The Introduction of the Euro - Who Warned and Why?
When the Euro crisis began in the wake of the worldwide financial crisis many journalists, politicians and economists said that they had warned about the introduction of the Euro in 1999 and that they had foreseen the problems that surfaced in 2009 and developed during the years since then. Therefore, they felt that the development had them proved right. In this paper, the question is analyzed whether this conviction is justified. It is indeed true that there were many warnings. But were the problems these warnings picked out as the central themes really the ones that were the relevant factors during the Euro crisis? It seems to be the case that the real problems (balance of payment crisis, “original sin” as a problem of each member of the monetary union, speculative attacks on member countries etc.) were quite different from the ones discussed before 1999 (dangers of inflation due to a weak central bank, dangers of asymmetric shocks, traditional analysis of optimum currency areas, etc.). So the alerters seem, at most, to be right for the wrong reasons. The paper investigates the question on several levels: • It analyses the development of the textbook by De Grauwe from the 1st to the current (14th) edition and shows that the problems that were discussed before and during the first years of the monetary union were quite different from the ones that were important in the crisis. • It looks at some contributions from German and international economists (here: the authors of two manifestos in Germany against the Euro and the debate in the Journal of Economic Perspectives between Charles Wyplosz and Martin Feldstein) • A special emphasis lies on the contributions of the German council of economic experts (“Sachverständigenrat”): in its annual reports the council has stated its opinions concerning exchange rate regimes in general and the monetary system(s) in Europe in particular. It will be shown that the council’s analyses are a prime example of concentrating on matters that turned out to be of minor importance in the Euro crisis whereas other topics were not touched upon at all. • Furthermore, it will be shown that before the outbreak of the Euro crisis some characteristics that turned out to be detrimental for the monetary union were not regarded as a bug, but as a feature. One example are the current account imbalances: these were regarded as beneficial due to facilitated capital imports; the famous Feldstein-Horioka paradox seemed to dissipate and the rising foreign indebtedness of members of the Euirozone experienced a benign neglect. Another example is the fact of the Euro being like a foreign currency from the perspective of the member states; but that the Euro is a “money you cannot make by yourself” was not regarded as problematic but as a pro-gress. All in all, the paper makes the case that it is not only important that warnings were issued but also to analyze whether these warnings were actually justified with regard to contents.
Area: Eshet Conference
Keywords: European Monetary Union, Exchange Rate Regimes, economic policy, optimum currency area, original sin, speculative attacks
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