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Is the euro a success?

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  1. Introduction
  2. The euro: A strong currency?
    1. The euro: An international currency?
    2. The exchange rate of the euro to a gross negligence? (Benign neglect)
  3. The specificity of the European policy mix
    1. The framework of the European policy mix
    2. The stabilization of the euro area shocks
    3. The Stability Pact

Now accused of all evils (stifling exports, slowing growth, feeding speculation, etc.), the euro seems to have become everybody's favorite scapegoat. Yet it remains that this currency is a unique experience (a single currency managed jointly by several countries), and it is undeniable that the adoption of euro has enabled success in economic and financial matters. So, is the euro successful?

The European economic union was born in the 50s with the Schuman Declaration in May 1950, for a political purpose: to prevent new European wars; an economic goal: restoring the productive activity, and create economic solidarity among member countries. In 1951, the Treaty of Paris created the ECSC, driven by Schuman and Jean Monet. The membership of this organization included France, Germany, Italy, Luxembourg, Belgium, and the Netherlands. In 1957, the Treaty of Rome gave birth to the EEC. Then in 1986, the Single European Act was signed primarily aiming at the establishment of a large domestic market.

This commercial development has gradually achieved a process of monetary integration. It was not until the late 60s that the idea of a single currency was expressed. The original base was the Werner Report in 1970 which advocated a program for building a European Economic and Monetary Union over a period of 10 years. A mistake was to keep the reference to the dollar as the basis of fixed exchange rates between European currencies. But the Bretton Woods system imploded on August 15, 1971, when Nixon removed the dollar's convertibility into gold: the Werner plan collapsed.

The EEC countries still chose to link the European currencies by setting relatively narrow bandwidths (2.25%), and by floating all the European currencies against the dollar to a maximum of 4.5%. This is what is called the ?snake in the tunnel', which ran from April 1972. This system became particularly vulnerable in June 1972 with the exit of the United Kingdom and Ireland; Italy in ?73, France in ?74, then it re-entered and exited in ?76. Since 1976, the snake is reduced to a single zone mark: the Deustche Mark.

The European Monetary System was established in March 1979. It attempts to create a zone of stability regarding the exchange which becomes independent against the dollar.This system worked until 31 December 1998 from a common currency, the ECU.

Then, the Maastricht Treaty in February ?92 put in place the process of monetary union, it includes three phases:

?1990 to end of 1993: begin with the liberalization of capital movements.
?1994 to end of 1998: phase marked by institutional change: reforming the status of national central banks, creation of the European Monetary Institute replaced on 1 June 1998 by the ECB.
?1999 signaled the effective start of EMU with the convergence criteria set by the Maastricht Treaty. On 1 January 2002, the euro was effectively introduced.

Today, pegged at over $1.5, the euro seems very strong, but can this really be construed as a sign of success?

Tags: European Monetary Institute, euro, dollar, exchange rate

[...] For all these reasons, it is necessary to regulate fiscal policy by rules.This is the fiscal constitutionalism, which denotes a certain distrust of politicians Criticism of the current criteria: Regarding rules of supervision of public finances, critics maintain that rules are too rigid, and have no economic justification. The rule of deficit is arbitrary. There is no clear economic justification. This criterion applies identically to all countries, regardless of their level of debt. However, the debt must also be taken into account: those with low debt can afford for example.This framework is too rigid and asymmetrical. [...]


[...] If specialization among member countries of the EU is based on inter- industry specialization (to Ricardo: each specializing in a sector), the probability of asymmetric shocks is high. If, however, specialization is done on an intra-industry (everyone produces all), the probability of asymmetric shocks is low. Today, the diagnosis can be difficult. Historically, Europe has been oriented towards intra- industry. Subsequent to the enlargement process, some countries tend to produce goods with high added value. However, if we follow Krugman's analysis developed in his paper titled Economic Geography' there will be polarization effects, agglomeration, targeted geographic areas, because the potential for market growth exists, as the workforce is skilled. [...]


[...] In the euro area, there is significant intra-European trade, which justifies the choice of a common currency.The single currency is the logical culmination of a process of regionalization, integration. Homogeneous preferences of Kindleberger in 1986: he took over the theory of openness of McKinnon. He said significant trade within an integrated economic area indicates that member countries have the same preferences not only for traded goods, but also for collective property/possessions. These identical preferences mainly concern the choice of same objectives of economic policy. [...]

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