Stability & Growth in the Eurozone

To: Jean-Claude Trichet, President of European Central Bank From: Andrew Trembley Date: May 4, 2011

Contents Executive Summary ............................................................................................ ii Background......................................................................................................... 1 Policy Goals ........................................................................................................ 3
Economic Stability & Growth .................................................................................................................... 3 Crisis Prevention ................................................................................................................................... 4 Crisis Management ............................................................................................................................... 5 Economic Unity ......................................................................................................................................... 6 Implementation ........................................................................................................................................ 6

Policy Alternatives .............................................................................................. 6
Status Quo................................................................................................................................................. 7 Crisis Prevention ................................................................................................................................... 7 Crisis Mitigation .................................................................................................................................... 8 Economic Unity ..................................................................................................................................... 8 Implementation .................................................................................................................................... 9 Eurozone Breakup ..................................................................................................................................... 9 Crisis Prevention ................................................................................................................................... 9 Crisis Mitigation .................................................................................................................................... 9 Economic Unity ................................................................................................................................... 10 Implementation .................................................................................................................................. 10 Reform .................................................................................................................................................... 11 Crisis Prevention ................................................................................................................................. 11 Crisis Management ............................................................................................................................. 11 Economic Unity ................................................................................................................................... 12 Implementation .................................................................................................................................. 12 Recommendation & Conclusion ......................................................................................................... 13

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Executive Summary
This paper discusses whether the recent economic crisis should be taken as a sign of a systemic failure of the unified currency system and reason for its breakup. It analyzes three prevailing policies: 1) the status quo (as of winter 2010); 2) complete dissolution of the Eurozone (as requested by the client); or 3) adoption of the proposed European Stability Mechanism and revisions to the Stability and Growth Pact1. I analyze the three policies based on three goals: the effectiveness of policies promoting future stability and growth, measured through each policy’s effects on crisis prevention and management; effects of the policy on economic unity of the European Union, particularly focusing on current Eurozone members and the costs of implementation, as measured by difficulty of political reform and potential economic shock. I recommend the adoption of the reforms recommended by the European Central Bank enumerated by the European Stability Mechanism and revisions to the Stability and Growth Pact. The current suite of crisis prevention and management mechanisms failed. Regulatory requirements failed to prevent periphery members such as Greece and Ireland from amassing debts beyond those allowed and prudent for their economies, thereby intensifying the crisis. The EU further exacerbated the crisis by not immediately taking steps to rescue the economies. While breakup would have not prevented overspending by periphery nations, it could have allowed them to pursue policies apart from their neighbors which could have mitigated their deficits earlier. The proposed reforms would have placed stricter requirements that could have eliminated the risk altogether by eliminating the possibility of amassing such deficits. Under feasibility, most calls for dissolution do not account for the political difficulty of implementing such a policy. According to the charter, adoption of the Euro is permanent and irrevocable. The dissolution of the Euro could result in an economic crisis far more detrimental any crisis that the Eurozone fails to avoid. The status quo discussed in this paper is defined primarily by a lack of

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This memorandum assesses policy options that were available but not yet adopted before December 2010.

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policy: without the European Stability Mechanism, the Eurozone lacks any official tools to use in such a crisis, and become dependent on external organizations such as the IMF for intermediation. For these reasons, I recommend that the Eurozone adopts the European Stability Mechanism and the proposed reforms to the Stability and Growth Pact to minimize risk for future crises and broaden their powers to more efficiently rescue struggling members.

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Background
The global economic crisis struck the Eurozone with great force. While initially the Euro demonstrated a resilience that appeared to have delayed the effects of the recession there, it ultimately proved too damaging to several more fragile Eurozone members. The instability of these countries was caused both by unsustainable macroeconomic policies (primarily excessive government expenditure) and problems intrinsic to the unified currency. Although Greece and Ireland could have reduced their government spending, their inability to control their own monetary policy limited their ability to reduce trade deficits. The Eurozone is recovering from a major economic crisis, which was caused by external factors but exacerbated by its own policies and structure. To understand how to prevent future disasters of this magnitude, it is necessary to understand the nature of the monetary union, its heightened risk for crises, and the limitations of its monetary policies. As a monetary union, Eurozone members fix their currencies and free mobility of capital between members. This provides benefits during times of growth and arguably helps members weather minor economic turbulence. When economic crises do infect members, no single nation can affect their own money supply, and must petition the European Central Bank (ECB) to take action (Caves, Frankel, & Jones, 2007). Economic crises may be viewed as market failures. In the case of the recent economic crisis, overspeculation by financial intermediaries in the United States precipitated a crisis of confidence in the financial system. Without government intervention, panics would eventually have ended and the economy would lurch back to growth, but government intervention arguably ensured a much faster recuperation and avoided a longer recession (Paulo, Sebastian, 2011). While the recent crisis did not originate in Europe, the macroeconomic weakness of Ireland, Greece, and others made the crisis much worse there. Once the crisis infected weaker Eurozone

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members, the ECB was unwilling to follow a monetary policy that would help struggling countries but harm those avoiding the crisis. While other central banks (such as the US) developed novel tools to manage the crisis, the ECB lacked tools precise enough to significantly help struggling economies without harming the rest of its members (Nelson, 2010). Global economic crises are a recurring problem: although due to economic cycles of expansion and contraction, uneven patterns or growth, and speculation, the European Union (EU) can do little to stop the cycles of booms and busts of the global economy. Uneven growth, speculation, and unforeseen circumstances will subject the global economy to ebbs and flows (Caves, Frankel, & Jones, 2007) . The best the EU can do is be prepared for externally caused crises. Even if the ECB developed effective tools to manage external crises, there is evidence that the current system is prone to financial instability. Before there was a discussion of a financial crisis anywhere, Eurozone members were quietly amassing unsustainable debts. . Greece masked debt through accounting practices until a financial collapse was imminent . Despite regulations requiring that debt not exceed 60% of gross domestic product (GDP), over half of Eurozone members violate that requirement (European Central Bank, n.d.). The lack of oversight of government finance and regulatory penalties for violating rules render regulation irrelevant and impotent. Unfortunately, evidence suggests that the unsustainable debts of peripheral members are not solely caused by careless politicians. The ECB conducts one monetary policy for the entire Eurozone, and that policy is not one-size-fits all: nations in crisis desire the opposite policy as nations not suffering from the crisis (Pisani-Ferry, 2010). Ireland and Greece grew rapidly in recent years, and imported unsustainable quantities of foreign goods. If they were not parts of the monetary union, their currencies would have likely depreciated much earlier due to doubts of their ability to sustain the debt. However, without an ability for currencies to depreciate, they were unable to discourage greater foreign debt through monetary policy.

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The ECB must consider the three sources of Europe’s current struggles: it must consider the root causes of macroeconomic imprudence, its regulatory failure to limit and correct the offending countries, and it must consider its tools to manage perennial global economic slowdowns. For succinctness and clarity, the final memorandum will focus on the first two components discussed.

Policy Goals
The primary stated objective of the ECB is to maintain price stability. Its secondary objectives are to ensure high employment and sustainable non-inflationary growth. The subordination of growth and employment to price stability means discussion of sacrificing the fixed exchange rate system for growth would seem anathema to the ECB’s mission (European Central Bank, n.d.). However, the current crisis has made some members question the value of price stability between members without economic stability domestically stability worldwide. Due to the existential nature of the questions, the ECB is justified in seeking economic stability in order to sustain the long-term viability of a European economic community. With this broader mission, the ECB is free to evaluate the long-term viability of a Eurozone and alternatives that could strengthen the justification for its existence. I will assess each scenario of longterm Eurozone viability based on three broad goals: Economic Unity (including price stability), Stability and Growth of the European Union, and Implementation of the policy.

Economic Stability & Growth
The monetary union of the Eurozone provides price stability to its members, but risks economic crisis through two conduits: 1) it risks creating economic crises based on tying nations with very different economies together, which require monetary policies that are suboptimal for any party; and 2) when crises strike, it prevents nations from allowing their exchange rates to float and recuperate on an individual basis. While in moments of crisis such as this, the dissolution of the Eurozone appears preferable or even necessary to some, breakup of the Eurozone is a considerable policy change that would cause substantial shocks and whose effects may be more limited than expected. We analyze 3

based on implementation effects, prevention of endemic crises, exposure to global crises, and political feasibility. Crisis Prevention Without fiscal transparency, regulation of fiscal prudence is meaningless. Oversight ability would come in various levels, from Memoranda of Understanding regarding budgets to formal roles between ECB advisory or supervisory colleges and finance ministries. Measurement of oversight ability would vary from self-reporting and minimal universal regulation, an informal role in fiscal policy, to an active and permanent supervisory role of the ECB in national budgeting tailored to each member nation (CEPS Task Force Report, 2008). Furthermore, purely fiscal oversight may be insufficient to observe fiscal risk: one should also assess whether a broader surveillance framework that includes risks from credit booms, real exchange rates, and other macroeconomic components (Pisani-Ferry, 2010) One of the earliest troubling signs in the European economy was the discovery of the true size of Greece’s debt relative to GDP. Greece masked debt through accounting practices until a financial collapse was imminent. Despite a strict limitation that debt cannot exceed 60% of gross domestic product for Eurozone members and minimum requirements for GDP growth for applicants, without fiscal transparency, such indicators could be calculated and measured in a myriad of ways, rendering the requirement meaningless. Even if the ECB maintained no increased regulatory power over nations, budgeting transparency would improve their ability to enforce existing regulation. Oversight ability would come in various levels, from Memoranda of Understanding regarding budgets to formal roles between ECB advisory or supervisory colleges and finance ministries. Measurement of oversight ability would vary from self-reporting and minimal universal regulation, an informal role in fiscal policy, to an active and permanent supervisory role of the ECB in national budgeting tailored to each member nation (CEPS Task Force Report, 2008). Furthermore, purely fiscal oversight may be insufficient to observe fiscal risk: one should also assess whether a broader surveillance framework that includes risks from credit booms, real exchange rates, and other macroeconomic components (Pisani-Ferry, 2010) 4

In 2010, the debt/GDP ratio of the EMU countries averaged 84% -- 24% above the EMU ceiling (Messori, 2011). If member nations choose to embark upon unsustainable macroeconomic policy, the ECB must be armed with the tools to prevent or penalize these practices. These must consider their effectiveness foremost: while the current toolset has been criticized from both sides (Borio, 2003), experience from the past three years has strengthened a need for more powerful tools (European Commission, 2010) . In addition, such tools must be both adroit in their ability to focus on specific weaknesses, be they due to credit markets, budgetary, or other constraints. Finally, such enforcement policies must be measured in their ability to be exercised: regulatory efforts that are politically unpopular (such as those that drastically limit autonomy) or painful for other members, their effectiveness will be undermined by their lack of use. While the creation of a multinational and interdependent monetary union is historically unprecedented, the Eurozone has several important limitations compared to an idealized Optimal Currency Area. Although capital moves freely between Eurozone countries, cultural and legal barriers limit labor mobility. By lacking labor mobility, fixed exchange rates create a balance-of-payments problems and internal instability in member nations (Meade ). While member nations could weather these differences if they followed similar economic trends, the fundamental differences between members exacerbate these problems. Before the crisis, Greece and Ireland were overheating their economies, and would have benefitted from lowering interest rates to shrink their trade deficits. Meanwhile, Germany was benefiting from higher interest rates as its economy steadily grew (Deroose, Roger, & Langedijk, 2008).Until the Eurozone becomes either a completely homogenous area or has perfect capital and labor mobility, it is likely that it will continue to face difficulties unique to its internal diversity. Crisis Management The interconnectedness of modern economies makes facing small economic downturns a necessary component of monetary management. Even if all of Europe managed economic issues 5

perfectly, the Eurozone still needs to have tools to prevent external crises from spreading to its members. These policies must ensure that Eurozone members act swiftly and in a concerted effort when a crisis strikes one member (such as past fears of Italy) or a class of members (such as Greece and Ireland currently). I will consider containment as its effectiveness at limiting the spread of an economic crisis and its ability to limit the length of hardship to specific countries.

Economic Unity
Fixed prices and free capital mobility across nations ease transactions across borders. Member economies become intertwined into a single economic polity. The first advantage is increased trade and freedom of capital movement: if Italy has a bad year of crops, or does not make efficient appliances, it can freely trade with other members to smooth consumption and benefit from neighbors (Caves, Frankel, & Jones, 2007). By stabilizing prices, it eases everyday trade and minimizes the costs of goods crossing borders. Beyond purely economic benefits, it encourages transnational unity encouraged by many European politicians. While it is neither within the purview of the ECB or the focus of this memorandum, the value many politicians place on the Euro currency as a symbol of unity cannot be underestimated (Messori, 2011).

Implementation
The discussion of legislation to create a monetary union forced several Eurozone members to move to floating exchange rates and risked causing a major economic crisis. The mere discussion (let alone passage) of changes to the monetary organization of the area could cause an economic crisis (Eichengreen, The breakup of the Euro Area, 2007). The magnitude of economic effects demand that the potential shock of any policy change be considered. This policy goal will focus on short-term effects of proposal, discussion, and implementation of such a policy change.

Policy Alternatives
The struggle to effectively manage the crisis has offered critics to provide a wide variety of alternative solutions for improving Eurozone crisis management. Many economists have proposed

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solutions of little political feasibility and some lacking empirical evidence to support. This memorandum discusses the status quo, the alternative discussed by the President of the European Central Bank – dissolution of the Eurozone – and the current proposed European Stability Mechanism recently proposed by the ECB. Other alternatives are of intellectual interest but are unlikely solutions. Interesting alternatives not discussed here include the creation of country-specific “Eurobonds,” partial dissolution of the Eurozone, and an expedited Eastern expansion of the Eurozone.

Status Quo
Current Eurozone policy has been criticized as too lenient on member nations and lacking institutional framework to manage crises once they hit. However, changing Eurozone policy would require considerable political will and could result in greater economic shock. Despite current polices being the ideal, this section discusses the advantages of not bringing about reform. Due to the strong public demand for reform, I argue that this moment should be seized as a chance to pass reform with minimal costs in political will. Crisis Prevention Given the diversity of Eurozone members, risk of economic crisis is endemic to the current system. In the past five years, the ECB and national banks have greatly improved their coordination of policy, conduct stress-tests of economies, and harmonize crisis preparedness. While these efforts may have improved long-term coordination, member states appear to have largely taken separate approaches in the face of the crisis (Eijiffinger, 2008). Given that the Eurozone operates upon a single currency and therefore effectively maintain shared interest rates, all EU members must find an interest rate that is a compromise of their demands There are multiple scenarios in which one nation may desire to cut interest rates (such as lowering trade deficits or increase job creation) while another member wants to increase interest rates (such as to increase lending or curb inflation concerns). Whenever the needs of member countries become too disparate, they risk economic crisis at one of two ends of the extremes. 7

While separate monetary policy is impossible, the status quo lacks substitute policies can mitigate the difficulties of countries managing interest rates furthest from their ideal. No current tools exist for the ECB to provide differentiated policy between nations (Torcia, 2010). Without such policies, the Eurozone risks repeating the mistakes that made it vulnerable to the recent crisis (Deroose, Roger, & Langedijk, 2008). Crisis Management Current policies lack crisis management tools and even preempt their creation. The Maastricht Treaty prevents one Eurozone member from assuming public debt of another member (European Union, 2005): many questioned the legality of the initial bailout of Greece. The ad-hoc policy constructed for the current crisis relies upon the IMF as an intermediary and external source of funds. While the role fits the IMF’s original mission, there is little justification for including the 187-member body in a crisis when the European Union can provide all the multilateral infrastructure and funds necessary for the endeavor. If members of the IMF sought to veto any such bailout (as the United States could have), the entire endeavor could have collapsed. Economic Unity At the creation of the Eurozone, it redefined international economic unity. Fixed pricing throughout the area ensures a level of economic unity unparalleled in history. However, the weak budgetary regulations of the current system make the status quo the least unifying of all alternatives that leave the current Eurozone intact. All alternatives maintaining the current Eurozone have the same long-term result: nearcomplete economic unity of member nations. In the short- and medium-term, their methods and results will vary. Current policies would maintain the Eurozone on the path economic unity the path would be fraught with stifled economies and threats of crisis in the nations whose monetary policy needs are farthest from those collectively chosen.

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Implementation Although maintaining the status quo would not require the passage of new laws, creation of new institutions, or hiring of new experts, this in some ways represents a weakness. The Eurozone’s inability to prevent the crises in Greece and Ireland and its inability to keep the crisis from spreading has caused skepticism in the viability of the Eurosystem as it exists today, and both financiers and the general public expect leaders to ensure that such a crisis will not happen again. The demand for reform makes maintaining the status quo less politically attractive and more likely to cause financial tumult than a modest suite of reforms.

Eurozone Breakup
Blaming the debt crisis solely on specific countries ignores the unavoidable systemic weaknesses of the Eurozone (Krugman, 2011). Without independent monetary policy or reasonable substitutes, nations most different (e.g. Greece and Ireland) from those that sway monetary policy (Germany) were bound to eventually face debt crises. If joint monetary policy makes future crises unavoidable, it is worth considering ending joint monetary policy. This section considers the merits of a wholesale breakup of the Eurozone. Crisis Prevention Once implemented, the return of the Eurozone to individual domestic currencies would allow substantial liberty to minimize crises. By allowing nations to manage their own monetary policies, they would be able to raise and lower their interest rates, and hence allow their currencies to appreciate and depreciate with much higher insulation from the greater EU economy. This will reduce the risk of crises arising due to monetary policy inflexibility. Crisis Management Without the creation of any EU bailout mechanism, it will increase any single nation’s exposure to external crisis. For example, before the recession spread to Europe, more fragile Eurozone members were protected from the recession. As parts of the Eurozone, their fate was tied to the greater economy, and apologists of the Eurozone cited it as a demonstration of strength through of a shared 9

currency. If smaller external crises could spread to more fragile EU members without a Eurozone, crisis prevention could be weaker without a shared currency (Alcidi, De Grauwe, Gros, & Oh, 2010). However, it is unclear that this would be the case. Even if weaker nations were more exposed to external crises without a monetary union, they would be able to enact their own monetary policy, and float their currencies against other nations, including other EU members. Economic Unity Short-term economic disunity is the source of the economic strength of this alternative. By allowing EU members to float their exchange rates, they would, as needed allow the variation necessary to minimize certain risks endemic to a common currency. In the long term, the economic disunity would slow the growth of the EU into a single economic polity. Further, it would reduce insulation of more fragile economies in order to minimize risk to the entire Union. Implementation There are three key components to implementing a substitution for domestic currencies for the Euro. No mechanism exists allowing members of the Eurozone from withdrawing from the Euro. Withdrawal constitutes a violation of the EU Treaty, and therefore all EU members would have to unanimously vote to alter the treaty. Second, each Eurozone member would have to determine how it would substitute currencies. While stable and strong economies (such as Germany) would face minimal struggle reverting to a sovereign currency, weaker economies (such as those that struggled most from the crisis) would face a unique difficulty. In the past, nations undergoing currency substitutions chose to transfer from a weak currency to a strong one such as through dollarization (Blejer & Levy-Yeyati, 2010). Such a substitution has only a handful of historical precedents (such as Argentina), but the context of such a change in European countries is almost impossible to predict (Eichengreen, Vox EU, 2007). After initial tumult

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during the initial policy change, members would presumably return to a policy of allowing currencies to float within a narrow band around a basket of EU currencies.

Reform
As opposed to calls to break up the Eurozone, the European Commission proposed to tighten bonds between members through reform. Proposed reforms come in terms of new budgetary regulations through the Stability & Growth Pact and new crisis management structures through European Stability Mechanism (ESM). The ESM would provide debt assistance similar to that of the IMF to distressed Eurozone members (Eurogroup). Crisis Prevention The Stability & Growth Pact includes several preventative provisions. While previous debt to GDP requirements utterly failed, the new pact provides greater monitoring of debt ratios and penalties for noncompliant members. The new pact sets specific numerical targets for all national debts, not only government deficits. By doing so, they are more likely to prevent the type of debt masking that resulted in Greece’s greatest problems. In particular, members will be forced to report specific medium-term targets to reduce their deficit and debt levels. Members who do not meet these goals will be subject to monetary penalties determined by a supervisory Commission and could only be prevented by a majority EU member vote. Crisis Management The ESM policy provides incremental improvements in current crisis management by creating official channels through which struggling economies may be rescued exclusive to the Eurozone. When a member country faces a crisis, the ECB and IMF would jointly determine the causes of the crisis. Similar to IMF loans, they would require austere (and often painful) fiscal policy by debtor nations. They would then receive loans in the form of bonds held by creditor EU members (such as France and Germany). To ensure repayment doesn’t prevent recovery, creditors may diminish repayment conditions by majority

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vote (European Central Bank, 2011). The presentation of the ESM suggests that such forms of relaxation are expected to be an intrinsic part of the recovery process (Micossi, Carmassi, & Peirce, 2011). Unfortunately, the process does not provide immediate and automatic mechanisms to provide emergency credit to nations in crisis. In the recent crisis, hesitation allowed the crises in Greece and Ireland to worsen before creditor countries were willing to act. Rescue by ESM mechanisms would still face hesitation and coordination costs similar to those in the recent crisis (Tabellini, 2010). The Stability and Growth Pact also discuss reforming institutional frameworks for budget policy. This would include standardizing budgeting accounting practices, which would ease regulation and ensure that fiscal targets were met in truth and not by unconventional accounting practices. Unfortunately, the discussion of reforms are left vague and are unlikely to have any true effect on practices (Tabellini, 2010). Economic Unity While preservation of the monetary union maintains higher economic unity than a Eurozone breakup, it does little to further economically unify the Eurozone. Without further economic unity, peripheral members will continue on divergent economic paths from founding members. If peripheral members return to uncontrollable trade deficits, they will likely return to another liquidity crisis. These reforms do not provide mechanisms to provide transfers from founding members to periphery members nor any other mechanisms to ensure members are on similar economic cycles. Implementation These reforms do not require an EU referendum, and must only be passed by the European Council2. Its primary short-term effects will simply be to discourage those helping struggling nations finance debt. While this may discourage further bailouts to some degree, the primary motivator of bailouts is to stabilize economies and not to improve terms of repayment.

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The European Stability Mechanism was passed by the European Council on December 17 2010. The Stability and Growth Pact has not yet been passed.

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Recommendation & Conclusion Based on 1) the weakness of current crisis management apparatus and 2) the possibility of economic catastrophe inherent in Eurozone breakup, I recommend adopting the European Stability Mechanism and the Stability and Growth pact. While these reforms are insufficient to prevent future crises caused by variations in economic cycles and disparities between members, they will reduce risks caused by avoidable deficits and provide a framework to manage future crises. While this memorandum did not discuss policy alternatives that suggest more sweeping reforms, I encourage future consideration of more sweeping reforms to the preventative arm of Eurozone policy.

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Bibliography Alcidi, C., De Grauwe, P., Gros, D., & Oh, Y. (2010). The Future of the Eurozone and Gold. Retrieved from Social Science Research Network: CEPS Special Reports: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1672672 Beckworth, D. (2011). Countdown has begun for Eurozone. Retrieved from Seeking Alpha: http://seekingalpha.com/article/262501-the-countdown-has-begun-for-the-eurozone-breakup Blejer, M. I., & Levy-Yeyati, E. (2010, 06 21). Leaving the Euro: What's in the Box? Retrieved from Vox EU. Borio, C. (2003, 02). Towards a Macroprudential Framework for Financial Supervision and Regulation. Retrieved from Bank for International Settlements: http://www.bis.org/publ/work128.pdf Caves, R. E., Frankel, J. A., & Jones, R. W. (2007). World Trade and Payments. Boston MA: Pearson. CEPS Task Force Report. (2008, 12 01). Concrete Steps Towards More Integrated Financial Oversight. Retrieved from http://www.ceps.eu/book/concrete-steps-towards-more-integrated-financialoversight-eus-policy-response-crisis Deroose, S., Roger, W., & Langedijk, S. (2008). Reviewing Adjustment Dynamics in EMU: From Overheating to Overcooling. Retrieved from Social Science Research Network: http://papers.ssrn.com/Sol3/Delivery.cfm/SSRN_ID1286422_code649764.pdf?abstractid=12864 22&mirid=2 Eichengreen, B. (2007). The breakup of the Euro Area. Retrieved from National Bureau of Economic Research: http://www.nber.org/papers/w13393 Eichengreen, B. (2007). Vox EU. Retrieved from Eurozone Breakup Would Trigger the Mother of All Financial Crises: http://www.voxeu.org/index.php?q=node/729 Eijiffinger, C. W. (2008). Crisis Management in the European Union. Retrieved from Committe on Economic and Monetary Affairs: http://feweb.uvt.nl/pdf/news_december_2008_4.pdf Eurogroup. (n.d.). European Stability Mechanism Memo. Retrieved 2011, from Europa: http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/10/636 European Central Bank. (2011). European Stability Mechanism Memo. Retrieved from Europa: http://www.consilium.europa.eu/uedocs/cms_data/docs/p European Central Bank. (n.d.). ECB: Tasks. Retrieved 11 April, 2011, from European Central Bank: http://www.ecb.int/ecb/orga/tasks/html/index.en.html European Central Bank. (n.d.). General Government Debt. Retrieved from Eurostat: http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&plugin=1&language=en&pco de=tsieb090 European Commission. (2010). Enhancing Economic Policy Coordination for Stability, Growth, and Jobs. Retrieved from European Commission: http://ec.europa.eu/economy_finance/articles/euro/documents/com_2010_367_en.pdf European Union. (2005). The Maastricht Treaty. Retrieved from Banque de France: http://www.banquefrance.fr/gb/eurosys/telechar/docs/Maastricht_treaty.pdf Georgiev, V. (2010). The Technicalities of Eurozone Breakup. Retrieved from European Union Law: http://eulaw.wordpress.com/2010/11/24/the-technicalities-of-eurozone-breakup/ Krugman, P. (2011, 01 12). Can Europe Be Saved? Retrieved from New York Times: http://www.nytimes.com/2011/01/16/magazine/16Europe-t.html 14

Messori, M. (2011). Can the Eurozone Countries Still Live Together Happily Ever After? Brussels: Centre for European Policy Studies. Micossi, S., Carmassi, J., & Peirce, F. (2011). CEPS Policy Brief: On the Tasks of the European Stability Mechanism. Retrieved from Harvard Law: http://www.law.harvard.edu/programs/about/pifs/symposia/europe/2011-europe/conceptpapers/micossi.pdf Nelson, R. (2010, 4 27). Greece's Debt Crisis: Overview, Policy Responses, and Implications. Washington, DC: Congressional Research Service. Paulo, Sebastian. (2011). Europe and the Global Financial Crisis. Retrieved from Foundation Robert Schuman: http://www.robert-schuman.eu/doc/questions_europe/frs-fichecrisefi-qe200-en.pdf Pisani-Ferry, J. (2010). Eurozone Governance: What Went Wrong and how To Repair It. In R. e. Baldwin, Completing the Eurozone Rescue: What More Needs to be Done. Brussels: Vox EU. Tabellini, G. (2010). Reforming the Stability Pact: Focus on Financial Supervision. Retrieved from VoxEU: http://www.voxeu.org/index.php?q=node/5622 Torcia, A. (2010, 05 07). Reuters. Retrieved from Q+A: Why is the euro zone failing to contain the crisis?: http://www.reuters.com/article/2010/05/07/us-eurozone-crisis-containidUSTRE64652X20100507

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Figure 1: Policy Goals Matrix Goal Impact Category Crisis Prevention Status Quo Poor : While non-crisis coordination is effective, systemic problems and lack of oversight will foment future crises Poor : no formal institutions to provide bailouts of countries in crisis Not Difficult : No necessary official steps, but reformers may argue this is a squandered opportunity Very Good :Unlikely to cause panic or strain markets Average: Does not account for economic diversity, but encourages long-term interconnectedness of member economies Yes Policy Alternatives Eurozone Breakup Mixed : Better ability to prevent internal crises and set own monetary policy, worse at coordination European Stability Mechanism Average : Provides safeguards against panic while minimizing moral hazard concerns. Does not address economic diversity Good: lessens risk of entire EU Good: Provides options to rescue suffering from crises, but increases failing economies through bond risk to individual high-risk nations sales and loans Very Difficult: requires changes to EU Not difficult: Does not require treaty and altering of core documents or treaties Very Poor: expectation of change Good: No risk of immediate fallout; could cause tremendous crisis reduced motivation of creditors Very Poor: likely lowers growth in peripheral members and higher growth in founding members. No Average: Does not account for economic diversity, but encourages long-term interconnectedness of member economies Yes

Stability & Growth Implementation Unity

Crisis Mitigation & Management Political Reform

Economic Shock

Economic Unity

Price Stability

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