Can the Euro Survive after the European Crisis?

Abstract

Abstract:The 'great recession' has highlighted a range of problems with the 'euro project', but these problems and difficulties are related to some fundamental weaknesses of the euro. The convergence criteria established by the Maastricht Treaty focused on nominal rather than real variables, failed to relate to issues such as current account positions. There are wellknown difficulties of macroeconomic policies under the Stability and Growth Pact including its deflationary nature and the 'one size fits all problem' of imposing common deficit requirements on all countries. Problems with the EMU monetary policy are also discussed before the economic performance of the euro area countries is briefly reviewed with attention paid to the differential inflation rates. Also accounted for are the changes in competitiveness as well as the current account deficits, and their implications for the future of economic performance within the euro area, and the euro itself. The nature of the reforms and their impact on the operations of the euro area are examined. The political limits (including those arising from the nature of the Treaty of Lisbon) and the ideological constraints (associated with the neo-liberal agenda) on serious reforms are discussed from which the general conclusion is that the needed reforms are extremely urgent, but unfortunately they will not be carried through. This discussion also includes consideration of the possible role for a substantial EMU-level fiscal policy and some other aspects of political integration. It is concluded that the deep-seated problems are unlikely to be resolved, casting a dark shadow over the future of the euro.

The European Union in Crisis

“…tariffs, quotas and embargoes) are also excluded policy options; whereby trade policies are negotiated on behalf of all EU members, thus individual nations are unable to apply direct controls against the RoW (Lea 2010). Additionally, longer-term policy options that emphasise BoP (Williamson and Milner 1991); since eurozone members cannot control their narrow money supply, together with the prohibition of capital controls, then they possess no control over credit creation (Arestis and Sawyer 2012). Therefore, members must either control their growth rate to prevent inflation, or face losing international competitiveness (McCombie and Thirlwall 1994).…”

“…For example, in current account surplus countries, such as Germany, the policy prescription would be expansionary fiscal policy to stimulate the economy and increase imports to resolve the imbalance (Jirankova and Hnat 2012). However, such policies may conflict with internal balance; for example, Germany has typically operated at full employment output, such that any expansionary fiscal policy to increase absorption would create inflation (Arestis and Sawyer 2012). Furthermore, since fiscal policy is limited due to the SGP, the burden of adjustment is asymmetrically imposed on deficit countries (Ahearne et al 2007).…”

Monetary Union Viability: A Criterion Proposal

“…Arestis and Sawyer () outline the economic policies of the EMU in their critical review of the EMU framework.…”

“…Arestis and Sawyer (2012) outline the economic policies of the EMU in their critical review of the EMU framework. 2 SeeMongelli (2002) for a review of the literature on the Theory of Optimal Currency Areas.…”

Alternative Economic Policies for the Economic and Monetary Union

“…Such claims were rather blown out of the water by the experiences of rising unemployment since the financial crisis to reach a level of 11.8 per cent at the end of 2012, the highest recorded during the time of the euro The picture for the euro at the beginning of 2013 does not look as rosy!. We have elsewhere (for example, Arestis and Sawyer, 2012) argued that the economic performance of the Eurozone in general was somewhat lack lustre during the 2000s (prior to the financial crisis) with growth (particularly in the larger countries) low relative to historic experience and other countries, though unemployment was tending to decline until the financial crisis. Inflation tended to be above the target of 2 per cent (albeit by a small margin), but with continuing differences between countries which had consequences for competitiveness of those with relatively high inflation and for real interest rates.…”