THE EURO IN THE 21ST CENTURY The International Political Economy of New Regionalisms Series The International Political Economy of New Regionalisms series presents innovative analyses of a range of novel regional relations and institutions. Going beyond established, formal, interstate economic organizations, this essential series provides informed interdisciplinary and international research and debate about myriad heterogeneous intermediate level interactions. Reective of its cosmopolitan and creative orientation, this series is developed by an international editorial team of established and emerging scholars in both the South and North. It reinforces ongoing networks of analysts in both academia and think-tanks as well as international agencies concerned with micro-, meso- and macro-level regionalisms. Editorial Board Timothy M. Shaw, Institute of International Relations at The University of the West Indies, St Augustine, Trinidad and Tobago Isidro Morales, Tecnológico de Monterrey, Escuela de Graduados en Administracion (EGAP), Mexico Maria Nzomo, Institute of Diplomacy and International Studies, University of Nairobi Nicola Phillips, University of Manchester, UK Johan Saravanamuttu, Institute of Southeast Asian Studies, Singapore Fredrik Söderbaum, School of Global Studies, University of Gothenburg, Sweden and UNU-CRIS, Belgium Recent titles in the series (continued at the back of the book) Crafting an African Security Architecture Addressing Regional Peace and Conict in the 21st Century Edited by Hany Besada Comparative Regional Integration Europe and Beyond Edited by Finn Laursen The Rise of China and the Capitalist World Order Edited by Li Xing The Euro in the 21st Century Economic Crisis and Financial Uproar MARÍA LORCA-SUSINO University of Miami, USA © María Lorca-Susino 2010 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, photocopying, recording or otherwise without the prior permission of the publisher. María Lorca-Susino has asserted her right under the Copyright, Designs and Patents Act, 1988, to be identied as the author of this work. Published by Ashgate Publishing Limited Ashgate Publishing Company Wey Court East Suite 420 Union Road 101 Cherry Street Farnham Burlington Surrey, GU9 7PT VT 05401-4405 England USA www.ashgate.com British Library Cataloguing in Publication Data Lorca-Susino, María. The euro in the 21st century : economic crisis and nancial uproar. (The international political economy of new regionalisms series) 1. Euro. 2. Euro area. 3. European Union countries Economic integration. 4. European Union countries Economic conditions 21st century. 5. Financial crises European Union countries. 6. Board of Governors of the Federal Reserve System (U.S.) 7. European Central Bank. 8. International Monetary Fund. I. Title II. Series 332.4'94-dc22 Library of Congress Cataloging-in-Publication Data Lorca-Susino, María. The euro in the 21st century : economic crisis and nancial uproar / by María Lorca-Susino. p. cm. (The international political economy of new regionalisms series) Includes indexes. ISBN 978-1-4094-0418-7 (hbk) ISBN 978-1-4094-0419-4 (ebk) 1. Euro. 2. Euro area. 3. European Union countries Economic conditions 21st century. 4. Europe Economic integration. I. Title. HG925.L67 2010 337.1'42 dc22 2010026844 ISBN 978 1 4094 0418 7 (hbk) ISBN 978 1 4094 0419 4 (ebk) I Contents List of Graphs vii List of Tables xi Foreword xiii Acknowledgements xvii List of Abbreviations xix PART I HISTORICAL AND THEORETICAL INTRODUCTION TO THE EURO 1 Historical and Theoretical Considerations 3 PART II THE EURO AS A COMMON, INTERNATIONAL, AND GLOBAL CURRENCY: AN EMPIRICAL STUDY 2 The Euro as a Common Currency 27 3 Statistical Analysis of the Euro as a Stabilizer for the Eurozone 49 4 The Euro as an International and Global Currency 81 PART III THE EURO AND THE EUROZONE: BEFORE, DURING, AND AFTER THE FIRST ECONOMIC CRISIS OF THE 21ST CENTURY 5 The New Monetary Order of the 21st Century 111 6 The Eurozone and its First Economic Crisis 143 7 The Future of the Eurozone and the EU at a Crossroads: Coordination or Breakup 183 8 The Euro in the Twenty-First Century: The Need for a “Euro Index” 211 The Euro in the 21st Century vi PART IV CONCLUSION 9 The Eurozone in the 21st Century 249 Bibliography 275 Index 309 List of Graphs 2.1 European Commission Euro Area Business Climate Indicator 32 2.2 US Conference Board, US Leading Index of 10 Ten Economic Indicators 33 2.3 GDP based on purchasing power parity (PPP) per capita in selected AEC countries 37 2.4 Ination in selected AEC countries 37 2.5 GDP based on purchasing power parity (PPP) in Mercosur full member countries 40 2.6 Ination in Mercosur full member countries 41 2.7 Current account balances in Mercosur full member countries 41 2.8 Alternative measures of political and economic integration—six countries compared 42 2.9 Economic freedom—six countries compared 43 2.10 Some problematic factors for political integration—six countries compared 45 3.1 US Dollar Index (USDX) 56 3.2 US Dollar Index with 20-month simple moving average and de-trended 57 3.3 Deutsche mark composite 57 3.4 Deutsche mark composite and US Dollar Index 58 3.5 Evolution of the euro 59 3.6 Euro and US Dollar Index 59 3.7 Deutsche mark composite and euro 60 3.8 French franc and euro 60 3.9 Spanish peseta and euro 61 3.10 Italian lira and euro 61 3.11 UK pound and euro 62 3.12 Euro and UK pound since 1981 63 3.13 Dow Jones Industrial Average (DJIA) 64 3.14 DJIA with 30-month moving average and de-trended 64 3.15 Deutscher Aktien IndeX 30 (DAX) 65 3.16 DAX with 30-month moving average and de-trended 66 3.17 DJIA and US Dollar Index 66 3.18 DAX and euro 66 3.19 DAX and euro 67 3.20 DJIA and DAX with covariance 67 3.21 DJIA, DAX, and Eurotop 100 68 The Euro in the 21st Century viii 3.22 Crude Oil and CRB Indexes 69 3.23 CRB and Crude Oil Indexes with covariance 69 3.24 CRB Index and US Dollar Index 70 3.25 Crude Oil and US Dollar Indexes 70 3.26 Crude Oil and US Dollar Indexes with covariance 71 3.27 Crude Oil Index and euro 72 3.28 US 2-year Treasury Note and Eurodollar (3 months) 73 3.29 US 10-year Treasury Note and Bund 74 3.30 Eurodollar (1 month) and Eurodollar (3 months) 74 3.31 EURIBOR (3 months) and Eurodollar (3 months) 75 3.32 EURIBOR (3 months) and LIBOR (1 month) 76 3.33 EURIBOR (3 months) and euro 77 3.34 Euro and Bund 77 4.1 Export activity between Eurozone’s Member States 84 4.2 Total bond issuing activity in Eurozone 86 4.3 Evolution of Eurozone bond issuing—central and local governments 87 4.4 Sovereign bond spread with German yield 89 4.5 Evolution of Eurozone bond issuing—corporate and nancials 90 4.6 GDP comparisons—US, EU, and Eurozone 94 4.7 Comparison of growth in trade exports to the world 95 4.8 Size of the capital market, 2007 97 4.9 Bond, equities, and bank assets compared (as % of GDP), 2007 98 4.10 Financial asset comparison—US and Eurozone 99 4.11 Hourly compensation costs in manufacturing 100 4.12 Labor productivity growth indexes compared 101 4.13 Capacity utilization comparison 102 4.14 Comparison of US and Eurozone GDPs 104 4.15 Consumer Condence Indicators—Eurozone and US compared 105 4.16 Global capital ows 106 5.1 Euro and UK pound, 1981 to 2010 123 5.2 Euro and UK pound, April 2008 to August 2009 125 5.3 Currency reserves worldwide 129 5.4 Special drawing rights, percentage change 130 5.5 Time series data on international reserves and foreign currency liquidity—selected countries 134 5.6 Bank of Russia foreign exchange reserves by currency 136 5.7 Banco Central do Brasil—reserve currency composition 137 5.8 Chinese yuan and Hong Kong dollar 140 5.9 Euro and the euro/Hong Kong dollar composite 140 5.10 Euro/yuan and euro 140 6.1 Comparative analysis of government debt levels, 2010 145 6.2 Euroarea government debt as % of GDP 146 6.3 Government debt in Eastern EU countries 147 6.4 General government nancial balances—selected countries 149 List of Graphs ix 6.5 Eurozone government decits 150 6.6 Decits and surpluses in Eastern EU countries 151 6.7 Sovereign bond spread with German yield 152 6.8 The Markit iTraxx Europe Index 154 6.9 EU current account 155 6.10 Current account balances 155 6.11 Economic Sentiment Indicator (ESI) 157 6.12 Recent Spanish economic history 165 6.13 Euro and Crude Oil Index 168 6.14 Spanish peseta and Crude Oil Index 169 6.15 Spanish peseta and DJIA 170 6.16 Credit default swaps 171 6.17 Spanish Tourism Index 173 6.18 Average labor costs per worker in Spain 174 6.19 Spain’s trade balances, 1997–2008 176 6.20 Academic excellence—comparison of Spain with selected countries 177 6.21 Labor productivity index—selected countries 178 6.22 General government debt as % of GDP—Euroarea and Spain 179 6.23 Spain’s total government revenues and expenditures 180 7.1 Trade balances for Germany and the Eurozone 194 8.1 US Dollar Index 214 8.2 Trade-weighted US Dollar Index 216 8.3 US Dollar Index and trade-weighted US Dollar Index 217 8.4 Random walk 219 8.5 White noise 219 8.6 DJIA, DAX, and Eurotop 100 222 8.7 Australian dollar and DJIA 223 8.8 New Zealand dollar and DJIA 223 8.9 Singapore euro and US Dollar Index 224 8.10 US Dollar Index movement—June 2004 to March 2010 225 8.11 A periodic trajectory 228 8.12 Critical point, convergence, and attractor 228 8.13 Sandpile 229 8.14 Critical point in thermodynamics 230 8.15 Fractals: year, month, week, day 231 8.16 Cross-rates used for the Australian Index 234 8.17 Cross-rates for the Australian Index at the critical point 235 8.18 Australian Index and its cross-rates 236 8.19 Cross-rates used for the New Zealand Index 237 8.20 Cross-rates for the New Zealand Index at the critical point 238 8.21 New Zealand Index and its cross-rates 239 8.22 Cross-rates used for the Euro Index 240 8.23 Euro Index and its cross-rates 241 8.24 Self-made US Dollar Index and its cross-rates at the critical point 243 [...]... began in the 1980s with the political and economic integration efforts in the EU and the Eurozone The current economic events are affecting the integration process in the EU and the Eurozone in two dangerous but interesting ways On the one hand, the economic crisis has negatively affected to different degrees the economies of some countries such as Portugal, Italy, Ireland, Greece, and Spain In particular,... Regionalism and the Current Economic Crisis and Financial Uproar At the time of writing (January 2010) the EU and the Eurozone are facing a difficult period It seems that suddenly the integration process—widening and deepening— has come to an abrupt halt On the one hand, there are no more countries “waiting in line” to join the EU, which gives a sense of emptiness On the other hand, it seems as if the Lisbon... of the European feelings recorded in the Eurobarometers demonstrate that under the current economic crisis and financial uproar, Europeans are falling out of love with the EU and the Eurozone and are in fact seeking to go back to the nation-state as a provider and defender of interests In fact, Eurobarometer 71 (Eurobarometer 2009b) has reported significant shifts in public opinion about the EU and. .. Greece, Spain, and Portugal are in financial and economic positions that are halting the integration program, particularly financial and economic integration On the other hand, these economic difficulties are pushing certain countries to look inward in a sort of defensive mechanism Such is the case of Belgium, the UK, and in Spain, where national nationalism is suddenly being revamped and is now becoming... stands united behind an ambitious project Finally, the euro has become an international currency and a pillar in the global monetary system; as such, it has projected a strong image of Europe in the world and has become a symbol of our unity and determination Since the end of 2008, the euro has helped the EU weather the economic and financial storm The crisis hit just as the Eurozone was establishing... with the purpose of comparing and explaining the evolution of the euro vis-à-vis other currencies Second, the evolution of the euro is analyzed to explain how the common currency is affecting the stock market cycles on both sides of the Atlantic, demonstrating that the introduction of the euro has helped synchronize stock indexes and provide European investors with wider investing opportunities Furthermore,... preeminence On the other hand, this preeminence has given the greenback an edge over the euro in terms of the size, credit quality, and liquidity of the dollar financial market over the euro financial market The preeminence of the US dollar has helped the US exercise political hegemony, which has resulted in the “Pax Americana.” The euro has, nonetheless, transformed the Eurozone into a solid and internationally... not rush into joining the euro area: 36 percent would like to have the euro introduced after a certain time and one-third as late as possible” (Eurobarometer 2008c, 3) Furthermore, the current economic crisis has affected European opinion on the euro s introduction In September 2007, 45 percent of the population favored the introduction of the euro, with 35 percent rather or very much against it Two... world order” in the twenty-first century and how the current economic crisis and financial uproar is affecting both the new order and the tenets of the new approach The introduction of the euro created the Eurozone, a new region considered a supranational or world region with an important role in the current global transformation The euro has demonstrated that although it was introduced as an economic. .. economic and monetary integration successes have been the fuel necessary for the EU and the Eurozone to continue moving forward The Lisbon Treaty impasse was the result of an implacable economic situation in Ireland that let society reject it, and in the UK, the vision of the euro changes with the economic difficulties of the country Currently, the UK is facing one of worst recessions in history, and . 332.4'94-dc22 Library of Congress Cataloging -in- Publication Data Lorca-Susino, María. The euro in the 21st century : economic crisis and nancial uproar / by María Lorca-Susino. p. cm. (The international. Cross-rates used for the Euro Index 240 8.23 Euro Index and its cross-rates 241 8.24 Self-made US Dollar Index and its cross-rates at the critical point 243 The Euro in the 21st Century x 8.25 Indexes. 183 8 The Euro in the Twenty-First Century: The Need for a Euro Index” 211 The Euro in the 21st Century vi PART IV CONCLUSION 9 The Eurozone in the 21st Century 249 Bibliography 275 Index