aj

ASHGATE

The Euro in the

21 st Century
Economic Crisis and Financial Uproar

Mana Lorca-Susino

The International

Political Ecortomv

of New ftegionatisms Series

THE EURO IN THE 21ST CENTURY

The International Political Economy of

New Regionalisms Series
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Isidro Morales, Tecnologico de Monterrey, Escuela de Graduados en
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Maria Nzomo, institute of Diplomacy and international Studies, University
of Nairobi
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Recent titles in the series (continued at the back of the book)
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 Maria Lorca-Susino
2010

The Euro in the 21st Century

Economic Crisis and Financial Uproar

MARIA LORCA-SUSINO
University of Miami, USA

ASHGATE

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.
Maria Lorca-Susino has asserted her right under the Copyright, Designs and Patents Act, 1988,
to be identified as the author
of this work.
Published by
Ashgate Publishing Limited
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Ashgate Publishing Company

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British
Library
Cataloguing in Publication
Data
Lorca-Susino, Maria.
The euro in the 21st century : economic crisis and financial 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, Maria.
The euro in the 21st century : economic crisis and financial uproar / by Maria 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

Mixed Sources

Product group from well-managed

forests and othercontroiied sources
T7 c

X1 OL 1996 Forest Stewardship Council

Printed and bound in Great Bntain by

www.fsc.org Cert no. SA-COC-1565

MPG BOOKS GfOUp, UK

TTr

Contents

List of Graphs
List of Tables
Foreword
Acknowledgements
List of Abbreviations

PART I
1

vii
xi
xiii
xvii
xix

HISTORICAL AND THEORETICAL INTRODUCTION

TO THE EURO

Historical and Theoretical Considerations

PART II THE EURO AS A COMMON, INTERNATIONAL, AND GLOBAL

CURRENCY: AN EMPIRICAL STUDY
2

The Euro as a Common Currency

27

Statistical Analysis of the Euro as a Stabilizer for the Eurozone

49

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

The eurozone and its First economic crisis

143

The Future of the eurozone and the EU at a crossroads:

Coordination or Breakup

183

The euro in the Twenty-First century: The Need for a

Buro index

211

PART IV CONCLUSION
9 The Eurozone in the 21st Century

249

Bibliography

275

Index

309

List of Graphs

2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
3.13
3.14
3.15
3.16
3.17
3.18
3.19
3.20
3.21
3.22

European Commission Euro Area Business Climate Indicator

us conference Board, us Leading index of 10 Ten economic
Indicators
GDP based on purchasing power parity (PPP) per capita in
selected AEC countries
Inflation in selected AEC countries
GDP based on purchasing power parity (PPP) in Mercosur
full member countries
Inflation in Mercosur full member countries
current account balances in Mercosur full member countries
Alternative measures of political and economic integrationsix
countries compared
economic freedomsix countries compared
some problematic factors for political integrationsix
countries compared
us Dollar index (usDX)
us Dollar index with 20-month simple moving average and
de-trended
Deutsche mark composite
Deutsche mark composite and us Dollar index
evolution of the euro
euro and us Dollar index
Deutsche mark composite and euro
French franc and euro
spanish peseta and euro
italian lira and euro
uK pound and euro
euro and uK pound since 1981
Dow Jones industrial Average (DJiA)
DJiA with 30-month moving average and de-trended
Deutscher Aktien indeX 30 (DAX)
DAX with 30-month moving average and de-trended
DJiA and us Dollar index
DAX and euro
DAX and euro
DJiA and DAX with covariance
DJiA, DAX, and eurotop 100
Crude Oil and CRB Indexes

32
33
37
37
40
41
41
42
43
45
56
57
57
58
59
59
60
60
61
61
62
63
64
64
65
66
66
66
67
67
68
69

3.23
3.24
3.25
3.26
3.27
3.28
3.29
3.30
3.31
3.32
3.33
3.34
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
5.9
5.10
6.1
6.2
6.3
6.4
6.5

CRB and Crude Oil Indexes with covariance

CRB index and us Dollar index
crude oil and us Dollar indexes
crude oil and us Dollar indexes with covariance
crude oil index and euro
us 2-year Treasury Note and Eurodollar (3 months)
us 10-year Treasury note and Bund
eurodollar (1 month) and eurodollar (3 months)
EURIBOR (3 months) and eurodollar (3 months)
EURIBOR (3 months) and LIBOR (1 month)
EURIBOR (3 months) and euro
euro and Bund
Export activity between Eurozones Member states
Total bond issuing activity in Eurozone
Evolution of Eurozone bond issuingcentral and local governments 87
sovereign bond spread with German yield
Evolution of Eurozone bond issuingcorporate and financials
GDP comparisonsus, EU, and eurozone
comparison of growth in trade exports to the world
size of the capital market, 2007
Bond, equities, and bank assets compared (as % of GDP), 2007
Financial asset comparisonus and Eurozone
Hourly compensation costs in manufacturing
Labor productivity growth indexes compared
capacity utilization comparison
comparison of us and Eurozone GDPs
Consumer Confidence IndicatorsEurozone and US compared
Global capital flows
Euro and uK pound, 1981 to 2010
Euro and uK pound, April 2008 to August 2009
currency reserves worldwide
special drawing rights, percentage change
Time series data on international reserves and foreign currency
liquidityselected countries
Bank of Russia foreign exchange reserves by currency
Banco central do Brasilreserve currency composition
chinese yuan and hong Kong dollar
Euro and the euro/Hong Kong dollar composite
Euro/yuan and euro
comparative analysis of government debt levels, 2010
Euroarea government debt as % of GDP
Government debt in Eastern Eu countries
General government financial balancesselected countries
Eurozone government deficits

69
70
70
71
72
73
74
74
75
76
77
77
84
86
89
90
94
95
97
98
99
100
101
102
104
105
106
123
125
129
130
134
136
137
140
140
140
145
146
147
149
150

6.6
6.7
6.8
6.9
6.10
6.11
6.12
6.13
6.14
6.15
6.16
6.17
6.18
6.19
6.20
6.21
6.22
6.23
7.1
8.1
8.2
8.3
8.4
8.5
8.6
8.7
8.8
8.9
8.10
8.11
8.12
8.13
8.14
8.15
8.16
8.17
8.18
8.19
8.20
8.21
8.22
8.23

Deficits and surpluses in Eastern EU countries

Soverelgn bond spread with German yleld
The Markit iTraxx Europe Index
EU current account
current account balances
Economic sentiment Indicator (EsI)
Recent spanish economic history
Euro and crude oil index
spanish peseta and crude oil index
spanish peseta and DJiA
credit default swaps
spanish Tourism index
Average labor costs per worker in spain
Spains trade balances, 1997-2008
Academic excellencecomparison of Spain with selected countries 177
Labor productivity indexselected countries
General government debt as % of GDPEuroarea and Spain
Spains total government revenues and expenditures
Trade balances for Germany and the Eurozone
US Dollar Index
Trade-weighted US Dollar Index
US Dollar Index and trade-weighted US Dollar Index
Random walk
White noise
DJIA, DAX, and Eurotop 100
Australian dollar and DJIA
New Zealand dollar and DJIA
Singapore euro and US Dollar Index
US Dollar Index movementJune 2004 to March 2010
A periodic trajectory
Critical point, convergence, and attractor
Sandpile
Critical point in thermodynamics
Fractals: year, month, week, day
Cross-rates used for the Australian Index
Cross-rates for the Australian Index at the critical point
Australian Index and its cross-rates
Cross-rates used for the New Zealand Index
Cross-rates for the New Zealand Index at the critical point
New Zealand Index and its cross-rates
Cross-rates used for the Euro Index
Euro Index and its cross-rates
8.24 Self-made US Dollar Index and its cross-rates at the critical point 243

151
152
154
155
155
157
165
168
169
170
171
173
174
176
178
179
180
194
214
216
217
219
219
222
223
223
224
225
228
228
229
230
231
234
235
236
237
238
239
240
241

The Euro in the 21st Century

8.25
9.1
9.2
9.3
9.4

Indexes compared
Job openings and labor turnover survey
comparison of us and Eu productivity
comparison of us and EU capacity utilization
us small Business optimism index

244
252
252
253
254

9.5
9.6

european commission euro Area Business climate indicator

Comparison of Consumer Confidence IndicatorsUS Conference Board and
european commission consumer indicator for the
eurozone

255

9.7

Gross household saving rateshare of gross savings as % of gross

disposable income

257
258

List of Tables

1.1
1.2
2.1
2.2
2.3
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
4.1
4.2

4.3

Monetary system date overview

summary of monetary evolution from the Bretton Woods system
to the European Monetary system
List of existing and de facto monetary unions
List of planned monetary unions
Recognized regional economic communities
(RECS)
summary of indexes
summary of currencies analyzed
summary of stock exchange, crude oil, andcRB Indexes
summary of money market indexes
summary of statistical study
custom-made covariance formula
custom-made de-trended formula
20-month simple moving average
Functions of an international currency
some currencies pegged to the us dollar, the euro, the uK
pound,
and
other
85
credit rating of countries by Moodys, standard and Poors
and
Fitch,
as
at
March

7
9
34
35
36
50
51
51
52
52
53
54
55
83
currencies

7,

88
Currency Composition of Official Foreign Exchange Reserves
(COFER) (in us$ millions)
4.5
Leading exporters and importers in world merchandise trade,
2008 (in billions)
4.6
Financial assets, us and eurozone compared (in us$ trillions,
using 2008 exchange rates for all years)
5.1
currency distribution of reported foreign exchange market turnover:
percentage share of average daily turnover, April 2007
5.2
Daily global foreign exchange turnover, 1989 to 2008
(us$ billions)
5.3
Daily average foreign exchange turnover, net of double-counting,
by instrument (us$ millions)
5.4 Daily foreign exchange turnover and transactions costs, net of doublecounting, by instrument, counterparty and currency,
April 2004

2010

4.4

91
96
97
115
115
117

118

5.5 Daily foreign exchange turnover and transactions costs, net of doublecounting, by instrument, counterparty and currency,
April 2007

120

5.6 Comparative analysis: the UK pound, annual tumover and

transaction costs
121
5.7
Daily averages of trading transactions in the uK pound
(in us$ millions), 2001 and 2007 compared
122
5.8
special drawing rights allocations to IMF members since 1970
126
5.9
calculated quota share of sDRs
128
5.10 Participants and credit amounts in IMFS NAB and cAB
arrangements
132
5.11Foreign exchange tumover, net of local and cross-border interdealer doublecounting, by instrument, counterparty and currency
(in us$ millions)
133
5.12 Estimated reserves of foreign exchange and gold (as at
December 31, 2008)
133
5.13 Emerging and developing economies (in us$ millions)
135
6.1
some European corporate defaults in 2009
153
6.2
Macroeconomic data in time of crisis
166
6.3
structural and cohesion funds received by spain since
1986
166
6.4
credit default risks as measured by credit default swaps prices
(cost in us$ for a us$10,000 debt for 5 years)
172
7.1
estimated global exposure to Greeces default
187
7.2
Cost-benefit analysis of introducing the Economic Monetary
system (EMS) in Germany
192
7.3
The Lisbon Agenda - Employment Rate Objectives
201
8.1
Case studies
221
8.2
Summary of ideas and fields used
226