Will EU survive the second decade of the new millennium?
1.2Rules governing union (Stability and Growth Pact and Maastricht Treaty)6
4.WHY SAVE EURO?9
4.1.2Institutionalised austerity and ECB bailing out12
4.1.3ECB lends money to IMF and latter disburses loans with stiff conditionality’s12 4.1.4Creation of European treasury/ Empowering EFSF12
4.1.5United States of Europe and issuance of Euro bonds:13
TABLE OF FIGURES
Figure 1: Prospects of the financial sector and sovereign spreads7
Figure 2: History Repeats9
Figure 3: Euro-area north-south divide10
Figure 4: GDP Growth Forecasts, 2011 (in percentage)13
Figure 5: Current account balances of PIIGS versus Germany, UK, US14
Figure 6: Unemployment rate difference between Periphery and Germany14
Today PIIGS juggernaut has transformed into Euro zone’s Frankenstein monster. As the euro was designed to be the Roach Motel of currencies, there is no legal provision for departure. The cost of departure of either Germany or France is forbiddingly high, estimated at about as high as 40-50% of their GDP by UBS. The paper traces evolution of Euro, perceived benefits which led to its creation, the fault lines,and the similarities with Global financial Crises, the impact of its deleveraging cycle and possible alternatives.While the costs of efforts to save the euro are justified by the claim that the alternative would be too dreadful to contemplate, there lies an important lesson to be learnt from Argentina. A potential fiscal union on lines of United Europe is envisaged which would require transforming European Financial Stability Facility (EFSF) into full-fledged treasury thereby giving European Union’s monetary Union a political leg to stand on.
“I am sure the Euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created.” -Romano Prodi, EUCommission President, December 2001
Today PIIGS juggernaut has transformed into Euro zone’sFrankensteinmonster and has emerged more virile as regards the prediction by Prodi.Under the aegis of the Stability Growth Pact and Maastricht Treaty, EU provided its adopters access to common currency,unified capital markets ,free trade, cheap credit-allowing it to accumulate high levels of debt and engage in tax evasion which led to shrinkage of government income along with near absence of lender of last resort.
With the vision of “One market, one money” creation of Euro as a single currency for 27 countries (accounting for more than 500 million population and approximately one-fifth of global wealth) remains both futuristic and weighted in history. Since Charlemagne’s creation of single currency in his empire in 794, there have been numerous attempts to unify Europe under Philip II of Spain, Louis XIV, Napoleon and Hitler. Today a fifth attempt is under way through the European Union. As the architect of Euro Jacques Delorstermed the potential roadblocks in premature monetary union as a ‘ Beneficial Crises ‘ which would propel European governing class to expedite with extra urgency and dynamism their over-riding project of integration, and the creation of a single European state. Perceived benefits
The transition from EMS (European Monetary System, 1979-98) which was characterized by frequent currency realignments and widespread government control over capital movements to the much more ambitious goal of single shared currency was driven mainly on grounds of: I. Belief that a single EU currency would produce a greater degree of European market integration by removing threats of EMS currency realignments and eliminating the costs of currency conversion. II. Resolve...