The Euro: Its Origins, Development and Prospects

256 Pages·2008·0.77 MB·English

by  Chris Mulhearn

The Euro
Dedicated to the memory of two old Europeans:
L/pl Jack Mulhearn, 5th Welch Regiment
and
Philip Maurice Vane, 48th Division Signals
And welcome to a new one:
Layla Moreno Mulhearn
The Euro
Its Origins, Development and Prospects
Chris Mulhearn
Reader in Economics, Liverpool Business School,
Liverpool John Moores University, UK
and
Howard R. Vane
Professor of Economics, Liverpool Business School,
Liverpool John Moores University, UK
Edward Elgar
Cheltenham, UK • Northampton, MA, USA
© Chris Mulhearn and Howard R. Vane 2008
All rights reserved. No part of this publication may be reproduced, stored in
a retrieval system or transmitted in any form or by any means, electronic,
mechanical or photocopying, recording, or otherwise without the prior
permission of the publisher.
Published by
Edward Elgar Publishing Limited
Glensanda House
Montpellier Parade
Cheltenham
Glos GL50 1UA
UK
Edward Elgar Publishing, Inc.
William Pratt House
9 Dewey Court
Northampton
Massachusetts 01060
USA
Acatalogue record for this book
is available from the British Library
Library of Congress Control Number: 2008927694
ISBN 978 1 84720 051 8 (cased)
Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall
Contents
List of figures vii
List of tables viii
List of abbreviations and acronyms ix
Preface x
Acknowledgements xii
1 The euro and the origins of European integration 1
1.1 Introduction 1
1.2 The Second World War and European integration 3
1.3 The Schuman Declaration 5
1.4 Early monetary cooperation in Europe 8
1.5 Integration stalled and revived in the 1950s 10
Interview with Nick Crafts 13
2 Before the euro: the first steps in the process of
monetary integration 27
2.1 Introduction 27
2.2 The Barre Memorandum 27
2.3 The Werner Report 32
2.4 Werner abandoned 34
2.5 The ERM: reviving monetary cooperation in Europe 36
Interview with Paul De Grauwe 45
3 The economics of the euro 54
3.1 The transition to European economic and
monetary union 54
3.2 Economic benefits of adopting a common currency 62
3.3 Economic costs of adopting a common currency 65
3.4 Comparing the benefits and costs of adopting a
common currency 68
3.5 Is Europe an optimum currency area? 71
Interview with Niels Thygesen 73
4 The euro’s architecture 91
4.1 Monetary policy in the euro area 91
4.2 Fiscal policy in the euro area 99
Interview with Charles Wyplosz 108
v
vi The euro
5 Euro-area enlargement: Denmark, Sweden and the
United Kingdom 120
5.1 Introduction 120
5.2 Denmark 121
5.3 Sweden 124
5.4 United Kingdom 127
5.5 Concluding remarks 130
Interviews with Willem Buiter and 133
Patrick Minford 152
6 Euro-area enlargement and the accession economies 169
6.1 Introduction 169
6.2 Economic catch-up, inflation and the accession
economies 173
6.3 Real convergence and the accession economies 184
6.4 Concluding remarks 187
Interview with Andrzej Wojtyna 190
7 Reflections on the future of the euro 198
7.1 Introduction 198
7.2 The euro in its first decade 198
7.3 Possible scenarios for the euro area 208
7.4 Concluding remarks 220
Bibliography 223
Time line of key events in the history of European economic,
monetaryand political integration 229
Name index 237
Subject index 239
Figures
1.1 The euro area 2
2.1 Inflation for the Six, plus Denmark, Ireland and the
UK, 1970–79 35
2.2 ERM members’ inflation differences with Germany,
1979–90 38
2.3 Real effective exchange rates, selected economies,
1975–89 39
4.1 Economic growth in the euro area 105
4.2 Unemployment in the euro area 105
6.1 EU27 and candidate countries 170
6.2 GDPper capita in PPS (EU15, CE10, EU27) 174
6.3 EU15 and CE10 real GDPgrowth rates, 1999–2008 174
6.4 EU15 and CE10 price inflation, 1998–2006 176
6.5 GDPper capita in PPS (Cyprus, Malta, Slovenia,
CE10 excluding Slovenia) 176
6.6 Euro-area GDPshares, 2006 (including Lithuania) 180
6.7 Inflation reference rates 181
6.8 Accession economies’ share of trade with EU27, 2005 186
7.1 Nominal exchange rate: US dollars per euro,
1999–2007 200
7.2 EU15 share of trade with EU25, 2005 201
7.3 Inflation in the euro area, 1999–2007 203
7.4 Unemployment in the euro area, US and UK,
1999–2007 205
7.5 ECB main interest rate, 1999–2007 206
7.6 Real GDPgrowth in France, 1999–2007 206
7.7 Real GDPgrowth in the euro area, 1999–2006 209
7.8 Real effective exchange rates 213
7.9 Real GDPgrowth, selected economies, 1999–2006 213
7.10 Net migration/population, 1985–2005 214
7.11 EU27 GDPshares, 2006 217
vii
Tables
1.1 Key characteristics of the euro area, 2005 2
3.1 Share of inter-regional trade flows in each region’s
total merchandise exports, 2005 70
5.1 Economic growth in Denmark, Sweden, the United
Kingdom and the euro area 126
5.2 Unemployment in Denmark, Sweden, the United
Kingdom and the euro area 127
5.3 Inflation in Denmark, Sweden, the United Kingdom
and the euro area 127
6.1 The accession countries and the euro area 171
6.2 The accession countries and the euro area: inflation,
interest rate and debt and deficit criteria 183
6.3 Selected euro-area economies’ deficit and debt
positions, 2005 184
6.4 Costs of euro adoption cited by selected Eastern
accession economies 185
6.5 Benefits of the euro cited by the Eastern accession
countries 188
7.1 Macroeconomic performances, 1999–2008 208
viii
Abbreviations and acronyms
BIS Bank for International Settlements
CEEC Committee for European Economic Cooperation
EC European Community
ECB European Central Bank
ECOFIN European Union Council of Economics and Finance
Ministers
ECSC European Coal and Steel Community
EDP excessive deficit procedure
EEC European Economic Community
EMI European Monetary Institute
EMS European Monetary System
EMU economic and monetary union
EPU European Payments Union
ERM exchange rate mechanism
ERM II exchange rate mechanism II
ESCB European System of Central Banks
EU European Union
Euratom European Atomic Energy Community
FDI foreign direct investment
HICP Harmonized Index of Consumer Prices
IMF International Monetary Fund
NCB national central bank
OCA optimum currency area
OECD Organization for Economic Cooperation and
Development
SEA Single European Act
SGP Stability and Growth Pact
TEU Treaty on European Union
ix
Preface
Today, university economics students and their teachers can refer
to a number of established texts on the economics of monetary
union. Given their intended audience, these books are inevitably
quite detailed and technically demanding. The main intention
behind the present volume is to provide a non-technical but com-
prehensive overview of the central issues surrounding the euro.
Our book is primarily aimed at intermediate undergraduates
taking courses not just in economics, but also in business studies,
modern economic history, politics and international relations. It
should also prove useful to postgraduate students in these disci-
plines in their preliminary year of study.
Our approach in writing the book is intended to allow students
on a range of degree courses to read individual chapters in isola-
tion, according to their interests and needs. Having said this, the
book follows a structured path by tracing the origins, develop-
ment and prospects for the euro. After an introductory chapter on
the origins of European integration we examine the first steps
in the process of monetary integration (Chapter 2), the econom-
ics of the euro (Chapter 3), the euro’s architecture (Chapter 4) and
euro-area enlargement issues (Chapters 5 and 6), before reflecting
on the future of the euro (Chapter 7). Reading individual chap-
ters in isolation can detract from the bigger picture. To help over-
come this potential problem we have included a time line of key
events in the history of European economic, monetary and polit-
ical integration. This provides the reader with a useful point of
reference, as does the list of abbreviations and acronyms used
throughout the book.
In order to help bring the subject matter alive and capture the
imagination of the reader, at the end of the first six chapters we
have included interviews with leading academics in the field. We
are extremely grateful to (listed in the order in which the inter-
views appear in the book): Nick Crafts, Paul De Grauwe, Niels
Thygesen, Charles Wyplosz, Willem Buiter, Patrick Minford and
Andrzej Wojtyna for the time and care they took in answering our
questions, and in subsequent correspondence. Their illuminating
x