THE EUROZONE CRISIS: WAS THE EURO ITSELF A PRIMARY CAUSE? Compiled by Diarmuid O’Flynn #BallyheaSaysKnow i 1 Table of Contents 1 CHAPTER 1. INTRODUCTION .................................................................................................... 1 1.1 THE EUROZONE CRISIS – WAS THE EURO ITSELF A PRIMARY CAUSE? ............................. 1 1.1.1 CENTRE FOR EUROPEAN POLICY (cep) ...................................................................... 1 1.1.2 WALL STREET ............................................................................................................. 1 1.1.3 NEOLIBERALISM ........................................................................................................ 2 1.1.4 RATINGS AGENCIES, FINANCIAL MARKETS ............................................................... 2 2 CHAPTER 2. EXECUTIVE SUMMARY ......................................................................................... 4 2.1 THE EURO – WOLF IN SHEEP’S CLOTHING ........................................................................ 4 2.2 EXPERT OPINION ............................................................................................................... 4 2.3 DESIGN .............................................................................................................................. 4 2.4 EU RESPONSE TO THE CRISIS ............................................................................................ 5 2.5 BALLYHEA SAYS KNOW ..................................................................................................... 5 2.6 CONCLUSION ..................................................................................................................... 5 3 CHAPTER 3. EURO DESIGN ....................................................................................................... 7 3.1 PRELUDE ............................................................................................................................ 7 3.2 GALLOP THROUGH HISTORY ............................................................................................. 7 3.2.1 MONNET PLAN .......................................................................................................... 8 3.2.1.1 THE USA CHIMES IN .............................................................................................. 8 3.2.1.2 THE UNITED STATES OF EUROPE .......................................................................... 8 3.2.1.3 EUROPEAN MONETARY SYSTEM ........................................................................... 8 3.2.2 SCHUMAN DECLARATION – EUROPEAN COAL & STEEL COMMUNITY ..................... 9 3.2.3 TREATY OF ROME ...................................................................................................... 9 3.2.4 BRETTON WOODS AGREEMENT ............................................................................. 10 3.2.5 THE WERNER REPORT ............................................................................................. 10 3.2.6 EMS and ERM .......................................................................................................... 10 3.2.7 BLACK WEDNESDAY – THE EMS UNDERMINED ...................................................... 11 3.2.8 THE DELORS REPORT ............................................................................................... 11 3.2.9 THE ROTTEN HEART OF EUROPE ............................................................................. 12 4 CHAPTER 4. FLAWED CONCEPT → FLAWED CURRENCY ...................................................... 14 4.1 FLAWED CONCEPT .......................................................................................................... 14 4.1.1 OPTIMAL COMMON CURRENCY AREA .................................................................... 14 4.1.2 SUPPORTING ARGUMENTS AGAINST THE EURO AS AN OPTIMAL CURRENCY AREA 15 4.1.2.1 PAUL DE GRAUWE .............................................................................................. 15 ii 4.1.2.2 INTERECONOMICS – German-based ‘platform for economic and social policy debates in Europe’ .............................................................................................................. 15 4.1.2.3 PETER WAHL – THE EUROPEAN ILLUSION (4) – Chapter Titled ‘Alternatives To The Euro’: ........................................................................................................................... 16 4.1.2.4 KARL WHELAN – INTRODUCING ASYMMETRIC SHOCKS .................................... 16 4.2 FLAWED CURRENCY ........................................................................................................ 17 4.2.1 DE GRAUWE – NO LENDER OF LAST RESORT ......................................................... 17 4.2.2 ASHOKA MODY – NO FISCAL TRANSFERS .............................................................. 18 4.2.3 JOSEPH STIGLITZ – euro flawed at birth ................................................................. 18 4.3 FLAWED FROM CONCEPT TO COLLAPSE ........................................................................ 19 5 CHAPTER 5. CRISIS FORETOLD ............................................................................................... 21 5.1 WYNNE GODLEY – 1992 ................................................................................................. 21 5.2 MILTON FRIEDMAN – 1997 ............................................................................................ 21 5.3 MARTIN FELDSTEIN – 1997 ............................................................................................. 22 5.4 DE GRAUWE 1998 ........................................................................................................... 23 5.5 BERNARD CONNOLLY - 1995 .......................................................................................... 24 5.6 MARTIN FELDSTEIN AGAIN - 1997 .................................................................................. 25 5.7 BERNARD CONNOLLY AGAIN – AFTER THE LAUNCH BUT LONG BEFORE THE BUST, AN ARTICLE IN 2002 (7) WARNING OF THE SUBSEQUENT POWER-GRAB BY THE EU: ...................... 26 5.8 NORMAN TEBBITT .......................................................................................................... 26 6 CHAPTER 6. A CRISIS UNFOLDS ............................................................................................. 28 6.1 ANDY STOREY – CHRONICLE OF A CRISIS FORETOLD ..................................................... 28 6.2 NEOLIBERALISM IN PRACTICE ......................................................................................... 30 6.2.1 HARD LAW V SOFT LAW ......................................................................................... 30 7 CHAPTER 7. FUELLING THE FLAMES – EU RESPONSE ............................................................ 32 7.1 MONETARY POLICY ......................................................................................................... 32 7.2 FISCAL POLICY ................................................................................................................. 32 7.3 ASHOKA MODY - EUROTRAGEDY ................................................................................... 33 7.4 WEAPONISING MONETARY POLICY ................................................................................ 33 7.4.1 PAUL DE GRAUWE – ‘Design Failures in the Eurozone: Can they be fixed?’ .......... 34 7.4.1.1 Chapter 4 of this paper is headed ‘Misdiagnosis of the sovereign debt crisis’. 34 7.4.1.2 Chapter 5 – ‘The ECB as a lender of last resort in the government’. ................ 35 7.4.1.3 Chapter 6 brings us to the crux of the problem – the failure by the ECB and the Commission to see the bigger picture. ............................................................................... 35 7.5 INTERNAL DEVALUATION – HITTING LABOUR................................................................ 35 7.5.1 ERIC TOUSSANT – The Euro Straitjacket ................................................................. 36 7.6 CHORUS ON EU FAILURE ................................................................................................ 37 iii 7.6.1 ASHAKA MODY ........................................................................................................ 37 7.6.2 PATRICK HONAHAN ................................................................................................. 37 7.6.3 BEN CHU .................................................................................................................. 38 8 CHAPTER 8. EU RESPONSE –THE COMMISSION AND THE PARLIAMENT .............................. 39 8.1 EUROPEAN COMMISSION ............................................................................................... 39 8.1.1 JOSE MANUEL BARROSO ......................................................................................... 39 8.1.1.1 MICHAEL MCGRATH RESPONDS TO BARROSO ................................................... 40 8.1.1.2 GERRY ADAMS RESPONDS TO BARROSO ............................................................ 40 8.1.1.3 PASCHAL DONOHUE............................................................................................ 41 8.2 EUROPEAN PARLIAMENT ................................................................................................ 41 8.2.1 ECON COMMITTEE .................................................................................................. 41 9 CHAPTER 9. EU RESPONSE – THE COUNCIL (Eurogroup) ......................................................