Back
About RSIS
Introduction
Building the Foundations
Welcome Message
Board of Governors
Staff Profiles
Executive Deputy Chairman’s Office
Dean’s Office
Management
Distinguished Fellows
Faculty and Research
Associate Research Fellows, Senior Analysts and Research Analysts
Visiting Fellows
Adjunct Fellows
Administrative Staff
Honours and Awards for RSIS Staff and Students
RSIS Endowment Fund
Endowed Professorships
Career Opportunities
Getting to RSIS
Research
Research Centres
Centre for Multilateralism Studies (CMS)
Centre for Non-Traditional Security Studies (NTS Centre)
Centre of Excellence for National Security
Institute of Defence and Strategic Studies (IDSS)
International Centre for Political Violence and Terrorism Research (ICPVTR)
Research Programmes
National Security Studies Programme (NSSP)
Social Cohesion Research Programme (SCRP)
Studies in Inter-Religious Relations in Plural Societies (SRP) Programme
Other Research
Future Issues and Technology Cluster
Research@RSIS
Science and Technology Studies Programme (STSP) (2017-2020)
Graduate Education
Graduate Programmes Office
Exchange Partners and Programmes
How to Apply
Financial Assistance
Meet the Admissions Team: Information Sessions and other events
RSIS Alumni
Outreach
Global Networks
About Global Networks
RSIS Alumni
Executive Education
About Executive Education
SRP Executive Programme
Terrorism Analyst Training Course (TATC)
International Programmes
About International Programmes
Asia-Pacific Programme for Senior Military Officers (APPSMO)
Asia-Pacific Programme for Senior National Security Officers (APPSNO)
International Conference on Cohesive Societies (ICCS)
International Strategy Forum-Asia (ISF-Asia)
Publications
RSIS Publications
Annual Reviews
Books
Bulletins and Newsletters
RSIS Commentary Series
Counter Terrorist Trends and Analyses
Commemorative / Event Reports
Future Issues
IDSS Papers
Interreligious Relations
Monographs
NTS Insight
Policy Reports
Working Papers
External Publications
Authored Books
Journal Articles
Edited Books
Chapters in Edited Books
Policy Reports
Working Papers
Op-Eds
Glossary of Abbreviations
Policy-relevant Articles Given RSIS Award
RSIS Publications for the Year
External Publications for the Year
Media
Cohesive Societies
Sustainable Security
Other Resource Pages
News Releases
Speeches
Video/Audio Channel
External Podcasts
Events
Contact Us
S. Rajaratnam School of International Studies Think Tank and Graduate School Ponder The Improbable Since 1966
Nanyang Technological University Nanyang Technological University
  • About RSIS
      IntroductionBuilding the FoundationsWelcome MessageBoard of GovernorsHonours and Awards for RSIS Staff and StudentsRSIS Endowment FundEndowed ProfessorshipsCareer OpportunitiesGetting to RSIS
      Staff ProfilesExecutive Deputy Chairman’s OfficeDean’s OfficeManagementDistinguished FellowsFaculty and ResearchAssociate Research Fellows, Senior Analysts and Research AnalystsVisiting FellowsAdjunct FellowsAdministrative Staff
  • Research
      Research CentresCentre for Multilateralism Studies (CMS)Centre for Non-Traditional Security Studies (NTS Centre)Centre of Excellence for National SecurityInstitute of Defence and Strategic Studies (IDSS)International Centre for Political Violence and Terrorism Research (ICPVTR)
      Research ProgrammesNational Security Studies Programme (NSSP)Social Cohesion Research Programme (SCRP)Studies in Inter-Religious Relations in Plural Societies (SRP) Programme
      Other ResearchFuture Issues and Technology ClusterResearch@RSISScience and Technology Studies Programme (STSP) (2017-2020)
  • Graduate Education
      Graduate Programmes OfficeExchange Partners and ProgrammesHow to ApplyFinancial AssistanceMeet the Admissions Team: Information Sessions and other eventsRSIS Alumni
  • Outreach
      Global NetworksAbout Global NetworksRSIS Alumni
      Executive EducationAbout Executive EducationSRP Executive ProgrammeTerrorism Analyst Training Course (TATC)
      International ProgrammesAbout International ProgrammesAsia-Pacific Programme for Senior Military Officers (APPSMO)Asia-Pacific Programme for Senior National Security Officers (APPSNO)International Conference on Cohesive Societies (ICCS)International Strategy Forum-Asia (ISF-Asia)
  • Publications
      RSIS PublicationsAnnual ReviewsBooksBulletins and NewslettersRSIS Commentary SeriesCounter Terrorist Trends and AnalysesCommemorative / Event ReportsFuture IssuesIDSS PapersInterreligious RelationsMonographsNTS InsightPolicy ReportsWorking Papers
      External PublicationsAuthored BooksJournal ArticlesEdited BooksChapters in Edited BooksPolicy ReportsWorking PapersOp-Eds
      Glossary of AbbreviationsPolicy-relevant Articles Given RSIS AwardRSIS Publications for the YearExternal Publications for the Year
  • Media
      Cohesive SocietiesSustainable SecurityOther Resource PagesNews ReleasesSpeechesVideo/Audio ChannelExternal Podcasts
  • Events
  • Contact Us
    • Connect with Us

      rsis.ntu
      rsis_ntu
      rsisntu
      rsisvideocast
      school/rsis-ntu
      rsis.sg
      rsissg
      RSIS
      RSS
      Subscribe to RSIS Publications
      Subscribe to RSIS Events

      Getting to RSIS

      Nanyang Technological University
      Block S4, Level B3,
      50 Nanyang Avenue,
      Singapore 639798

      Click here for direction to RSIS

      Get in Touch

    Connect
    Search
    • RSIS
    • Publication
    • RSIS Publications
    • CO12172 | Eurozone Crisis: Will Reforms be Enough?
    • Annual Reviews
    • Books
    • Bulletins and Newsletters
    • RSIS Commentary Series
    • Counter Terrorist Trends and Analyses
    • Commemorative / Event Reports
    • Future Issues
    • IDSS Papers
    • Interreligious Relations
    • Monographs
    • NTS Insight
    • Policy Reports
    • Working Papers

    CO12172 | Eurozone Crisis: Will Reforms be Enough?
    Pradumna Bickram Rana

    13 September 2012

    download pdf

    Synopsis

    The Economic and Monetary Union launched in Europe in 1999, was an experiment amongst countries with diverse economic structures. A number of reforms have since been initiated to address the flaws in its design. Will these reforms be enough to save the euro?

    Commentary

    GIVEN THE raft of gloomy economic data from the region, it is hardly appropriate to be optimistic about the prospects for the sustainability of the monetary union in Europe. But in one key area some progress is being made. The root causes of the crisis have been identified and actions are being taken to address them. This week, on 12 September 2012, a little known German constitutional court took a huge decision and cleared the country’s participation in a new bailout fund. Markets have reacted positively. Also the win of the pro-EU party in the Netherlands is encouraging. A week prior to this, the European Central bank (ECB) reversed an earlier decision and announced that it would serve as a lender of last resort for government bonds.

    Root causes of the crisis and flaws

    The root causes of the eurozone crisis were the flaws in the design of the monetary union. The Economic and Monetary Union (EMU) launched in 1999 comprised the euro (the single currency) and the European Central Bank (ECB) for a common monetary policy. It did not contain a fiscal union, and other institutional mechanisms required for coordinating structural policies. Both the Werner Report of the 1970s and the Delors’ Report of the 1980s, which served as the blueprint, had developed a three-stage roadmap comprising closer economic coordination among members, binding constraints on member states’ national budget, and a single currency.

    But in their haste and eagerness to accomplish a full and irrevocable European unity, the “founding members” had felt that the two convergence criteria enshrined in the Maastricht Treaty – a threeper cent limit on annual fiscal deficit and 60 per cent limit on gross public debt to GDP ratio – would be adequate for the purpose.

    In practice, these thresholds were neither binding nor fixed. The EMU was, therefore, launched as an experiment between a set of countries that were quite diverse and far less integrated than required. And the hope that a monetary union would lead to an economic union was not realised.

    The institutional flaws have now been identified and are being fixed. A key shortcoming in the design of the EMU was the absence of the lender of last resort in government bond markets. When a country issues sovereign bonds in its own currency there is an implicit guarantee from the central bank that cash will always be available to pay out the bondholders. The absence of such a guarantee in a monetary union – where bonds are issued in a currency over which individual countries have little control – makes the sovereign bond markets prone to liquidity crisis and contagion, very much like banking systems in the absence of lender of last resorts.

    ECB as lender of last resort

    Initially, given the no-bailout clause in the EU treaty, the ECB was reluctant to pursue the role of lender of last resort. Instead, the eurozone set up the European Financial Stability Facility (EFSF) for the purpose. A permanent 500 billion euro European Stability Mechanism (ESM) is targeted by the year-end and this week’s German constitutional court approval was a key step forward. The establishment of the ESM is critical as the EFSF is running out of money (having bailed out Greece, Ireland, and Portugal) and is due to expire in less than a year.

    But there has been a dramatic turnaround in the ECB. In July, ECB chief Mario Draghi, had promised to “do whatever it takes” to protect the euro. He delivered on 6 September when he announced plans to make the ECB the lender of last resort in government bond markets. Under the new programme dubbed the Outright Monetary Transactions (OMT), the ECB will buy existing government bonds in the secondary market without limits. The OMT will primarily benefit fiscally-troubled countries like Spain and Italy which are facing difficulties financing their debt as their borrowing costs have soared in recent months.

    To prevent moral hazard and ensure that countries continue their austerity programmes, the ECB will require that a country seeking to benefit from the OMT to first apply to the eurozone’s bailout fund, the EFSF and the ESM, which require tough conditions. The ECB will also continue to offset its purchases in full by taking an equal amount of liquidity out of circulation so that money supply will not change.

    Fiscal Compact for crisis prevention

    In the area of crisis prevention several bold actions are being taken. Firstly, in March 2012, EU members (except the Czech Republic and the United Kingdom) agreed to set up a new Fiscal Compact. The Compact will require all ratifying members to enact laws on national budgets to meet the two Maastricht convergence criteria except that this time around implementing it will be enforced by the European Court of Justice. The target is to make the Compact effective on 1 January 2013 if it is ratified by at least 12 members.

    Secondly, a banking union is also being established. This requires establishing a Europe-wide supervisor – Brussels has proposed ECB for the task. It also requires setting up a deposit guarantee scheme, and a resolution regime to ensure that unsecured creditors rather than taxpayers pay the cost of future bank failures.

    A number of actions are being taken to refocus the experiment that the “founding fathers” of the EMU began in 1999. These, however, fall short of a full-fledged fiscal union with taxes and expenditure handled by a common authority, deeper integration including with high labour mobility, and a political union such as the “United States of Europe”. This is because each of them requires politicians to give up powers which many of them regard as sacrosanct. Whether the reformed EMU, or EMU II, will be enough to save the single currency system remains to be seen.

    About the Author

    Pradumna B. Rana is Associate Professor in International Political Economy at the S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University. He is also coordinator of economic multilateralism and regionalism studies at the RSIS’ Centre for Multilateralism Studies

    Categories: RSIS Commentary Series / International Political Economy / Regionalism and Multilateralism / Europe

    Synopsis

    The Economic and Monetary Union launched in Europe in 1999, was an experiment amongst countries with diverse economic structures. A number of reforms have since been initiated to address the flaws in its design. Will these reforms be enough to save the euro?

    Commentary

    GIVEN THE raft of gloomy economic data from the region, it is hardly appropriate to be optimistic about the prospects for the sustainability of the monetary union in Europe. But in one key area some progress is being made. The root causes of the crisis have been identified and actions are being taken to address them. This week, on 12 September 2012, a little known German constitutional court took a huge decision and cleared the country’s participation in a new bailout fund. Markets have reacted positively. Also the win of the pro-EU party in the Netherlands is encouraging. A week prior to this, the European Central bank (ECB) reversed an earlier decision and announced that it would serve as a lender of last resort for government bonds.

    Root causes of the crisis and flaws

    The root causes of the eurozone crisis were the flaws in the design of the monetary union. The Economic and Monetary Union (EMU) launched in 1999 comprised the euro (the single currency) and the European Central Bank (ECB) for a common monetary policy. It did not contain a fiscal union, and other institutional mechanisms required for coordinating structural policies. Both the Werner Report of the 1970s and the Delors’ Report of the 1980s, which served as the blueprint, had developed a three-stage roadmap comprising closer economic coordination among members, binding constraints on member states’ national budget, and a single currency.

    But in their haste and eagerness to accomplish a full and irrevocable European unity, the “founding members” had felt that the two convergence criteria enshrined in the Maastricht Treaty – a threeper cent limit on annual fiscal deficit and 60 per cent limit on gross public debt to GDP ratio – would be adequate for the purpose.

    In practice, these thresholds were neither binding nor fixed. The EMU was, therefore, launched as an experiment between a set of countries that were quite diverse and far less integrated than required. And the hope that a monetary union would lead to an economic union was not realised.

    The institutional flaws have now been identified and are being fixed. A key shortcoming in the design of the EMU was the absence of the lender of last resort in government bond markets. When a country issues sovereign bonds in its own currency there is an implicit guarantee from the central bank that cash will always be available to pay out the bondholders. The absence of such a guarantee in a monetary union – where bonds are issued in a currency over which individual countries have little control – makes the sovereign bond markets prone to liquidity crisis and contagion, very much like banking systems in the absence of lender of last resorts.

    ECB as lender of last resort

    Initially, given the no-bailout clause in the EU treaty, the ECB was reluctant to pursue the role of lender of last resort. Instead, the eurozone set up the European Financial Stability Facility (EFSF) for the purpose. A permanent 500 billion euro European Stability Mechanism (ESM) is targeted by the year-end and this week’s German constitutional court approval was a key step forward. The establishment of the ESM is critical as the EFSF is running out of money (having bailed out Greece, Ireland, and Portugal) and is due to expire in less than a year.

    But there has been a dramatic turnaround in the ECB. In July, ECB chief Mario Draghi, had promised to “do whatever it takes” to protect the euro. He delivered on 6 September when he announced plans to make the ECB the lender of last resort in government bond markets. Under the new programme dubbed the Outright Monetary Transactions (OMT), the ECB will buy existing government bonds in the secondary market without limits. The OMT will primarily benefit fiscally-troubled countries like Spain and Italy which are facing difficulties financing their debt as their borrowing costs have soared in recent months.

    To prevent moral hazard and ensure that countries continue their austerity programmes, the ECB will require that a country seeking to benefit from the OMT to first apply to the eurozone’s bailout fund, the EFSF and the ESM, which require tough conditions. The ECB will also continue to offset its purchases in full by taking an equal amount of liquidity out of circulation so that money supply will not change.

    Fiscal Compact for crisis prevention

    In the area of crisis prevention several bold actions are being taken. Firstly, in March 2012, EU members (except the Czech Republic and the United Kingdom) agreed to set up a new Fiscal Compact. The Compact will require all ratifying members to enact laws on national budgets to meet the two Maastricht convergence criteria except that this time around implementing it will be enforced by the European Court of Justice. The target is to make the Compact effective on 1 January 2013 if it is ratified by at least 12 members.

    Secondly, a banking union is also being established. This requires establishing a Europe-wide supervisor – Brussels has proposed ECB for the task. It also requires setting up a deposit guarantee scheme, and a resolution regime to ensure that unsecured creditors rather than taxpayers pay the cost of future bank failures.

    A number of actions are being taken to refocus the experiment that the “founding fathers” of the EMU began in 1999. These, however, fall short of a full-fledged fiscal union with taxes and expenditure handled by a common authority, deeper integration including with high labour mobility, and a political union such as the “United States of Europe”. This is because each of them requires politicians to give up powers which many of them regard as sacrosanct. Whether the reformed EMU, or EMU II, will be enough to save the single currency system remains to be seen.

    About the Author

    Pradumna B. Rana is Associate Professor in International Political Economy at the S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University. He is also coordinator of economic multilateralism and regionalism studies at the RSIS’ Centre for Multilateralism Studies

    Categories: RSIS Commentary Series / International Political Economy / Regionalism and Multilateralism

    Popular Links

    About RSISResearch ProgrammesGraduate EducationPublicationsEventsAdmissionsCareersVideo/Audio ChannelRSIS Intranet

    Connect with Us

    rsis.ntu
    rsis_ntu
    rsisntu
    rsisvideocast
    school/rsis-ntu
    rsis.sg
    rsissg
    RSIS
    RSS
    Subscribe to RSIS Publications
    Subscribe to RSIS Events

    Getting to RSIS

    Nanyang Technological University
    Block S4, Level B3,
    50 Nanyang Avenue,
    Singapore 639798

    Click here for direction to RSIS

    Get in Touch

      Copyright © S. Rajaratnam School of International Studies. All rights reserved.
      Privacy Statement / Terms of Use
      Help us improve

        Rate your experience with this website
        123456
        Not satisfiedVery satisfied
        What did you like?
        0/255 characters
        What can be improved?
        0/255 characters
        Your email
        Please enter a valid email.
        Thank you for your feedback.
        This site uses cookies to offer you a better browsing experience. By continuing, you are agreeing to the use of cookies on your device as described in our privacy policy. Learn more
        OK
        Latest Book
        more info