The New Europe         Dale R. DeBoer, PhD         CU-Colorado Springs
Optimal Currency Area• Outgrowth of the work of Robert Mundell  (1961)• Requirements for a geographic region to  operate u...
Why do it?• Reduced transactions costs • Greater gains from trade• Potential to challenge the dollar as the  international...
Requisites for an OCA• Labor mobility • Why? • Legal restrictions • Cultural restrictions
Requisites for an OCA• Labor mobility• Financial capital mobility
Requisites for an OCA• Labor mobility• Financial capital mobility• Wage and price flexibility
Requisites for an OCA• Labor mobility• Financial capital mobility• Wage and price flexibility• Fiscal transfer mechanism
Requisites for an OCA• Labor mobility• Financial capital mobility• Wage and price flexibility• Fiscal transfer mechanism• ...
Steps towards an OCA                                                        Source: “Treaties of the European Union.”    h...
Steps towards an OCA• European Economic Community (1957) • Belgium, France, Italy, Luxembourg,    Netherlands, and West Ge...
Steps towards an OCA• European Economic Community (1957)• Economic and Social Committee (1958) • Consultative body of unio...
Steps towards an OCA• European Economic Community (1957)• Economic and Social Committee (1958)• Common Agricultural Policy...
Steps towards an OCA• Economic and Social Committee (1958)• Common Agricultural Policy (1962)• European Community (1967) •...
Steps towards an OCA• European Community (1967)• European Monetary System (1978-79) • Spurred by the demise of the Bretton...
Steps towards an OCA• European Community (1967)• European Monetary System (1978-79)• Single European Currency Act (1987) •...
Steps towards an OCA• European Monetary System (1978-79)• Single European Currency Act (1987)• Maastricht Treaty (1992) • ...
Steps towards an OCA• European Monetary System (1978-79)• Single European Currency Act (1987)• Maastricht Treaty (1992)• E...
Steps towards an OCA• Growth and Stability Act (1997) • National debt < 60% • Budget deficit < 3% • Inflation < 3.2% • Lon...
Early judgement• Mundell • “This is in my view a great step    forward ...”• Friedman • “I have very low expectations ...”
Was it enough?• Countries • Belgium, France, Italy, Luxembourg,    Netherlands, Germany, Denmark, Ireland,    Greece, Port...
Labor mobility           Source: Gakova, Z. and Dijkstra, L. 2008. Labour Mobility   between the Regions of the EU-27 and ...
Labor mobility    Source: Gakova, Z. and Dijkstra, L. 2008. Labour Mobility between             the Regions of the EU-27 a...
Debt       Source: Eurostat, Google Public Data
Debt       Source: Eurostat, Google Public Data
Deficits       Source: Eurostat, Google Public Data
Deficits       Source: Eurostat, Google Public Data
Inflation        Source: Eurostat, Google Public Data
Inflation        Source: Eurostat, Google Public Data
Unemployment        Source: Eurostat, Google Public Data
Unemployment        Source: Eurostat, Google Public Data
Unemployment        Source: Eurostat, Google Public Data
Business Cycles           Source: Eurostat, Google Public Data
Business Cycles           Source: Eurostat, Google Public Data
Where did things go      wrong?• Conditions not met • Debt • Deficits
Where did things go      wrong?• Conditions not met• Theory not satisfied • Asynchronous business cycles • Insufficient la...
Options for resolution• Do nothing• Dissolve the union• Tighten the union
Current situation                                                Source: Eurostat, Google Public Data                     ...
Current situation           Source: Eurostat, Google Public Data
Current situation           Source: Eurostat, Google Public Data
Do nothing?• Greek collapse• Political unrest
Dissolve the union?• No mechanism in place• Financial market risk
Tighten the union?• Extreme “federalism”
Limits on the ECB• Unified goal • Medium term inflation no greater than    2%• Outright Monetary Transactions • September ...
Current Bailouts• European Financial Stability Facility • May 2010 • €440 billion • Backed by Germany • Borrowing up to ca...
Current Bailouts• European Financial Stabilization Mechanism • January 2011 • €60 billion • Bonds guaranteed by the EU
Current Bailouts• Brussels Agreement • October 2011 • 50% write-off of Greek debt   • Later increased to 53.5%   • Approxi...
Current Bailouts• European Stability Mechanism • October 2012 • “Firewall” action
Latest “monkey          wrench”• Italian election results (or lack thereof) • February 25, 2013
Ramifications for the          US• Position of the dollar strengthened• Export market weak• Financial contagion
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New Europe

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New Europe

  1. 1. The New Europe Dale R. DeBoer, PhD CU-Colorado Springs
  2. 2. Optimal Currency Area• Outgrowth of the work of Robert Mundell (1961)• Requirements for a geographic region to operate under a single currency
  3. 3. Why do it?• Reduced transactions costs • Greater gains from trade• Potential to challenge the dollar as the international reserve currency
  4. 4. Requisites for an OCA• Labor mobility • Why? • Legal restrictions • Cultural restrictions
  5. 5. Requisites for an OCA• Labor mobility• Financial capital mobility
  6. 6. Requisites for an OCA• Labor mobility• Financial capital mobility• Wage and price flexibility
  7. 7. Requisites for an OCA• Labor mobility• Financial capital mobility• Wage and price flexibility• Fiscal transfer mechanism
  8. 8. Requisites for an OCA• Labor mobility• Financial capital mobility• Wage and price flexibility• Fiscal transfer mechanism• Synchronized business cycles
  9. 9. Steps towards an OCA Source: “Treaties of the European Union.” https://en.wikipedia.org/wiki/Treaties_of_the_European_Union. Downloaded February 12, 2013
  10. 10. Steps towards an OCA• European Economic Community (1957) • Belgium, France, Italy, Luxembourg, Netherlands, and West Germany • Customs union • Price unification and flexibility • Removal of legal restrictions on labor and capital mobility
  11. 11. Steps towards an OCA• European Economic Community (1957)• Economic and Social Committee (1958) • Consultative body of unions, employers, and “special interests” • The European “3rd way”
  12. 12. Steps towards an OCA• European Economic Community (1957)• Economic and Social Committee (1958)• Common Agricultural Policy (1962)
  13. 13. Steps towards an OCA• Economic and Social Committee (1958)• Common Agricultural Policy (1962)• European Community (1967) • Joined with European Coal and Steel Community and European Atomic Energy Community • Planning entities
  14. 14. Steps towards an OCA• European Community (1967)• European Monetary System (1978-79) • Spurred by the demise of the Bretton Woods system • Exchange rate fluctuation bounds set • Elimination of legal restrictions on labor mobility
  15. 15. Steps towards an OCA• European Community (1967)• European Monetary System (1978-79)• Single European Currency Act (1987) • Establishes intention to create a unified currency
  16. 16. Steps towards an OCA• European Monetary System (1978-79)• Single European Currency Act (1987)• Maastricht Treaty (1992) • Name changed to the European Union • Single currency implementation strategy established
  17. 17. Steps towards an OCA• European Monetary System (1978-79)• Single European Currency Act (1987)• Maastricht Treaty (1992)• European Monetary Institute (1994) • Established coordinated central bank actions under the aegis of the ECB
  18. 18. Steps towards an OCA• Growth and Stability Act (1997) • National debt < 60% • Budget deficit < 3% • Inflation < 3.2% • Long-term interest rates < 7.2% • Participation in the EMS
  19. 19. Early judgement• Mundell • “This is in my view a great step forward ...”• Friedman • “I have very low expectations ...”
  20. 20. Was it enough?• Countries • Belgium, France, Italy, Luxembourg, Netherlands, Germany, Denmark, Ireland, Greece, Portugal, Spain, Austria, Finland • Special cases • Sweden, United Kingdom
  21. 21. Labor mobility Source: Gakova, Z. and Dijkstra, L. 2008. Labour Mobility between the Regions of the EU-27 and a Comparison with the US.
  22. 22. Labor mobility Source: Gakova, Z. and Dijkstra, L. 2008. Labour Mobility between the Regions of the EU-27 and a Comparison with the US.
  23. 23. Debt Source: Eurostat, Google Public Data
  24. 24. Debt Source: Eurostat, Google Public Data
  25. 25. Deficits Source: Eurostat, Google Public Data
  26. 26. Deficits Source: Eurostat, Google Public Data
  27. 27. Inflation Source: Eurostat, Google Public Data
  28. 28. Inflation Source: Eurostat, Google Public Data
  29. 29. Unemployment Source: Eurostat, Google Public Data
  30. 30. Unemployment Source: Eurostat, Google Public Data
  31. 31. Unemployment Source: Eurostat, Google Public Data
  32. 32. Business Cycles Source: Eurostat, Google Public Data
  33. 33. Business Cycles Source: Eurostat, Google Public Data
  34. 34. Where did things go wrong?• Conditions not met • Debt • Deficits
  35. 35. Where did things go wrong?• Conditions not met• Theory not satisfied • Asynchronous business cycles • Insufficient labor mobility
  36. 36. Options for resolution• Do nothing• Dissolve the union• Tighten the union
  37. 37. Current situation Source: Eurostat, Google Public Data Source: Wall Street Journal, http://online.wsj.com/article/SB10001424127887324162304578303503840132168.html, downloaded 2/19/2013.
  38. 38. Current situation Source: Eurostat, Google Public Data
  39. 39. Current situation Source: Eurostat, Google Public Data
  40. 40. Do nothing?• Greek collapse• Political unrest
  41. 41. Dissolve the union?• No mechanism in place• Financial market risk
  42. 42. Tighten the union?• Extreme “federalism”
  43. 43. Limits on the ECB• Unified goal • Medium term inflation no greater than 2%• Outright Monetary Transactions • September 2012
  44. 44. Current Bailouts• European Financial Stability Facility • May 2010 • €440 billion • Backed by Germany • Borrowing up to capital invested in ECB
  45. 45. Current Bailouts• European Financial Stabilization Mechanism • January 2011 • €60 billion • Bonds guaranteed by the EU
  46. 46. Current Bailouts• Brussels Agreement • October 2011 • 50% write-off of Greek debt • Later increased to 53.5% • Approximately a €100 billion reduction
  47. 47. Current Bailouts• European Stability Mechanism • October 2012 • “Firewall” action
  48. 48. Latest “monkey wrench”• Italian election results (or lack thereof) • February 25, 2013
  49. 49. Ramifications for the US• Position of the dollar strengthened• Export market weak• Financial contagion

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