The Euro @ 20: How Economic and Financial “Asymmetries” Marred the Promise of the Single Currency

• Published date: 01 December 2020
• Author: George Alogoskoufis,Laurent Jacque
• Date: 01 December 2020
• DOI: http://doi.org/10.1111/jacf.12435

IN THIS ISSUE:

Public

Finance and

Central Banks

8Rethinking Macro Measurement

James Sweeney, Chief Economist, Credit Suisse

17 e First Modern Financial Crises: e South Sea and Mississippi

Bubbles in Historical Perspective

Robert F. Bruner, University of Virginia; and Scott C. Miller, Yale University

34 Convergence and Reversion: China’s Banking System at 70

Carl Walter

44 Apocalypse Averted: e COVID-Caused Liquidity Trap, Dodd-Frank,

and the Fed

Craig Pirrong, University of Houston

49 e Poverty of Monetarism

Patrick Bolton, Columbia University

68 Columbia Business School Roundtable on Broken Models of Public Finance

Panelists: Jared Bernstein, Center for Budget and Policy Priorities; and Paul Kazarian,

Japonica Partners. Moderated by Shiva Rajgopal, Columbia University

82 Columbia Business School Roundtable on e Fed’s Response to the

Global Financial Crisis—and Now the Pandemic

Panelists: Frederic Mishkin and Patricia Mosser, Columbia University. Moderated by Kate Davidson,

The Wall Street Journal

90 e Euro @ 20: How Economic and Financial “Asymmetries”

Marred the Promise of the Single Currency

George Alogoskous, Athens University of Economics and Business; and Laurent Jacque,

Tufts University

105 e Benets of Buying Distressed Assets

Jean-Marie Meier, University of Texas at Dallas; and Henri Servaes, London Business School,

CEPR, and ECGI

117 Using ESG to Enhance Fixed-Income Returns: e Case of Inherent Group

Nikhil Mirchandani and Chelsea Rossetti, Inherent Group

127 e Economic (Not Literary) Oenses of Michael Lewis:

e Case of e Big Short and the Global Financial Crisis

Don Chew, Journal of Applied Corporate Finance

VOLUME 32

NUMBER 4

FALL 2020

APPLIED

CORPORATE FINANCE

Journal of

90 Journal of Applied Corporate Finance • Volume 32 Number 4 Fall 2020

e breakdown of the Bretton Woods system in 1971 and the

ensuing chaotic experiment of generalized oating exchange

rates revived the goal of a European Monetary Union. e

ill-fated European Monetary System (1979-99) reenacted on

a European scale a mini-Bretton Woods system of pegged

exchange rates that was designed to limit exchange rate vola-

tility. Undermining this quest for exchange rate stability were

structural

disparities, or “asymmetries,” between “core”

and “periphery” countries. More specically, the source

of failure was the signicant dierences between member

countries’ key macroeconomic aggregates such as GDP

per capita, unemployment, ination, current account

balances, interest

rates, nominal and real exchange rates,

scal balances, and government debt—dierences that the

European Monetary System proved unable either to elimi-

nate, or to deal with eectively.

e launch of the single currency in 1999 rekindled the

European Union’s momentum for deeper integration. But a

rst decade of low interest rates was marred by bulging budget-

ary and current account decits in several eurozone sovereigns

that brought them to the brink of default in 2010. A second

decade of sluggish and lopsided recovery since then has

deeply scarred Europe’s social fabric and widened the divide

between the single currency’s winners—Northern European

countries—and losers—chiey, the Mediterranean countries.

Can a retrospective of the EU’s long quest for monetary union

explain how the euro crisis was seeded? What is in store for the

euro in its 20th

year? Will the coronavirus pandemic prove to

be a game changer by enabling the eurozone to recapture its

momentum—or is it fated to languish and fade away?

In what we have cast as a drama in ve acts, Act I recounts

the quest for a European Monetary Union and documents the

gradual deepening of monetary cooperation among member

states. e promise of how the single currency held rst with

the launch of the euro in 1999 (Act II) but was later broken

by the euro crisis (Act III) is explained through the lens of the

construct of an optimal currency area. Is the euro @ 20 (Act

IV) likely to limp along by “muddling through”? or, will the

coronavirus pandemic (Act V) usher the euro area into bold

reforms to deepen the European monetary union by laying the

foundations of a scal union? or will it simply splinter with

one of the crisis countries exiting the euro area?

Act I: The Quest for Monetary Union

Launched on March 13, 1979 by the EC, the European Mone-

tary System (EMS) had three principal objectives: to reduce

exchange rate variability, limit macroeconomic asymmetries

and foster monetary stability through economic convergence

he dream of building a unied Europe traces its roots back to the signing of the

Treaty of Rome in 1957. France, Germany, Italy, the Netherlands, Belgium, and

Luxembourg established a common market known as the European Community, or EC,

which meant abolishing intra-trade barriers and erecting common external tariff barriers.

To facilitate the functioning of the common market and encourage intra-EC trade and

investment, exchange rate stability was deemed an integral part of deeper economic,

nancial, and political integration among EC member states. In the heyday of the Bretton

Woods system (1944-1971), pegged exchange rates provided the necessary currency

stability that made a monetary union a less urgent goal for the European project.

by George Alogoskous, Athens University of Economics and Business; and Laurent Jacque, Tufts University

e Euro @ 20: How Economic and Financial “Asym-

metries” Marred the Promise of the Single Currency

T