Two schools of thought on European integration

An optimistic note on European crisis. It is by C . Fred Bergsten and Jacob Funk Kirkegaard of PIIE.

I liked this bit from the note. It begins with little history on the EMU and says:

There have been two schools of thought on how European integration would be achieved: the locomotive theory, where
the common currency would be introduced early and act as  a locomotive for additional economic and political integration of Europe3; and the coronation theory, where a common currency would be introduced only at the end of a long process of real economic and political integration in Europe. As described in Bergsten and Kirkegaard (2012), the locomotive theory won out, as Europe needed a swift strategic response to German unifi cation in 1990 and thus settled on the quick and dirty politically achievable solution of a monetary-only Economic and Monetary Union (EMU).

However, history since the introduction of the euro in 1999 shows the locomotive theory is empirically wrong. The  introduction of the common currency itself did not facilitate any increase in economic and political integration in the euro area. It produced the opposite result. Indeed, as described in Duval and Elmeskov (2005, 35), “there appears to have been a slowdown in the reform process in EMU countries after the formal advent of the euro.” Private fi nancial markets mistakenly responded by prolonged underpricing of sovereign risk following the introduction of the euro, allowing all sovereign  borrowers to borrow at ultra-low German interest levels until the global fi nancial crisis hit in 2008.

The locomotive clearly has crashed…

How then is the note optimistic. The authors believe because of the crisis, the integration will be quicker.

On Eurobonds it points to this interesting fact. Some bit has already started:

Starting  small, the European Commission proposals for so-called project bonds, the Europe 2020 Project Bond Initiative,6 has already been accepted by the EU Council and EU Parliament and will in all probability begin to be implemented by the European Investment Bank (EIB) later in 2012. Th ese project bonds, which will be backed by the entire EU-27 (i.e., not just the euro area), are intended to “fund pre-identifi ed transport, energy and ICT priority infrastructures of EU interest, and

both physical and information technology infrastructures, consistent with sustainable development criteria”7 but are in
the pilot phase not presently intended to exceed more than €400 million to €500 million. Viewed in the context of the
euro area’s much broader fi nancial problems, these bonds are inconsequential. However, when seen as a step toward more joint liability debt issuance in the euro area, its precedent setting eff ect should not be underestimated. 

Very interesting..Need to read up.

A nice round up on Europe (before the Jun-end summit)..


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