1. The euro as solution and problem THE POLITICS OF EUROPEAN MONETARY INTEGRATION ZOLTÁN ÁDÁM, KOPINT-TÁRKI INSTITUTE FOR ECONOMIC RESEARCH EMAIL: ZOLTAN.ADAM@KOPINT-TARKI.HU

2. 1. The euro as the top achievement of European integration Decided about in 1995 in Madrid, based on the 1992 Maastricht Treaty Officially introduced in 1999 Coins and notes introduced in 2002

3. What is it good for? The euro is the official currency of the eurozone, the world’s second largest economy, consisting of 17 indiviudal countries and 334 million people The world’s second most important reserve currency Issued by the European Central Bank in Frankfurt that is responsible for monetary policies in the eurozone

4. Why was it created? Economic theory behind: The theory of optimum currency area (Robert Mundell, 1961) ◦Labor mobility ◦Capital mobility; price and wage flexibility across the area ◦Fiscal transfer mechanism (risk sharing) ◦Similar business cycles

5. Political goals behind ◦Strengthening political integration ◦Fostering solidarity among member states ◦Promotion of economic development across the area ◦Alignment of business cycles

6. Why could it be realized? Creditor and debtor countries were both interested (Potential) current account imbalances did not seem to be a problem Differences in competitiveness did not seem to be a problem either (capital and labor mobility would eliminate those differences on the long run) According to the Stability and Growth Pact, no fiscal bail out was possible (no moral hazard was assumed with respect to divergent fiscal policies)

7. 2. All this collapses in 2008-09 The shock proves asymmetric between the core and the periphery Capital markets differentiate between the two The no bail out close could not be maintained Differences in competitiveness, demonstrated by current account imbalances prove problematic

9. 3. What’s now? Shall the core finance the periphery? Shall the periphery stay in the eurozone? Economic and political costs of maintaining the eurozone or its (partial) disintegration

10. 4. The German case The quintessential creditor country: Germany ◦Interested in maintaining the eurozone (exports to the periphery, enjoys the relative weakness of the euro) ◦Controls vast financial resources that can be used to finance the periphery ◦But the public is opposed to the idea of bailing out peripheral countries

11. German elections 2013

12. Thank you Zoltán Ádám, Kopint-Tárki Institute for Economic Research zoltan.adam@kopint-tarki.hu