deemed to have acted as a proper governing institute(likely).

6.1.3. Scenario 3: EMU break up Despite the new framework, the crisis has continued and there are no political shifts within the major EMU countries. However, in this scenario, there are a plethora of defaults and exits of member states, combined with huge risk and defaults in major banks. The borrowing costs for the entire EMU rise due to the increased risk of default for the entire Eurozone and the lack of a properly functioning support plan. This causes other member states to fall short on their budgetary obligations and also

become at risk for default. The ECB and the ESM reach their intervention limits, but the IMF does not grant financial support as there are clear structural issues within the EMU.

The European growth plan is non‐existent and the member states spiral downward. No further steps are taken in improving instruments nor is there a coordinated return effort. The troubled member states suffer from ongoing recessions which eventually exacerbate the situation further through emigration flows. All member states are now faced with rising unemployment and deficits. member states refuse, under the negative European climate, to give more fiscal authority to the EMU. The new surveillance mechanisms are put out of commission and eventually the structural issues contaminate nation by nation leading to more defaults or voluntary exits.

A closely related scenario to this is that the EMU trims down and faces member exits until a core union forms itself. In this core union, the business cycles are aligned and the core structural problems that the enlarged EMU had are no longer an issue. The core union can then pass on to become a full fiscal union without much effort.

6.1.4. Scenario 4: Full union Following the framework and strong policy shift within the EMU, faith is restored. member states agree to complete the fiscal and political union. The ESM institution is given permission to begin the issuing of Eurobonds and is installed as common debt manager. Borrowing costs, unemployment rates and risk converge downwards while growth converges upwards. The EMU becomes a stronger international player because of this. European growth plans are easily maintained within the new fiscal union and macro‐economic surveillance improves further against Inman’s and the Kopits‐Symanski criteria.

There are numerous researchers who have examined the European Federacy from a legislative point of view (Frey, B [47]; Mancini, G [48]; and McKay, D [49]) and they all address the same concern that a confederate Europe only goes so far in addressing the needs of its inhabitants as a whole and that the attribution of responsibility is better left with the European governing instances than those on the national level. They agree that internally competing governments will sooner or later lead to the

break‐up of the EMU. They also point out a fully federal Europe would be cheaper to maintain. There is however, a pitfall within a heterogeneous European population. It would take a colossal effort to unite the EMU under one banner, as previous attempts by strong historical leaders have already failed.

6.2. Challenges 6.2.1. Growing past the current model There is a growing academic concern [50] that the German model the EU is currently trying to follow is not sustainable on a larger and longer scale. Germany has relied on austerity measures and very high export numbers to achieve their stellar image [51]. This export‐based success, however, is very hard to mimic on a European scale as the measures, per definition, lose their effects the more countries implement them. Relative competitive factors cannot improve if everyone imposes the exact same policy measures. This type of behavior inevitably leads to a so‐called ‘Race‐to‐the‐ bottom’ and the bankruptcy of the EMU. A sustainable long‐term pan‐European model, however, is yet to be worked out. As a solution, Heylen (in one of his lectures on European continuity) opts for a European‐coordinated labor structuring effort to evade the ‘Race‐to‐the‐bottom’ and to make a better Currency Area. This should certainly be possible given the EMU’s lasting commitment to co‐ ordinate structural policies for the greater good of the union. Moravcsik, however, speaks of the current state of the EMU as a “natural plateau” based on the division between the current national policies and the supranational policy. While he does not see an “ever‐closer” European Federal State in the near future, Moravcsik “sees a stable constitutional Europe working in a continuous response to the challenges of an increasingly interdependent world”. [51]

6.2.2. Growing towards an optimal currency area In the same paper where the German model is questioned [50], the move towards a more optimal currency area is suggested by integrating the labor policy on a European level or at least offer some form of coordination. It would appear from research as well as the general media, that the EMU needs a better coordination on labor policies (i.e. explaining wage‐gaps as witnessed in the transport industry). This follows Mundell OCA‐theory closely, as he proposes the world to be divided into parts where there is full mobility of production factors internally and there is a high internal price and wage flexibility [52] (e.g. the United States of America) and strongly suggests, even in 1961, that

Europe, with very little labor mobility due to cultural and language barriers, is going to be hard‐ pressed to succeed as a monetary union. Mundell suggests that when a monetary union is not an optimum currency area, then some of the members will have to bear the weight (high unemployment and low output) which would have been offset by the benefit of having a single currency (lower transaction and hedging costs) and that this would force them to abandon the union. Economists have now agreed on the following criteria to be met to achieve the status of “optimal currency area” [53]:  External: o Common shocks: Exposure to similar sources o Common responses to these shocks o Symmetric shocks: Similar relative importance of shocks o Idiosyncratic shocks should only have small impacts and be quickly dealt with  Internal: o Price and wage flexibility o Mobility of factors of production (e.g. capital and labor) o Degree of economic openness o Financial market integration o Fiscal integration The idea behind these points then is, if a region satisfies these demands it will have similar business cycles, so a common monetary policy is optimal. However, current research on the state of the European Union argues that, while the EU was definitely not an OCA ex ante, it is on its way to becoming one ex post [54]. Increased capital mobility and increasing labor mobility help the EMU evolve to an OCA. There are around 26 studies regarding this ex‐post OCA supervised by Andrew K. Rose and they come to the conclusion that the EMU has raised trade inside the Eurozone by 8 to 23% [16] and the monetary union of large rich countries has increased intra‐zone trade, synchronized business cycles and, as such, lessened the need for desynchronized national monetary policies. In addition to this, there is also a major criticism towards the usefulness of current “OCA‐tests”, as most of these are based on comparing the EMU‐case to the US‐case and thus heavily relies on [55]:  The US actually coming close to being an OCA  The implication that satisfying OCA‐criteria is sufficient for the viability of a monetary union

On the first point, there is empirical evidence to suggest that within the US, there are unsynchronized business cycles, yet the US is a successful monetary union. The disapproving of the first point then also undermines the second point, as there must also be other factors needed for a viable monetary union.

6.2.3. Converging the members An ever‐returning argument against the SGP is the simple one of asymmetric shocks that cause different issues in different countries. Applying the IS‐LM model to the asymmetric shocks, we can deduce that the only way for a nation within the EMU to react to an asymmetric shock is to alter the government spending, which is in itself heavily criticized by the ‘Austerity’‐movement for its crowding out effects. In light of the SGP, this puts an extra constraint on the only stabilizing mechanism a nation has to combat this problem. Failure to resolve these asymmetric shocks leads to a debt spiral as now witnessed in Greece. Here, the Euro Plus pact comes into play. Austerity measures are taken by governments to reduce their budget deficits during adverse economic conditions. However, there is currently a lack of distinction between ‘smart’ and ‘blunt’ austerity. The measures proposed in the Euro Plus pact are mostly ‘smart’ austerity, as the guidelines incentivize governments to properly handle their current budget instead of unnecessarily trimming it down. This is probably also where one of the main ‘solutions’ to the IS‐LM convergence issues lie given the current SGP framework. A ‘smarter’ government spending could actually incentivize the economy for the same total government spending as government spends about double what economists deem optimal (Niskanen, 1968).

To better understand the difference between what was earlier called ‘smart’ and ‘blunt’ austerity, a reference is made to ‘the golden rule of financing’ which has recently found renewed support after the initial spike of interest from 2001‐2003 (Kopits, 2001; Blanchard and Giavazzi, 2003 and European Commision, 2002). The ‘golden rule’ is the commitment of governments only using borrowed money to invest in future generations while abstaining from doing this to run a balanced budget. This rule stems from general macro economics. An increase in government borrowing ceteris paribus raises the real interest rate, thus crowding out public investments because of the need for a higher return in the public sector. So unless the government matches the rate of return of their projects to that of private investments, deficits increase and economic growth is hampered.

Linking this back to the proposed difference between ‘blunt’ and ‘smart’ austerity, one could already argue that if the government does spend money to incentivize the economy, it need only look at current return rates on private investments or act like any other enterprise: seek sustainable growth.

6.2.4. Political power‐shifts New reforming governments have made their appearance across Europe. Italy, Spain, Greece and Ireland all have had major political shifts within their parliaments. These governments are bent on making the euro work, but they face tough choices and a tough climate. Opposition politicians in these countries call for leaving the Eurozone rather than enduring the austerity measures put on them by EMU politicians.

Meanwhile, small independent research, high ranking economists and some officials have stated that Germany could survive in a smaller northern Eurozone or with its own currency. As stated during our scenario analysis, much will depend on the decisions taken in national politics in reaction to the new governance framework that was imposed by the EMU.

Preserving the euro in its current form will entirely depend on creating the sustainable compromises on which countries will support the burden of getting Europe’s economies to converge. Most members turn to Germany for this. The German stance is that the existence of the euro relies on countries making tough reforms and cutting public spending. This is partially correct but it then needs to be followed by the stronger EMU countries committing to helping the diverging members. as they have done in the ESM. It would have been overzealous for stronger European countries to financially support the deficit countries without those countries fully committing to a balanced budget. That is why these countries have insisted on the ratification of the TSCG as it requires governments to incorporate balanced budget provisions into their national legislations. Yet this still leaves unresolved two crucial questions about how to distribute the costs of Europe’s adjustment, both within countries and among them.

6.2.5. ‘Lean’ government The lean approach has been very successful in the private‐sector during the last decade. However, public institutions have only now started model projects and those are mostly located in the US. Some of the challenges we have discussed earlier, could however be solved with the implementation of a more ‘lean’ government. Faster decision times, lower costs and reinforcing quality by implementing measures that are focused on sustainable and continuous improvement seem like a good fit for governments, especially for large and overly complex multi‐national structures like the EMU. Given the goals set within the Euro Plus pact, it would seem that the ‘lean’ concept would indeed be an answer to the most pressing issues.

The use of lean optimization has transformed operations and decision structures within successful organizations in the private sector and model projects show they can do the same for public services. According to a BCG study on lean model projects within the public sector ‘the main challenge would be engaging employees be critically important for achieving results that are acceptable to the many different stakeholders.’ [56] This study further proposes that the time would be ripe for governments to incorporate lean principles and that the current state of governments and the global economic climate would make ‘lean government’ a winner. They also address skeptics and say that government is not all that different from companies. They address 3 main differences between the private sector and the public sector, namely ‘Lack of competition’, ‘Perverse incentives’ and the ‘Equity principle’ and conclude that these are not insurmountable.

Given the scenario analysis and conclusions from the previous chapters, we can only agree that the bigger challenges faced by governments that have shown merit are lowering their costs, increasing their flexibility and agility and achieving sustainable, continuous growth.

7. Conclusion

7.1. Analytical Summary First we looked at commonly used performance indicators of the Eurozone to assess how it fared in absolute terms and relative to the world. From these indicators it was made clear that the EMU was successful in promoting growth and stability, reducing volatility and winning confidence of investors worldwide. From the compiled data, a case is made for the EMU’s relative success during the initial shock of the recently experienced financial crisis. However, the story did not end there and the EMU fell into a sovereign debt crisis that spiraled out of control.

To assess the further performance of the EMU, we looked at the supporting pillars (namely the ECB and the SGP) and appraised their performance during the crisis by looking at criticisms and performance. Regarding the ECB, the point was made that the exceptional measures taken were effective in combating the crisis [22] and that the commitment of the ECB remains unchanged after the crisis. There are however, new facilities in place (EFSF and ESM) that were installed to safeguard the sovereign bond markets and private financial institutions. We concluded that the ECB has acted with good flexibility and conviction during the crisis and that it is a sound pillar for the EMU to be based upon.

Afterwards, the history of the SGP was given to ensure that the reader was acquainted with both the spirit and the letter of the pact. It became obvious that while the spirit of the pact was made in good faith, there were numerous criticism on the actual implementation. We then looked at the changes made during the initial reforms in 2005 and concluded that those changes were more of a trade‐off on the same level of efficiency than a proper improvement. Afterwards, we looked at the new governance framework the EMU proposed in 2012: the six‐pack, the Euro Plus pact and the TSCG and tested them to the same criteria used for the original SGP and the reformed SGP. We found that this time around, criticisms were addressed without compromising other criteria.

We then moved on to listing possible scenarios for the Eurozone and found that, while there are plenty of variables to analyze, only two scenarios are actually relevant in the very long term. Either the EMU does not succeed to combat the current crisis and it fails, or it succeeds and further pursues

a full fiscal union. There is a middle‐ground scenario where Europe ‘muddles through the current crisis, but still ends in one of the two mentioned scenarios in the long run.

Concluding the thesis, there was a listing of some challenges and unanswered criticisms for the EMU. From these we concluded that the new governance framework also does well in addressing non‐ explicit criteria and provides tangible measures for the EMU countries to implement and improve convergence without spiraling further into a crisis. The main takeaways from this chapter were the need for labor market coordination on the European level, the continued convergence of the EMU to an OCA and the need for a continuous effort for reducing decision times and increasing intelligent measures within the EMU.

7.2. Concluding statement At the end of this dissertation, I hope that the reader has a proper vision on the newly imposed governance framework, the reasoning behind it, which issues it solves and what questions or issues still remain. The reader should also be aware of the implicit structural difficulties that lie within the heterogonous cluster of countries that is the EMU and the external forces that also affect this union.

Directions for further research would be assessing the impact the new framework has had ex‐post as the timing of this dissertation did not allow me to make an econometric analysis of the impact of the new framework on employment and convergence, as these are the two issues which the original SGP failed to resolve. However, employment data can be analyzed as per the methodology in research by Castroand Soukiazis(2003) [57] and the methodology for analyzing the convergence of business cycles is given in research by Massman and Mitchell(2003) [58].

8. Dutch Summary/Nederlandse samenvatting

Vooreerst keken wij naar in de praktijk vaak gebruikte indicatoren voor de prestaties van de Eurozone om na te gaan hoe deze in absolute termen met de crisis om ging en ook in vergelijking met andere werelddelen. Van deze indicatoren leidden wij af dat de EMU succesvol was in het verwezenlijken van groei en stabiliteit wereldwijd. Als we naar het volledige plaatje kijken, merken we op dat de EMU relatief gezien beter door de initiële schok van de crisis kwam dan andere landen, terwijl de naschok, zijnde de schuldencrisis, een veel grote impact had op de EMU.

Om de verdere prestaties van de EMU te beoordelen, keken we naar de ondersteunende pijlers van het EMU beleid, namelijk de ECB en het SGP. We beoordeelden de performantie van deze pijlers door te kijken naar vaakvernoemde kritieken en de reactie erop. Met betrekking to de ECB kunnen we besluiten dat de exceptionele maatregelen die deze instelling nam tijdens de crisis effectief waren en dat de ECB op zichzelf onveranderd blijft na de crisis. De hoofddoelstelling is nog steeds ongewijzigd en het onafhankelijke orgaan is dit gebeleven. Er zijn wel nieuwe sub‐pijlers opgericht om eventuele nieuwe schokken op te vangen. Het European Systemic Risk board en het European Stability Mechanism moeten de monetaire en financiële continuïteit van de Eurozone waarborgen. Vanuit deze maatregelen konden we afleiden dat de ECB een goeie ‘vader’ is voor de EMU en gehandeld heeft met het nodige inzicht en flexibiliteit.

Hierna gingen wij over naar de beoordeling van de tweede pijler(SGP). Het werd meteen duidelijk dat de geest en de letter van het pact niet bepaald overeenkwamen en het pact dus al van bij de geboorte interne spanningen had. We konden afleiden uit de eerste hervormingsronde in 2005 dat het pact verscheidene trade‐offs had gemaakt maar niet noodzakelijker een beter pact was geworden. Vervolgens keken we naar de voorgestelde hervormingen van 2012 en zagen hierin wel een uniforme verbetering van het pact.

Uit de scenario‐analyse ten slotte konden we afleiden dat er maar twee mogelijke scenarios zijn op lange termijn voor de eurozone. Een quote van Attlee maakte dit duidelijk: “Federate or Die.” Hierbij werd wel niet vermeld dat de federatie die voortkwam uit de EMU volledig identiek moest zijn aan de huidige. Er werd ook nog een korte oplijsting van uitdagingen en mogelijke oplossingen gegeven. 64

References

[1] ECB, "The future of the international monetary system: Lessons from 1971 for Europe and the world in light of past and present experience," 2011 may 11. [Online]. Available: http://www.ecb.int/press/key/date/2011/html/sp110511.en.html. [Accessed 2012 september 21].

[2] ECB, "Europe: The first ten years," [Online]. [Accessed 7 20 2012].

[3] New York Times, "No Fireworks for Euro as It Reaches the 10‐Year Mark," Kulish, Nicolas, 31 December 2011.

[4] European commision, "PUBLIC OPINION IN THE EUROPEAN UNION," TNS Opinion & Social, Spring 2012.

[5] D. Prusvic, "European Fiscal Policy Rules: First 15 Years," Ministry of Finance of the Czech Republic, Letenská, 2010.

[6] European Commision, "The Euro," [Online]. Available: http://ec.europa.eu/economy_finance/euro/. [Accessed 16 July 2012].

[7] J. B. Taylor, "THE FINANCIAL CRISIS AND THE POLICY RESPONSES: AN EMPIRICAL ANALYSIS OF WHAT WENT WRONG," National Bureau of Economic Research, Cambridge, 2009.

[8] J. Ackermann, "The subprime crisis and its consequences," ELSEVIER, Frankfurt, 2008.

[9] M. Arghyrou and A. Kontonikas, "the EMU sovereign‐debt crisis: Fundamentals, expectations and contagion," European Commission, Brussels, 2011.

[10] EuroSTAT, "Statistical Data Warehouse," [Online]. Available: http://sdw.ecb.europa.eu/. [Accessed 26 11 2012].

[11] IMF, "Currency Composition of Official Foreign Exchange Reserves(COFER)," [Online]. Available: http://www.imf.org/external/np/sta/cofer/eng/cofer.pdf. [Accessed 25 March 2013].

[12] M. Chinn and J. Frankel, "WILL THE EURO EVENTUALLY SURPASS THE DOLLAR AS LEADING INTERNATIONAL RESERVE CURRENCY," National Bureau of Economic Research, Cambridge, 2005.

[13] O. Blanchard, "Explaining European Unemployment," National Bureau of Economic Research, 2004.

[14] OECD, "OECD Statistical Warehouse," [Online]. [Accessed 28 April 2013].

[15] M. Hoffman and S. Gerlach, "The impact of the euro on international stability and volatility," march 2008. [Online]. Available: http://ec.europa.eu/economy_finance/publications/publication12265_en.pdf. [Accessed 15 January 2013].

[16] A. Rose, "Is Emu becoming an Optimum Currency Area? The evidence on trade and business Cycle synchronization.," [Online]. Available: http://faculty.haas.berkeley.edu/Arose/EMUmetaECB.pdf. [Accessed 2012 January 30].

[17] ECB, Monetary Policy Transmission in the Euro Area, A decade after the introduction of the Euro, Frankfurt am Main: ECB, 2010.

[18] C. Dumas, "The Netherlands & the Euro ‐ The full report," Lombard Street Research, London, 2012.

[19] ECB, "General," [Online]. Available: http://www.ecb.int/. [Accessed April 2013].

[20] ECB, "ECB:Principles," [Online]. Available: http://www.ecb.int/mopo/strategy/princ/html/index.en.html. [Accessed 18 7 2012].

[21] ECB, "Transmission mechanism of monetary policy," [Online]. Available: http://www.ecb.europa.eu/mopo/intro/shared/img/chart_3_1.jpg. [Accessed 20 March 2013].

[22] P. Abassi and T. Linzert, "The effectiveness of monetary policy in steering money market rates during the financial crisis," Deutsche Bundesbank, Frankfurt am Main, 2012.

[23] NBB, "What can we and can't we infer from the recourse to the deposit facility?," June 2012. [Online]. [Accessed August 2012].

[24] General Secretariat of the Council, EUROPEAN COUNCIL 16‐17 DECEMBER 201 CONCLUSIONS, Brussels: European Council.

[25] EFSF, "About EFSF," EFSF, [Online]. Available: http://www.efsf.europa.eu/about/index.htm. [Accessed 14 February 2013].

[26] ESM, FAQ, 2012.

[27] C. Blot and J. Labondance, "Business lending rate pass‐through in the Eurozone: monetary policy transmission before and after the crisis," Economics Bulletin, vol. 33, no. 2, pp. 973‐985, 2013.

[28] ESRB, "Mission, objectives and tasks," ESRB, [Online]. Available:

http://www.esrb.europa.eu/about/tasks/html/index.en.html. [Accessed 15 February 2013].

[29] G. Langenus, "Het stabiliteits‐ en groeipact: Een bewogen geschiedenis," NBB, 2004. [Online]. Available: http://www.nbb.be/doc/ts/publications/economicreview/2005/ecotijdii2005n_h4.pdf.

[30] European Council, "Stability and Growth Pact," [Online]. Available: http://ec.europa.eu/economy_finance/economic_governance/sgp/index_en.htm. [Accessed 5 March 2012].

[31] H. Oksanen, "Setting Medium‐Term Objectives for Government Budgets under the EU Stability and Growth Pact," 2009. [Online]. Available: http://www.middlebury.edu/media/view/206671/original/OksanenPaper.pdf.

[32] European Council, "EC: Press Releases," [Online]. Available: http://www.european‐ council.europa.eu/home‐page.aspx.

[33] P. De Grauwe, "The SGP in need of reform," KU Leuven, Leuven, 2003.

[34] Civitas, "Stability and Growth Pact," 12 April 2012. [Online]. Available: http://www.civitas.org.uk/eufacts/FSECON/EC10.htm. [Accessed 18 December 2012].

[35] L. Shuknecht, "Stability and Growth Pact: issues and lessons from political economy," International Economics and Economic Policy, 2005.

[36] NBB, "Nieuwe ontwikkelingen in de economische governance van de Europese Unie," NBB, Brussels, 2012.

[37] G. Kopits and S. Symansky, "Fiscal Policy Rules," IMF, Washington, 1998.

[38] R. Inman, "Balanced Budget Rules and Public Deficits: Evidence from the US," National bureau of economic research, Cambridge, 1996.

[39] M. Buti, S. Eijffinger and D. Franco, "Revisiting the SGP: grand design or internal adjustment," European Commission, Brussels, 2003.

[40] R. Beetsma and A. Bovenberg, "Monetary Union without fiscal coordination may discipline policymakers," European Commision, 1998.

[41] European Commission, "COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL AND TO THE EUROGROUP," EC, Brussels, 2013.

[42] European Council, "Conclusions from the European Council on 24/25th march 2011," European

Council, Brussels, 2011.

[43] S. &. d. H. J. Eijffinger, "European Monetary and Fiscal Policy," Oxford University Press, 2000.

[44] European Council, "Conclusions for a roadmap of the EMU," Brussels, 2012.

[45] L. Schuknecht, P. Moutot, P. Rother and S. J, "The Stabililty and Growth Pact: Crisis and Reform," ECB, Frankfurt am Main, 2011.

[46] M. J. Rodrigues, "Mapping future scenarios for the Eurozone," Friedrich Ebert Stiftung, Berlin, 2012.

[47] B. Frey, "A directly democratic and federal Europe.," Constitutional Political Economy, pp. 267‐279, 7 April 1996.

[48] G. Mancini, "Europe: the Case for statehood," European Law Journal, pp. 29‐42, 4 January 1998.

[49] D. McKay, "Designing Europe: Comparative lessons from the federal experiance," OUP, 2011.

[50] F. Heylen, "Is Duitsland een voorbeeld voor Europa?," Tijdschrift voor Arbeidsvraagstukken, pp. 224‐ 239, 2 2012.

[51] A. Moravcsik, "Europe After the Crisis ‐ How to sustain a Common Currency," Foreign Affairs, 2012.

[52] R. Mundell, "A Theory of Optimum Currency Areas," The American Economic Review, pp. 657‐665, September 1961.

[53] F. Mongelli, "New Views on the Optimum Currency Area Theory: What is EMU telling us?," ECB, Frankfurt am Main, 2002.

[54] M. Fürrutter, "The Eurozone:an OCA?," February 2012. [Online]. Available: http://igeuropeanresearch.files.wordpress.com/2012/02/paper_ifier_martina_fuerrutter_feb2012.pdf. [Accessed 12 12 2012].

[55] M. Kouparitsas, "Is the United States an optimum currency area?," Federal Reserve Bank of Chicago, Chicago, 2001.

[56] A. Audier, U. Sanders and A. Winslade, "More than lean, raising the quality of public services," BCG, 2010.

[57] V. Castro and E. Soukiazis, "The Impact of the Maastricht Criteria and the Stability Pact on Growth and Unemployment in Europe," Universidade de Coimbra, 2003.

[58] M. Massmann and J. Mitchell, "Reconsidering the evidence: Are Eurozone business cycles converging?," Center for European Integration Studies, Bonn, 2003.

[59] NBB, "Report of International Environment," [Online]. Available: http://www.nbb.be/doc/ts/Publications/NBBreport/2010/NL/T1/verslag2010_T1_H1.pdf. [Accessed 23 10 2012].

[60] European Council, "The European Council agrees on a Roadmap for the completion of Economic and Monetary Union," [Online]. Available: http://www.european‐council.europa.eu/home‐ page/highlights/the‐european‐council‐agrees‐on‐a‐roadmap‐for‐the‐completion‐of‐economic‐and‐ monetary‐union?lang=en. [Accessed 15 12 2012].

[61] V. R. R. a. K. S. R. Carmen M. Reinhart, "Public Debt Overhangs: Advanced Economy Episodes since 1800," Journal of economic perspectives, vol. 26, no. 3, pp. 69‐86, 2012.