ISSN 2187-7467

Review of EU Asia Pacific Studies (REAPS)EUSI Tokyo ( Economics & Economic History)
No. 2&3 (March, 2017)

The EU at a Crossroads:
Responding to Challenges for theEuro-zone and the EU
Edited by Takamoto Sugisaki

Review of EU Asia Pacific Studies

No.2&3 (March, 2017)

Review of EU Asia Pacific Studies
No.2&3 (March, 2017)EUSI Tokyo (Economics & Economic History)
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ISSN 2187-7467

Review of EU Asia Pacific Studies

No.2&3 (March, 2017)

The EU at a Crossroads: Responding to Challenges for the Euro-zone and the EU
Contents
Acknowledgement
Contributors
Introduction…………………………………………………………Takamoito Sugisaki

4Part I The EU at a Crossroads: In the Economic Perspectives
Europe’s Crisis in the Early Twenty-First Century: A Historical Perspective………………………………………………………..……… Yousef Cassis

9

Economic Outlook and Policies in Europe……………………………………………………………….. Zsolt DarvasComments………………………………………………………… Kentaro Kawasaki

17
29

Post Global Financial Crisis Ireland: A ‘Model’ of Economic Recovery?
…………………………..………… Bernadette Andreosso-O'Callaghan

31

Prospect of New Member States for the Euro Adoption:
Based on Small Countries’ Experiences………………………………………………………..……… Yoji Koyama

46

Part II Special Lectures: Background of the European Integration
International Monetary System revisited 20 Years Later…………………….…………………………………………. Toru Iwami 55
Richard Coudenhove-Kalergi and Japan: A Brief History………………………………………………………… Hidenori Tozawa 66
Part III Presentations in the Conference
The Greek Debt Crisis and its Aftermat ……………………………. Panos Tsakloglou

75

Round Table : Social Cohesion and its Resilience in Europe
Europe at a Crossroads: Is Austerity Destroying the EU or Can It Revitalise IT?
……………………………………………… Proposal: Henk Overbeek

86Part IV Supplement
Crisis! What Crisis? The “German Model” facing Economic and Financial Challenges
since the 1990s ……………………………………………….……… Werner Bührer 90
Programme of the Conference…………………………………………………….………

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Acknowledgement.
This work is based on the International Conference, “Responding to Challenges for the Euro-zone: Resilience ofEurope and New Perspectives of EU Studies” held on 8th & 9th March, 2015 at Tsuda College, and the Lecture
Series “Thinking about Economics: On EU Studies” held by EUSI Tokyo Economics Unit & Tsuda College
FD Support Seminar in February, 2016, both projects of EUSI Tokyo. This work started under the EU Asia
Japan Day Project at Tsuda College in October, 2011, when the first preliminary International Conference was
held.
EUSI Tokyo is the EU supported academic consortium organised among Hitotsubashi University, Keio
University and Tsuda College. This consortium was established in 2008, building on the EUIJ Tokyo project
which was established in 2004, and is now at the end of its second four-year term. Review of EU Asia PacificStudies (PEAPS) is a web journal of EUSI Tokyo, published by the Economics and Economic History
Research Group (Economics Unit). Financial assistance was provided by the EU.
The editor thanks all the contributors for their support and patience in publishing the proceedings of theConference. Unfortunately, some presentations at the Conference could not be included in this Journal, though
we hope there may be a chance to include them in future editions.
The editor is grateful also for the support of colleagues at Tsuda College, especially Professor Chris Burgess
and Professor Ryosuke Amiya-Nkada. I would also like to express my thanks to Ms. Akiko Kariatsumari, Ms.
Tamami Kita, Ms. Shoko Yokohama, Ms. Akiko Kawamo, the EUSI Tokyo Office and International Centre at
Tsuda College, and to the Bun-Shin Co,. especially Mr. Ryo Kitano, for editorial assistance.
Takamoto Sugisaki
Tsuda College

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Contributors
Bernadette Andreosso-O’Callaghan, Professor Jean Monnet Chair of Economics at the Universityof Limerick, Ireland and Professor of East Asian Economics at the Ruhr Universität Bochum,
Germany.
Youssef Cassis, Professor of Economic History, Joint Chair Department of History and Civilization
and Robert Schuman Centre for Advanced Studies, European University Institute
Zsolt Darvas, Senior Fellow at the Brussels-based think-tank Bruegel. Senior Research Fellow at
the Institute of Economics of the Hungarian Academy of Sciences at the Corvinus University ofBudapest.
Toru Iwami, Emeritus Professor, University of Tokyo.
Kentaro Kawasaki, Professor, Faculty of Business Administration, Toyo University.
Yoji Koyama, Professor Emeritus at Niigata University.
Hidenori Tozawa, Professor of International Relations, School of Law, Tohoku
University.
Werner Bührer, Professor of Contemporary History, Munich University of Technology.
Henk W. Overbeek, Emeritus Professor of International Relations, VU University, Amsterdam.
Panos Tsakloglou, Professor, Athens University of Economics and Business, Greece.

Edited by
Takamoto Sugisaki, Professor. Director, Institute of International and Cultural Studies, Tsuda
College.
EUSI Tokyo, Economics Unit.

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Introduction
Takamoto Sugisaki

This volume of REAPS combines previous Numbers 2 and 3 in a collection of papers revised following
presentations at the 2015 EUSI Tokyo International Conference and the 2016 EUSI Tokyo Economics
Unit & Tsuda College FD Support Seminar Series.1
The International Conference occurred amidst the Greek Crisis, and the EU’s austerity policy was among
the main issues discussed. Since then, successively important matters have arisen in and around the EU.
The EU’s humanitarian open-door policy triggered an influx of Syrian refugees and a migrant crisis that
sired sweeping economic and political nationalism. The June 2016 referendum in the United Kingdom
delivered the historic and erroneous decision favouring Brexit. It was followed by a blatantly
nationalistic presidential campaign in the United States.
The impact on Europe of the US-instigated 2007–2008 global financial crisis has been debatedextensively, and we had some trials to consider the meaning of the European integration after theinternational monetary crisis in globalisation.2 As the situation evolved from a U.S. monetary crisis into
the European Sovereign Debt Crisis in 2011–2012, it became necessary to consider the Eurozone’s
predicament within the context of globalisation. Challenged by US-centric globalisation, Europe hasreached a crossroads: one path leads towards dissolution of the EU and Balkanization into small statesagain; the other, towards greater integration and a European super-state.3
REAPS Vol.1 (2013) introduced Mundell’s tri-lemma praxis to consider unrestricted movement of capital
among EU states (Mundell, 1963). Mundell’s tri-lemma shows that perfect international capital mobility
and independent monetary domestic policy are incompatible in stabilizing pegged foreign exchange rates.
This tri-lemma praxis was applied to introduction of a single currency in the Eurozone, where every
state abdicates power over monetary policy to the European Central Bank. The United Kingdom could
not countenance doing so. Notwithstanding convergence of monetary policies, finance and budgetary
problems remain far from convergence because countries’ social problems differ. Accordingly,
Mundell’s tri-lemma model should be expanded to encompass to monetary policy alongside publicfinance policies inter-dependent on domestic social dimensions (Sugisaki, 2007).
The GCES (Global Capital Exchanges States) structure model is introduced in this context. In this model,
mobility of global capital (GC) confronts a restrictive territorial sovereign (S), and the conflict between
1

The former conference—Responding to Challenges for the Euro-zone: Resilience of Europe and New Perspectives
on EU Studies—was held 8–9 March 2015 at the Sendagaya Campus of Tsuda College. The latter—Thinking about
Economics: On EU Studies—occurred in February 2016 at the Kodaira Campus of Tsuda College.
2 EUSI Tokyo (Economics & Economic History), Review of EU Asia Pacific Studies (REAPS), No1(March, 2013), as a result of the EUSI Tokyo International Conference The EU at a Crossroads: The Euro-zone
Crisis under Globalization held 12–13 October 2012 at Tsuda College, Japan.
3 Ibid. p.4.
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them should be adjusted via exchange rates (E) (Sugisaki, 2016). Under the single-currency mechanismof the euro, however, conflict between member states’ territorial sovereignty and capital mobility haveintensified in several respects. First, states affected by movements of global capital relinquish fiscal
autonomy, especially when foreigners own much of their sovereign debt. The Greek Crisis exemplifies
this conflict. It also reveals weaknesses in the EU’s fiscal power through its inability to defend Greece
from capital flight. Second, sovereign states cannot set internal labour policy when capital and labour
flow within one borderless market. Free flows of capital, labour and other productive inputs are
inseparable for monetary and market integration. Yet the 2015 influx of refugees revealed direconsequences when countries relinquish control over their borders. In addition, a consolidated monetaryarea must be able to curtail entry of labour from without, further eroding states’ control over internallabour markets.
Trans-border mobility of labour under the Schengen Treaty is the basis of European monetary integration.
That is why the conflict between GC and S caused by capital mobility now appears as a conflict involving
mobility of labour. Absent adjustments via exchange rates within the GCES structure, freedom of GC in
the EU contradicts sovereignty of individual states (S) over their public finances and labour markets. In
2017, elections in several EU countries will decide the future of the EU. Will member states opt forstronger integration, abrogating independent fiscal sovereignty, including labour-market policy, or will
they revert to fragmented sovereign states?
Although these questions deserve extensive discussion, contributors and discussants at the Conferenceagreed almost unanimously that the central problems are monetary integration without fiscal power
based on democratically made decisions and absence of cohesion among countries. Therefore, thisvolume focuses on several countries disrupted by the increasing mobility of factors of production in a
multispeed integration in the EU.

Part I—The EU at a Crossroads in Economic Perspectives—features fiver papers. Yousef Cassis(‘Europe’s Crisis in the Early Twenty-First Century: A Historical Perspective’) and highlights lessons
from the 1930’s relevant to the three-fold current crisis. Zsolt Darvas (‘Economic Outlook and Policies
in Europe’) illuminates the crisis comprehensively and focuses on six short-term economic difficulties
that impair the EU’s long-term economic growth. Kentaro Kawasaki’s ‘Comments’ on Darvas’s Paper’
accentuates the importance of the latter and the problem presented by the Eurozone’s political and social
incohesion. Bernadette Andreosso-O'Callaghan (‘Post Global Financial Crisis Ireland: A “Model” of
Economic Recovery?’) discusses Ireland’s post-crisis recovery as an export-oriented economy
benefitting from the multinational pharmaceutical industry. Abridged from his edited book, Yoji
Koyama’s ‘Prospect of New Member States for Euro Adoption Based on Small Countries’ Experiences’shows the importance of new states adopting the euro and emphasises the necessity of replacing austerity
measures.
Part II—Special Lectures: the Background of European Integration—contains two papers.
Toru Iwami (‘The International Monetary System revisited 20 Years Later’) discusses changes in the
global economic power structure over two decades to set the monetary problem of the euro in historicalcontext. Hidenori Tozawa (‘Richard Coudenhove-Kalergi and Japan: A Brief History’) supplies basic
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knowledge to understand the historical background of European integration.
Part III—Presentations at the Conference—assembles materials presented at the conference. Panos
Tsakloglou (‘The Greek Debt Crisis and its Aftermath’) provides valuable information about the Greek
economy and Greece’s financial and sovereign crisis. Werner Bührer (‘Crisis! What Crisis? The“German Model”: Facing Economic and Financial Challenges since the 1990s’) makes points we hope
to develop further.
The Round Table—Social Cohesion and its Resilience in Europe—supplies materials from Henk
Overbeek’s presentation (‘Europe at a Crossroads: Is Austerity Destroying the EU or Can It RevitaliseIt?’).
Part IV—Werner Bührer supplies supplementary paper which we found important to consider the titleof this volume.
Rallying to cries of ‘Britain First!’ and ‘America First!’, two countries that have led globalisation sincethe 1980s turned toward economic nationalism during 2016. The consequences spread beyond Europe
to the Pacific as the Trump Administration disavowed the Trans-Pacific Partnership. The two nations’emergent subordination of globalisation to domestic industrial and labour supremacy portends
protectionism and beggar-thy-neighbour international policies.
As editor, my closing question is who now stands at that crossroads—the Eurozone and the EU, the AsiaPacific, or the entire world? The next few years promise massive historic transformation. This combinednumbers edition will prompt deeper scholarly understanding of these issues and cooperative research.

References
Andréosso-O'Callaghan, B. and M. B. Zolin (2010). Current Issues in Economic Integration : can Asia Inspire the "West"?
(Farnham, Ashgate).
Andréosso-O'Callaghan, B. and F. Royall, Eds. (2013). Economic and Political Change in Asa and Europe: Social Movement
Analyses (Dordrecht Heidelberg NewYork London, Springer).
Arndt, H.W. (1944). The Economic Lessons of the Nineteen-Thirties: A Report (London, Oxford University Press).
Cassis, Y. (2006). Capitals of Capital : a History of International Financial Centres, 1780-2005, translated by Jacqueline
Collier (Cambridge, Cambridge University Press).
Cassis, Y., Grossman R.S. and Schenk, C.R. (2016). The Oxford Handbook of Banking and Financial History. (Oxford
University Press).
James, H. (2001). The End of Globalization : Lessons from the Great Depression (Cambridge, MA : Harvard University
Press).
Iwami, T. (1995). Japan in the International Financial System, Macmillan Press.
Koyama, Y.(2016). Eurozone Enlargement: Prospect of New EU Member States for the Euro Adoption, (NY: Nova Science).
Mundell, R. A. (1963). “Capital mobility and stabilization policy under fixed and flexible exchange rates” Canadian Journalof Economics and Political Science, 29, 475–485.
Nousios, P., H. Overbeek, et al. (2012). Globalisation and European Integration : Critical Approaches to Regional Order
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and International Relations (Abingdon ; New York, Routledge).
Obstfeld, M., Shambaugh, J. C., & Taylor, A. M. (2005).”The trilemma in history: Tradeoffs among exchange rates, monetary
policies, and capital mobility”. Review of Economics and Statistics, 87, 423–438.
Overbeek, H. (2002). The Political Economy of European Unemployment : European Integration and the Transnationalismof Unemployment (New York, London, Routledge).
Sugisaki, T. (2007). “‘The Basic Process of Convergence and Divergence of Business Cycles in European Integration’, Chap.
10 in EU Studies 2: Economic Integration, ed. by Eiji Ogawa (Tokyo: Keisou-Shobou). (In Japanese)
Sugisaki, T. (2008). ‘Convergence and Divergence of Business Cycles in European Integration: Reconsidering the Meaningof ‘Economic Integration’ in the Context of Globalisation’, The Study of International Relations, No.34, March (Tokyo, Tsuda
College). Its original was the paper presented at the Workshop, of Joint Research Study Group “EU Economy” of EU Institutein Japan (EUIJ) Tokyo Consortium on. March 25, 2007 at Hitotsubashi-University.
Sugisaki, T. (2016), “The GCES Structure and Struggle for the ‘Creator’s Rent’ in the Global System” (in Japanese), Journalof Tsuda College, No.48 (March).

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Part IThe EU at a Crossroads: In the Economic Perspectives

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Europe’s Crisis in the Early Twenty-First Century:
A Historical Perspective
Youssef Cassis

In the last decade or so, Europe has faced a triple crisis. The first is a financial crisis: it was the financial
debacle that followed the collapse of Lehman Brothers in September 2008. The second is an economiccrisis –the recession which followed the financial crisis and has lasted longer than in the United States,with significant differences between countries. And the third is a sovereign-debt crisis, the so-called ‘EuroCrisis’, which could have turned turn into a currency crisis if one or several member-states had left thecommon currency. To these three crises could be added a fourth one, of a different order, which some havecalled an ‘identity crisis’. Under this generic label, a number of issues related to the state of the European
Union are usually gathered –issues of governance, democracy, further integration but also dissent, internal
solidarity, position in a global world, and long-term decline. This ‘identity crisis’ has been exacerbated bymore recent events: first the refugee crisis, which intensified in 2015 and 2016, strengthening the positionof populist parties across the continent; and second ‘Brexit’ –Britain’s decision to leave the European
Union as a result of the referendum that took place on 23 June 2016.
The purpose of this paper is not to present an overview of these crises, which are obviously all related.
Most aspects of the ‘identity crisis’, including Brexit and the migrants drama, are at least in part due
Europe’s economic travails. In the same way, Europe’s hesitant management of the Euro-Crisis can beseen as another aspect if its ‘identity crisis’. And Brexit is of course as much a political as an economic
issue. While taking into account these interactions, this paper will concentrate on Europe’s economic
problems. Being a historian’s contribution to the debate, the paper will do so by putting these events inhistorical perspective, by identifying some meaningful historical parallels and also, perhaps more
importantly, differences. The object is not to draw ready-made lessons –historical lessons do not exist. It is
to better understand the context within which these events have been happening, to distinguish what is newfrom what is less new, what is likely from what is unlikely to happen, always remembering that history
never repeats itself and that there is always much room for the unexpected. And historians are notoriously
bad at making forecasts. So prudence is of the essence, but I do believe that history can provide somelandmarks, some tools for reflection, in order to ask oneself the right questions.
When considering Europe’s economic crises in the early twentieth century, two moments require particularattention. One is the financial crisis of 2008, and the other is the advent of the single currency, which took
place less than a decade earlier. The financial crisis was an extremely violent and unexpected shock, which
tested to the limit the strengths and weaknesses of Europe’s monetary Union.

I
Let us start with the financial debacle of 2008. It is true that it was not a specifically European crisis. It wasa global financial crisis, originating in the United States. But Europe was certainly not spared. In many
respects, there was nothing particularly new in the financial crisis. It was clearly fuelled by a massive
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credit expansion, inordinate levels of indebtedness, and speculative excesses with the belief, to use
Reinhart’s and Rogoff’s formula, that this time was different. However, while all crises share common
features, each one displays its own characteristics.1
I would emphasise three specific features of the financial crisis of 2008. First, it was a global financial
crisis taking place in advanced economies. This might not seem particular new or unusual, but major
financial crises had been a very rare occurrence in advanced economies since the Great Depression. They
had either been limited to single financial institutions (for example BCCI in Britain in 1991, Crédit
lyonnais in France in 1993, or LTCM in the United States in 1998) or single countries (including Japan in1998). The only global shock since the Great Depression came in August 1982, when Mexico unilaterally
declared a three-month moratorium on payment of its debt principal. Several of the world’s leading banks
were seriously exposed and risked failure if there were defaults, with a real risk of implosion of theinternational financial system. However, a major crisis was averted when agreement was reached between
the banks and the Latin-American countries under the auspices of the IMF.2
A second specificity of the 2008 financial crisis is the socio-economic context within which it took place.
The transition to a post-industrial society from the 1980s onwards had gone hand in hand with tremendous
growth of the tertiary sector in general and the financial sector in particular. The globalisation of the world
economy had also reached unprecedented levels, even compared with the pre-First World War period,
leading to a hitherto unequalled degree of interdependence between financial institutions. The verybusiness of banking had also radically changed during the twenty years preceding the crisis, through theinexorable march towards securitisation, the continuous flow of innovations and the devising of new
financial products. These products were extremely complex and opaque, few bankers really understoodthem, and therefore few were able to assess the risks involved. Warren Buffett famously referred toderivatives as ‘weapons of mass destruction’.
And the third specificity of the recent financial crisis was its extreme severity. It was not the most severe
since the Great Depression; it was the most severe financial crisis in modern history.3 Never before did somany leading banks –in terms of both size and reputation– in so many advanced economies, findthemselves at almost exactly the same moment requiring state intervention to save them from failing. The
risk of collapse of the international financial system was never so acute during the Great Depression –which is of course the crisis with which all comparisons are made.
Despite the global nature of the Great Depression, the banking crises then did not affect all countries
simultaneously. Some, like Britain, escaped them altogether. In others such as France, the crisis was
protracted but never very severe. The most serious banking crises occurred in the two countries mostaffected by the depression, the United States and Germany. In Germany, all the country’s major banks
stood on the edge of the abyss in July 1931 and government intervention just managed to save the day –asituation not dissimilar, at national rather than global level, to what happened in September 2008.4 In the
United States, four banking crises broke out and more than 10 000 banks disappeared between autumn

1 See C.P. Kindleberger, Manias, Panics and Crashes. A History of Financial Crises (London, 1978); R. Reinhart and K.

Rogoff, This Time is Different. Eight Centuries of Financial Folly (Princeton and Oxford, 2009).
2 See G. Bird, Commercial Bank Lending and third World Debt (London, 1989); R. Devlin, Debt and Crisis in Latin
America: the Supply Side Story (Princeton and Oxford, 1989); H. James, International Monetary Cooperation since Bretton
Woods (New York and Oxford, 1996).
3 See Y. Cassis, Crises and Opportunities. The Shaping of Modern Finance (Oxford, 2011).
4 See in particular H. James, ‘The Causes of the German Banking Crisis of 1931’, Economic History Review, 38 (1984); T.
Balderston, ‘The Banks and the Gold Standard in the German Financial Crisis of 1931’, Financial History Review, 1, 1
(1994); I. Schnabel, ‘The German Twin Crisis of 1931’, Journal of Economic History, 64, 3 (2004), and the ensuing
discussion with T. Ferguson and P. Temin in the same volume.
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1930 and spring 1933. But it was only in February 1933 that the American banking system came to a nearcomplete standstill. All the country’s banks had to be closed for a week, during which the new President,Franklin Roosevelt, announced a series of measures designed to restore confidence.5
If we now turn to the relationship between financial crisis and economic crisis, it clearly appears that theWall Street crash of October 1929 was not the cause of, but a contributory factor to the Great Depression,
whereas the financial crisis of September 2008 was clearly the cause of what has come to be known as theGreat Recession. The causes of the Great Depression lay elsewhere, above all in the international monetarysystem of the time, the gold standard, which was a fixed exchange rate system, and the deflationary
monetary policies that this system generated.6 The banking crises of the 1930s happened once theeconomic crisis was well under way, between 1930 and 1934, and they obviously further aggravated thesituation.7
The effects of the financial debacle of 2008 on the real economy were soon felt. GDP in the OECD
countries fell by 2% in the fourth quarter of 2008 and by 2.1% in the first quarter of 2009, then bottomedout (-0.02%) over the second quarter. The unemployment rate went up from 5.6% in April 2008 to 8.2% inJune 2009, before stabilising over the next few months.8 These trends were initially, comparable with thoseobserved in 1929-1930. On the other hand, the expansionist policies pursued by the political and monetary
authorities, in contrast to the deflationist policies of those in charge in the early 1930s, had a positive effectand prevented the “Great Recession” from becoming a ‘Great Depression’.9
There are thus both parallels and differences between 1929 and 2008. As a strictly financial crisis, thefinancial crisis of 2008 can be considered the most severe in history. Nevertheless, taken together over a
period of five years and with thousands of bank failures, the financial crises of the Great Depression weremore traumatic and caused greater damage to the real economy than the credit crunch and the crisis of
2007-2008. These parallels and differences are reflected in the responses to the crisis, whether in terms or
regulatory or recovery measures.
The Great Depression was the ‘crisis to end all crises’ and in most countries, regulatory measures weretaken to that effect –first and foremost in the United States.10 A series of radical reforms reshaped theAmerican financial system, including the Banking Act of 1933, better known as the Glass-Steagall Act,
which decreed the complete separation of commercial banking activities (taking deposits and making
loans) from investment banking activities (issuing, distributing and trading securities). A number ofEuropean countries, including Italy, Belgium, and later France, took a similar path. Nearly everywhere,
including Germany and Switzerland, banking laws were passed, restricting entry to the profession andestablishing supervisory bodies. Admittedly, the real change in Europe, especially in Britain and France,came after the Second World War, but this was part of the same phenomenon, the ‘Thirty Years War of theTwentieth Century’ –the period 1914-1945, marked by two world wars and the most severe depression of
the twentieth century.
The regulatory measures taken in the aftermath of the financial crisis of 2008 have proved rather
disappointing. Of course, measures such as Basel III, the Dodd-Frank Act in the United States, the Vickers
5 See E. Wicker, The Banking Panics of the Great Depression (Cambridge, 1996).
6 See B. Eichengreen, Golden Fetters. The Gold Standard and the Great Depression 1919-1939 (Oxford, 1992).
7 On the impact of the banking crises on the depression in the United States, see in particular B. Bernanke, Essays on the

Great Depression (Princeton, 2000).
8 OECD Quarterly National Accounts, 25 March 2009; OECD Harmonised Unemployment Rates, 8 June 2008.
9 B. Eichengreen and K. O’Rourke, ‘A Tale of Two Recessions: what the new data tell us?” VoxEU.org, 8 March 2010.
10 See Y. Cassis, ‘Regulatory Responses to the Financial Crises of the Great Depression: Britain, France and the UnitedStates’, in E. Balleisen et al., Policy Shock: Recalibrating Risk and Regulation after Oil Spills, Nuclear Accidents andFinancial Crises (Cambridge, forthcoming, 2017).
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Report in Britain, or the European System of Financial Supervision cannot be readily dismissed. They haveraised capital requirements and more generally tighten regulation, but they do not amount to a reshaping of
the financial system. Where is the ‘New Glass-Steagall Act’ or the ‘New Bretton Woods’ called for in thewake of the panic of 2008? So, one wonders if the recent financial crisis has been severe enough to befollowed by a fundamental overhaul of the financial system. There are reasons to be sceptical, and worried.
II
The Great Recession might not have been as severe as the Great Depression, but it was a very steep
downturn, the steepest since the 1930s, far more than in the mid-1970s, the early 1980s or the early 1990s.
The recession was particularly severe in Europe. GDP in the Eurozone decreased by 2.4 per cent between
2008 and 2012, and GDP per head by 3.7 per cent, while unemployment rose by 4.2 per cent –and by
nearly 20 per cent in countries such as Greece and Spain. Growth rates have been anaemic since 2013 andby 2014 GDP had not yet regained its pre-crisis level. By contrast, the recession was shorter in the UnitedStates, where growth resumed, though at a comparatively slow pace, in the third quarter of 2009.
How to explain this prolonged recession? The jury is still out, but there is no doubt about the restrictive
fiscal policies adopted by all European governments from 2010. The measures taken in 2008 and 2009 tosave the financial system and avoid a depression had led to a deterioration of public finances. From being
virtually in balance in 2008, government budgets in the Eurozone spiralled to a 6.4 per cent deficit in 2010,
before being reduced to 4.1 per cent in 2012 and 2.9 per cent in 2014. Reducing budget deficit required
austerity measures, with tax increases and spending cuts amounting to 1.5 per cent of GDP in 2011 and 2
per cent in 2012 –which did very little to boost economic growth. On the contrary, with most European
economies shrinking, public debt as a proportion of GDP continued to rise –from 60 per cent in 2008 to 84
per cent in 2012 and 89 per cent in 2014 for the Eurozone.
The recession was compounded by a sovereign-debt crisis affecting the weaker economies of Europe’s
periphery, the so-called PIGS, who imported massive amount of capital in the early years of the twentyfirst century –Greece, Ireland, Portugal, and Spain. Doubts were even expressed about Italy. Greece was ofcourse the worst case of unsustainable debt, with budget deficit reaching 13 per cent of GDP in 2009 andpublic debt 110 per cent. Ireland was crushed by the burst of the housing bubble and the failure of its banks
whose depositors and creditors had been given a government guarantee. Portugal suffered from its low
productivity and the lack of competitiveness of its economy. In Spain, despite a stronger economy andcomparatively low level of public debt, the crash of the property boom threatened the already weak savingsbanks, the cajas, which benefited from a state guarantee. With their government bond yields rising toalarming levels, these countries were no longer in a position to borrow from the market. Greece, Irelandand Portugal were bailed out by the so-called troika (IMF, European Commission and European CentralBank), on the condition of reducing public deficit and implementing various reforms. Spain‘s bailout wasless humiliating and its banks benefited from the support of the European Stability Mechanism.11
The sovereign-debt crisis led to the so-called Euro-crisis. The Euro itself was not in crisis and its internaland external value remained fairly stable. Nevertheless, doubts started to mount about its irreversible
character. Would Greece have to leave the Euro and if so would Ireland, Portugal and Spain be forced tofollow suit? And what would be the consequences of such exit, or exits, for those leaving the single
currency and for the Eurozone itself? It has usually been assumed that both would pay a hefty price,
though it hasn’t been quite clear how high the price would be. Perhaps even more worryingly, it has been
11

See F. Allen, E. Carletti and G. Corsetti (eds.), Life in the Eurozone with or without Sovereign Debt Crisis(Florence, 2011); F. Allen, E. Carletti and S. Simonelli (eds.), Governance for the Eurozone: Integration ofDisintegration ? (Florence, 2012).
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feared throughout the crisis that a break-up of the Euro would mean the end of the European Union. The
end of the crisis does not mean that the future of the Euro is entirely secure –for both economic andpolitical reasons.
III
The effects of the financial crisis of 2008 on the European economy have been compounded by theexperience of monetary union. This was a new experience, not so much because the European Central
Bank was still a young and inexperienced institution, but because such a monetary union was a first in
history, with no prior landmarks to rely on.
Europe’s monetary unification is a curious phenomenon, where both economic and political factors havebeen at work. Starting with the Werner Plan in 1970 and ending with the introduction of the Euro in
1999/2002, it took about thirty years to come to fruition. Interestingly, this is about the same time as theGerman monetary unification, which was completed over a 33 years period, from the Dresden Convention
in 1838 to the striking of the first Marks in 1871. The impetus for German monetary unification was givenby the formation of the Zollverein in 1834. Pressure from business interests mounted in the 1860s, but it
was Germany’s political unification which eventually paved the way for monetary unification. Other
monetary unifications took place at about the same time, as part of the formation of nation states –Switzerland in 1848, Italy in 1862.12
In Europe, monetary union took place not only before but without, at any rate for the foreseeable future,political union. There was a kind of precedent for this type of regional monetary union, where participating
countries remained politically independent. It was the Latin Monetary Union –a monetary convention
signed in 1865 between France, Italy, Belgium and Switzerland. Its purpose was to reach agreement on the
proportion of silver contained in the low-denomination coins of the four countries as, in accordance with
the Gresham Law, the coins with the highest fineness had been disappearing from circulation. The
convention was renewed in 1878 and officially lasted until 1921 –de facto until 1914. It survived a massive
fall in the price of silver, suspension of convertibility in France and Italy, and the deterioration of FrancoItalian diplomatic relationships following Italy’s joining of the Triple Alliance alongside Germany andAustria-Hungary.13 So it proved resilient. But it managed to survive in the absence of political unification
because its objective was fairly narrow –it was limited to coins, which were losing ground in the latenineteenth century, banknotes were excluded from the convention; and because the Latin Monetary Union
was integrated into a broader monetary system, the gold standard, a system of fixed rates, which is notstrictly speaking a monetary union even though it displays some of its characteristics.
Many doubts have been expressed about the possibility of achieving monetary union without politicalunion –in the run-up to the introduction of the Euro in the 1990s and again since the beginning of the Eurocrisis in 2010. There has also been much discussion about why Europe decided to follow this route. One
point is clear: there was a very strong economic imperative to establish a single currency, in addition to thepolitical will –an imperative going back to the early days of the Common Market and becoming stronger
ever since. This is why European countries were not only prepared to take the risks entailed by monetary
union without political union, but were convinced that they would reap ample benefits. This is also why
the Euro-crisis has been managed in such an awkward way in the last five years.

12

See M. Bordo and H. James, ‘A long term perspective on the euro’ and B. Eichengreen, ‘Sui generis EMU’,both in M. Buti et al., The Euro. The First Decade (Cambridge, 2010).
13
See L. Einaudi, Money and Politics. European Monetary Unification and the International Gold standard(1865-1873), (Oxford, 2001).
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The Treaty of Rome, signed in March 1957, which created the Common Market, did not envisage thecreation of a monetary area. However, the Bretton Woods system did not entirely satisfy the needs forexchange rate stability of the nascent European community. A first problem to arise was the maximum
possible fluctuation between two European currencies, which could be as high as 4%. The European
Monetary Agreement, signed in December 1958, reduced this spread to 3%, by narrowing the fluctuation
margin of European currencies against the dollar from ±1 to ±0.75%.14
Maintaining exchange rate stability required further cooperation in the late 1960s because of growing
divergence between member states. The need for such stability came, in particular, from the requirementsof the Common Agricultural Policy, which guaranteed the price and free movements of agricultural
products. In February 1969, the Barre Plan recommended, among other proposals, setting up a mechanismof cooperation in order to provide support in case of balance of payments difficulties. And in December
1969, at The Hague summit of the Heads of State and Government, a further step was taken with thedecision that economic and monetary union should be a long-term objective of the European Community.
The result was the Werner Plan, submitted in October 1970, which defined a three stages process leading,from 1971 to 1980, to economic and monetary union –starting with the removal of controls on capital
flows; followed by a complete integration of banking and financial markets; and ending with theelimination of fluctuation margins between currencies and the establishment of irrevocably fixed parities.
The final objective was the creation of a common currency. The Werner Plan was adopted by the Councilof Ministers in March 1971, despite French reservations (they were opposed to supra-nationality ineconomic and financial affairs) and German caution (they insisted that economic convergence should
precede monetary integration, unlike their French counterparts, who considered that fixed exchange rates
would accelerate the process of economic convergence).15
The Werner Plan had to be abandoned in 1977 in the face of the monetary upheavals of the early 1970s.
Yet the imperatives of monetary integration had not disappeared. The end of Bretton Woods and theadvent of floating exchange rates made it even more necessary for Europe to create, at regional level, an
area of fixed exchange rates or of some form of monetary stability. The European Monetary System cameinto force for that purpose in March 1979.16 It established fixed, but adjustable, exchange rates between
European currencies, within margins of fluctuation of ±2.25%. A central feature of the system was theEuropean Currency Unit (ECU) –a composite currency, made up of a basket of currencies, weighted
according to each country’s macroeconomic significance, with each member state’s currency having acentral rate against the ECU.
The Single European Act of 1987 pushed towards further monetary integration. The goal that it set itself
was to complete the internal market by 1st January 1993, by making a space without internal borders within
which the free circulation of goods, people, services and capital was assured. The Delors Report, madepublic in April 1989, kept with this logic, re-launching the Werner Plan with improved chances of success.
It was more precise about the three stages, and made provision for the creation of a central bank. Inflation,
which had been devastating in the previous two decades, seemed under control. And the Delors Planenjoyed strong political support. The French president François Mitterrand pushed very hard for economic
14

See E. Apel, European Monetary Integration: 1958-2002 (London, 1998).
See Apel, European Monetary Integration; D. Ikemoto, European Monetary Integration, 1970-79. British andFrench Experiences (Basingstoke, 2011); H. James, Making the European Monetary Union. The Role of theCommittee of Central Bank Governors and the Origins of the European Central Bank (Cambridge, Mass.,2012).
16
See E. Mourlon-Druol, A Europe Made of Money. The Emergence of the European Monetary System (Ithacaand London, 2012).
15

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No.2&3 (March, 2017)and monetary union in exchange for German re-unification. The Treaty of Maastricht, signed in February
1992, paved the way for the introduction of the single currency in 1999.
It would be foolish to underestimate the role of political factors in this process. There was nothing
automatic or spontaneous in the advent of the Euro. It was clearly a political decision, arising both fromthe wish to give a boost to European construction and from the international climate following the fall of
the Berlin Wall. And yet economic imperatives soon reasserted themselves with the currency crisis of
September 1992, when vast speculative movements drove the British pound and the Italian lira –the latter
temporarily– to leave the exchange-rate mechanism and the peseta to devalue by 5 per cent, while striking
fear into the French franc. Such risks of instability would be irrevocably removed if, instead of a system of
fixed exchange-rates, currencies were irreversibly locked in a single currency. If anything, the currency
crisis of 1992 reinforced the wish to succeed, despite persisting doubts in Britain and the United States.17
For there were other advantages to be gained from a single currency –not least those brought by a currency
capable of holding its own against the dollar or even to replace it; or those deriving from the creation of agenuine European financial market.
Europe’s crisis in the early twentieth century has to a large extent been the consequence of a monetary
union without sufficient political integration, in other words a proper political union. Political union isparticularly important to bind together countries, or regions, with significant differences in levels of
income and productivity, in order to make possible the necessary transfers from surplus to deficit areas, toachieve, as has been repeatedly mooted during the crisis, a fiscal union and a banking union.
Managing a monetary union without a political union has been an entirely new historical experience, and aperilous one after the shock of the financial crisis of 2008. For Europe’s weaker economies, there was nolonger the possibility to devalue their currency or even, as in the days of the gold standard, to leave asystem of fixed exchange rate. Before 1914, defaulting countries would as a rule leave the gold standard
and return at a later stage, usually with a depreciated currency. This was for example the case with
Argentina between 1876 and 1883, and again between 1885 and 1889.18 But the Euro being irreversible,
austerity and deflation are the only options in the absence of transfers. Public borrowings also pose entirely
new constraints. Member states of the Eurozone, while borrowing in their own currency, are in fact in theposition of countries borrowing in a foreign currency, with no possibility for their central bank to print
money. The markets could once again speculate against the ability of a country to sustain its debt.
There have been many accounts of the way the sovereign debt crisis has been handled, or rather
mishandled, especially in the case of Greece. From a historical perspective, it is interesting to notice that
Europe hardly had any experience in handling sovereign debt crises. Of course, Europe had been theworld’s banker before 1914 and had dealt with many a sovereign-debt crisis, whether in the Ottoman
Empire, Egypt, or Argentina –as well as Greece. They sometimes interfered directly in the debtor
country’s internal affairs –there were a British and a French minister in the Egyptian government in 1879.
Sovereign debt crises happened in the periphery, not in the core industrial countries. More recently, theInternational Debt Crisis of 1982, to which I referred at the beginning of this paper, provided a template,but it involved Mexico, Argentina, Brazil, as well as Poland, Zaire and other smaller debtors –not theEurope Union. Moreover, the very functioning of the European Union made it difficult to deal with an
17

O. Issing, The Birth of the Euro (Cambridge, 2008); D. Marsh, The Euro. The Politics of the New Global
Currency (New haven and London, 2009); James, Making the European Monetary Union.
18
C. Marichal, A Century of Debt Crisis in Latin America. From Independence to the Great Depression, 18201930 (Princeton, 1989); B. Eichengreen and P. Lindert (eds.), The International Debt Crisis in Historical
Perspective (Cambridge, Mass., 1991); J. Flores, ‘Sovereign Debt Defaults’, in Y. Cassis, R. Grossman, and C.
Schenk (eds.), The Oxford Handbook of Banking and Financial History (Oxford, 2016).
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internal sovereign debt crisis. So when the Greek crisis broke out in early 2010, the IMF was called to takecharge the negotiations with the Greek government, together with the European Commission and theEuropean Central Bank.19 This was not only interference in European affairs. It also created a dividing
line, between core and periphery, within the Eurozone.
IV
What can history tell us about the challenges facing Europe in the early twenty-first century? There might
be few meaningful historical parallels, given the novelty of some of these challenges. But some long-term
trends can nonetheless be perceived –though the direction to which they point is not entirely clear.
One trend is the economic imperatives of the single currency –they have not disappeared and the political
will is still there, which would suggest that the Euro is here to stay. Another is that economic downturns
are always followed by recovery. By 2015, the situation has started to improve and the European Central
Bank’s quantitative easing programme provided a much needed boost. And a third is that Europe, toparaphrase Jean Monnet, has been built through crises and by finding solutions to these crises –so here wasanother opportunity to move one step forward.
There are, however, a number of pitfalls suggesting that a less optimistic scenario cannot entirely be ruled
out, at any rate for southern Europe. Adherence to a system of fixed-exchange rates can lead to theadoption of savage deflationary policies, with devastating economic effects, not least in terms of
unemployment, and dramatic political consequences –as was the case in the 1930s in several European
countries. Europe would not easily withstand such a course of events.
Avoiding such pitfalls is a political rather than an economic challenge. Monetary union requires a fiscal
union, in other words moving closer to a political union. Some advances have undoubtedly been made in
the last five years. The Banking Union, for example, whatever its limitations, is a move in the right
direction. Several proposals have been made in order to secure the future of Europe’s monetary union.20
The debate is still going on –about their political feasibility, and how resilient Europe would prove whenconfronted with a new crisis.
Writing in late 2016, one cannot end a paper on Europe’s crisis in the early twenty-first century without aword on Brexit –the most recent shock, of a very different nature from the Euro crisis. How serious the
economic consequences of this shock will be remains, at this stage, impossible to assess, whether for theEuropean Union or Great Britain, though they are likely to prove deeper for the latter. In any case, Brexit
is both an economic and political shock. From a historical perspective, it is worth remembering the reasonsfor Britain joining the Common Market in 1973. It was in no small part in order to be part of a dynamic,
fast growing economic area: Britain disappointing growth rate in the ‘golden age’ was widely seen as aconsequence of its having missed the boat by not joining the EEC from the very start in 1958. Now Britainis leaving the European Union in the hope of freeing itself from a continent beleaguered by a sclerotic
economy. Whether Britain got it right or was wrong again sixty years later will tell us a lot about Europe’s
crisis in the early twenty-first century.

19

See B. Eichengreen, Hall of Mirrors. The Great Depression, the Great Recession and the Uses – and Misuses– of History (Oxford, 2015).

20 See for example R. Baldwin and F. Giavezzi, How to Fix Europe’s monetary union: Views from leading economists,

Vox.EU, 2016.
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Economic outlook and policies in Europe1
Zsolt Darvas
1. Introduction
Even though the acute phase of the euro-crisis is over, the European economy faces major challenges. In
addition to long-standing problems, there are problems related to the aftermath of global and European
economic and financial crisis:

The European Union’s older member states (members before 2004) face a long-standing growth
problem: following the period of the reconstruction after World War II, from the early 1970s mostcountries were unable to converge closer to the US (Figure 1)2.
There is a pressing current growth problem: the EU’s economic performance since 2009 has beenmuch worse than in other advanced countries and the outlook is weak (Figure 2). Investment
activity and inflation are extremely low, which mirror economic weaknesses. The unemployment
rate continues to be high.

There is also a huge dispersion within the EU. For example, Germany managed to achieve a solid economic
recovery while the unemployment rate remained historically low, but Greek output collapsed by a morethan a quarter and unemployment is historically high. Figures 2 and 3 also report GDP, GDP per capita andunemployment developments for three country groups within the euro-area: “core” (Austria, Belgium,
Finland, Germany and the Netherlands), “mid” (France and Italy) and “periphery” (Greece, Ireland,
Portugal and Spain). Developments in the three country groups underline the diversity and the social cost in
countries facing economic difficulties.
These problems are coupled with lack of cohesion within the EU, which makes it difficult to find proper
solutions to Europe’s pressing growth and social problems. Despite vast crisis lending and institutionalbuilding during the crisis, there is mistrust and discord in various issues within the EU. The support for
further solidarity and integration is limited. More nationalistic approaches dominate, while the support for
democracy is weakening in the hardest hit countries. This development is especially worrying, since
democracy is the core principle on which the EU is built.

1
Paper based on the presentation that the author gave at the EUSI Tokyo International Conference ”Responding to
Challenges for the Euro-zone: Resilience of Europe and New Perspectives of the EU Studies”, 8-9 March 2015, Tokyo,
Tsuda College, Sendagaya Campus.
2 The newer member states of the EU, which joined between 2004-2013 and labelled as “Central” and “East” on Figure 1, aredifferent and are able to reduce their gap with the USA, though they still have a long way to narrow the gap further.

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Figure 1: GDP per capita at Purchasing Power Parity in the European Union (US = 100), 1950-2020
90

80

West

70

North

60

South

50

Central

40

East

30

1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020

20

Source: author’s calculation using data from the October 2015 IMF World Economic Outlook, PENN World
Tables and EBRD. Note: unweighted group average values are shown. West: Austria, Belgium, France,
Germany, Netherlands. North: Denmark, Finland, Sweden, Ireland, UK. South: Greece, Italy, Portugal, Spain.
Central: Czech Rep., Hungary, Poland, Slovakia, Slovenia. East: Estonia, Latvia, Lithuania, Bulgaria, Romania

Figure 2: GDP and GDP per capita (2008Q1=100), 2008Q1-2015Q4
GDP
110

92

Core (AT, BE, FI, DE, NL)

90

2015Q1

2013Q1

2012Q1

Periphery (GR, IE, PT, ES)

86

2014Q1

2013Q1

2012Q1

2011Q1

2010Q1

2009Q1

2008Q1

Mid (FR, IT)

88

Periphery (GR, IE, PT, ES)

86Core (AT, BE, FI, DE, NL)

90

Mid (FR, IT)

88

2015Q1

94

92

2015Q1

94

2014Q1

96

2014Q1

98

96

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2013Q1

100

98

2012Q1

102

100

2011Q1

104

102

2010Q1

104

2011Q1

2008Q1

2015Q1

2014Q1

2013Q190
2012Q1

90

2011Q1

95

2010Q1

95

2009Q1

100

2008Q1

100

2010Q1

105

2009Q1

105

United States
United Kingdom
Japan
Euro area 18

2009Q1

United States
United Kingdom
Japan
Euro area 18

2008Q1

110

GDP/capita

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No.2&3 (March, 2017)

Source: Author’s calculation using data from Eurostat, OECD and IMF. Note: The three euro-area countrygroups represent the weighted averages of countries: euro-area core: Austria (AT: 7%), Belgium (BE: 9%),Finland (FI: 5%), Germany (DE: 64%) and Netherlands (NL: 15%); euro-area mid: France (FR: 54%) and
Italy (IT: 46%); euro-area periphery: Greece (GR: 13%), Ireland (IE: 11%), Portugal (PT: 11%) and Spain(ES: 66%).

Figure 3: Unemployment rate (%), January 2000 – January 2016
Global comparison

Intra-euro groups

12

25

10

20

8

15

6

10

4

5

2

2016

2014

2012

2010

2008

2006

2004

2002

2016

2014

2012

2010

2008

2006

2004

2002

2000

Euro area
United Kingdom

2000

0

0

Periphery (GR, IE, PT, ES)
Mid (FR, IT)
Core (AT, BE, FI, DE, NL)

United StatesJapan

Source: Author’s calculation using data from Eurostat. Note: see the definition of the three euro-area groups in
the note to Figure 2.

2. Why was the euro-area crisis so deep and why is the recovery so anaemic?
I highlight four key areas: macroeconomic issues, microeconomic factors, euro exit fears and insufficientdecision making process in the euro area.
First, macroeconomic and financial policies in the US and Europe were almost the opposite. In the US asevere stress test of the financial sector took place very rapidly and effective actions were taken to restore
confidence in the financial sector. A major fiscal expansion and a major monetary stimulus (in the form oflarge-scale purchases of government bonds and asset-backed securities) supported the economy at the time
when households aimed to decrease their indebtedness and thereby private demand was weak.
In contrast, in Europe delayed and weak stress tests prolonged banking woes. Since 2010 the strong focus
on fiscal consolidation made private sector deleveraging more difficult, while the ECB reacted with aserious delay in easing monetary conditions3.
At the same time, southern euro-area members face a major macroeconomic adjustment problem, which isin the heart of the economic troubles of the euro area. Before crisis, there was a close zero aggregate euroarea current account balance in the euro area, which masked major divergences within the area, such as
3 Yet ECB was effective in supporting banks with ample liquidity under much relaxed collateral requirements, as I describe

later.
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divergences in credit growth, property prices, consumer prices, labour costs, productivity, current accountbalances and international investment positions.
During this pre-crisis period, southern euro-area members lost their price and wage competitiveness
relative to core euro-area countries. Starting in late 2009, euro-members with large external deficits faced
a ’standard’ balance of payments crisis: reversal of private capital flows, which were replaced by European
Central Bank financing of banks. ECB financing of banks was only a temporary relief. A lasting
improvement in current account was needed, which necessitate reversing the pre-crisis divergences of
prices and wages. This is very difficult in a monetary union, because the countries with too-high wages andprices cannot rely on a currency devaluation, because they are ‘locked-in’ the euro. The only available tool
to address this issue was the so-called internal devaluation, that is, the reduction of prices and wages
relative to main trading partners. This process has started and there were some achievement in the southern
periphery, yet unfortunately the adjustment was largely one-sided: while the deficit countries underwent a
major adjustment which was especially painful in terms of increases in unemployment, surplus countries
hardly adjusted. As Figure 4 demonstrates, current account surpluses in core euro-area countries remained
practically unchanged. Thereby, the euro area as a whole moved from the close-to-balance position to a
current account surplus of about 3% of GDP. As a side effect, the euro area became a major contributor to
global current account imbalances.

Figure 4: Current account balance (%GDP), 1999 – 2015
Global comparison

Intra-euro groups
8

6

4

4

0

2

Euro area
United Kingdom

United States
Japan

2015

2013

2011

2009

2015

2013

2011

2009

2007

2005

2003

2001

1999

-6

2007

-12

2005

-4

2003

-8

2001

-2

1999

-4

0

Core (AT, BE, FI, DE, NL)
Mid (FR, IT)
Periphery (GR, IE, PT, ES)

Source: author’s calculation using data from AMECO. Note: see the definition of the three euro-area groups in
the note to Figure 2.

Second, as regards microeconomic factors, Europe has less flexible economies and less cross-country
adjustment capacity, which made the adjustments both within and across countries more difficult.
Third, fears from the exit of Greece from the euro area in 2010-12 also deterred investments both in
Greece and in the rest of the euro area, because a break-up would have had major negative
consequences for the whole euro area in my view.
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And fourth, decision making at the European level is fragmented and inefficient, while federal level
decision making and implementation are strong and effective in the US.

3. EU policy responses
EU institutions and national policymakers adopted various measures to address the triple crises that thecontinent faced: the balance of payments crisis, the banking crisis and the sovereign debt crisis.

3.1 Revamped economic policy coordination in the EU
In order to tackle the balance of payments crisis the European Commission argued for structural reforms
supported by intensified policy coordination and advice. A new instrument, the so-called Macroeconomic
Imbalances Procedure (MIP) was introduced, which aims to detect and correct various kinds of imbalances,including in the private sector. Moreover, a new annual cycle of policy coordination and enforcement ofEU rules have been introduced under the name of “European Semester”. Unfortunately, the European
Semester has been rather ineffective so far as demonstrated by Darvas and Leandro (2015).

3.2 Banking policies
For the banking crisis the ECB provided unlimited liquidity to banks under relaxed collateralrequirements. New institutions were launched, like the European Systemic Risk Board (ESRB) toadvice on EU-wide financial stability issues and the European Banking Authority (EBA) to ensure
effective and consistent prudential regulation and supervision across the European banking sector. The
European Banking Union was proposed and already partially implemented, which is the biggest
institutional development in the EU since the creation of the euro in 1999 (Véron, 2015). New plans
for a European Capital Markets Union were developed by the new European Commission since late2014.
3.3 Sovereign debt crisis management
In order to address the sovereign debt crisis which impacted several southern euro-area members (and also
some central and eastern European EU members outside the euro area) various rescue funds were launchedto provide loans to stressed government, under strict conditionality related to fiscal adjustment, structuralreforms and banking sector repair. Fiscal rules were strengthened by several agreements (6-pack, Europlus-pack, Fiscal compact, 2-pack), whereby more emphasis was placed on automaticity and sanctions. Yet
fiscal consolidation at the aggregate euro-area level and in most member states became pro-cyclical, which
widened the negative output gap further and increased unemployment (Darvas and Tschekassin, 2015). A
major handicap of the euro-area framework was the lack of a lender of last resort for sovereigns: bylaunching Outright Monetary Transactions (OMT) in the summer of 2012 was a major step in crisis
resolution in the euro area (Darvas, 2012a). Under the OMT the ECB is ready to purchase unlimited
government bonds of stressed countries provided they are subject to a financial assistance programme.

3.4 The Juncker investment plan: a step in the right direction, but unlikely to have a sizable impact
Actions against insufficient investments in the EU were for long more a slogan than a real action plan.
Specific programs have been announced, but implementation was not always a success. In June 2012 there
was an agreement, the so-called Compact for Growth and Jobs, which reiterated several earlier plans such
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No.2&3 (March, 2017)as the completion of the single market, structural reforms and growth-friendly fiscal consolidation, while italso included a commitment by EU Member States to provide €10 billion new capital to European
Investment Bank. This was useful, but too small. More recently, the Juncker EU Commission madeinvestment a top priority and launched an investment plan, which has a higher potential to support
investment than earlier European attempts, yet I am sceptical whether it can have a sizeable impact.
The plan addresses the European investment problem by attracting private investors unwilling to take risks
by absorbing first losses. The main constraint that the European Commission faced is that the European
Commission does not have unused resources, EU member states did not want to provide public money forinvestments and they did not agree to a plan which would involve borrowing at the EU level to fund EUwide investments. Therefore, the Juncker plan reallocates €21 billion from the EU budget and EIB
resources to be used as guarantees for private investors participating in the plan and presents a niceexample of financial engineering to arrive from €21 billion in guarantees to €315 billion in investment.
Given that no EU and national public money was available for a new investment plan and there was no
willingness to borrow at the EU-level to invest, this plan is probably constitutes the most that the European
Commission could propose. The Commission therefore deserves appreciation for its attempt to foster
investments.
However, there are two crucial questions about the contribution of this plan to aggregate investments in the
EU. Both are related to additionally.
First, by definition, all projects supported by this plan will be new. However, since private sector projects
will be supported, we will never know if the participating private companies will provide new resources toinvest in this plan, or redirect some of their earlier investment plans to this plan, in order to benefit from theEU guarantee. If the latter will dominate, aggregate investment will not be much higher with this plan, only
its composition will change.
Second, most of the EU budget contribution is taken away from Horizon 2020 and Connecting Europe
Facility budget lines, which support projects with potentially high long term returns. Therefore, thesefacilities will be able to support less investment on their own.
The Juncker investment plan is not only about mobilising investment finance and supporting projects andinvestments, but it has a third pillar to improve the investment environment by removing sector-specificand other financial and non-financial barriers to investment. This third pillar is highly welcome and I lookforward to seeing the action plan and its results.

3.5 Monetary policy measures
The primary objective of the European Central bank is to maintain price stability. The governing Council of
the ECB published the definition: “Price stability is defined as a year-on-year increase in the Harmonised
Index of Consumer Prices (HICP) for the euro area of below 2%”. The Governing Council has also
clarified that it aims to maintain inflation below, but close to, two percent over the medium term, though it
has not quantified what ‘closeness’ means, nor has it given a precise definition of the ‘medium term’. The
clarification has been widely interpreted to mean that the actual target of the ECB is close to, but below,
two percent inflation in the medium term.
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Inflation in the euro area has been below 2% in most years since 2008. While there are major benefits toprice stability, too-low inflation should be avoided too. Competitiveness adjustment in struggling southerneuro area members requires persistently lower inflation than in major trading partners, but if the average
euro inflation is low, inflation has to be even lower in southern Europe. And there are good reasons foravoiding too low inflation both at the euro-area level and in each country, because:






it worsens the public debt sustainability;
it leads to higher real interest rates;
it leads to postponement of consumption and investment decisions;
it makes reallocation across sectors more difficult;nominal wage rigidity requires some inflation otherwise adjustment goes via increased
unemployment.

Therefore, at least the 2% threshold of the ECB should be reached. To support inflation, economic activity
and also financial stability (which has indirect implications for price stability), the ECB adopted several
key monetary and financial stability measures:-

Extensive liquidity support to banks since 2007 including eased collateral policy;
Targeted credit easing through asset purchases: small-scale covered bonds purchasing programs in
2009, 2010 and 2014, also small-scale asset backed security purchases in 2014;
Supporting distresses sovereign bond markets: securities markets program (SMP) in May 2010 and
Outright Monetary Transactions (OMT) in summer 2012;
Cut in central bank interest rates from 2008, though temporary increase in 2011;
Negative central bank deposit rate for banks in late 2014;
Quantitative easing from March 2015 on.

Up to 2014, these measures were less effective in easing monetary conditions than the measures adopted by
the Federal Reserve. A useful indicator of monetary stance is the so-called ‘shadow interest rate’, which isan estimate of the interest rate that would occur in the absence of a zero lower bound for interest rates.
Using this indicator Figure 5 suggests that from early 2008 up to 2014 the ECB’s monetary stance wasrelatively tight. However, since 2015 when the large-scale quantitative easing programme was launched,
the estimated shadow interest rate fell substantially, to a level well below the US estimates for 2010-14
period.

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Figure 5: Estimated shadow central bank rates (%), January 2007 – February 201666

Euro area shadow rate
US shadow rate
UK shadow rate

4

4

2

2

0

0

-2

-2

-4

-4

-6

-6
07

08

09

10

11

12

13

14

15

16

Source: updated dataset of Jing Cynthia Wu and Fan Dora Xia (2016).

Still, euro-area headline inflation has remained close to zero since the ECB stepped up its quantitativeeasing programmes in early 2015. But as Darvas (2016) demonstrates, this does not mean that QE has beenineffective: core inflation and its adjusted version for the indirect effects of low oil prices have steadily
increased throughout 2015.
Low energy prices impact inflation, and not just because energy products accounts for more than 10 percentof the total consumer basket used to calculate inflation. Energy has indirect and second round effects on
inflation too, and so falling energy prices exert a downward pressure on core inflation. For example, thecost of transportation might fall, but more generally, lower energy prices reduce the costs of all producers,which may then reduce their sales prices in various sectors.
Since energy price developments are exogenous to ECB actions, it is worthwhile to calculate an adjusted
measure of core inflation which excludes the impact of energy prices. The results of Darvas (2016) are
reported in Figure 6, which shows that euro-area core inflation and its energy adjusted version haveincreased steadily since early 2015, at least using quarterly figures. Current and energy-adjusted euro-areacore inflation rates are still well below the ECB’s 2% threshold and are also below US core inflation, but
my analysis shows that the very low euro-area headline inflation rates cannot be used to argue for the
ineffectiveness of ECB QE.

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Figure 6: Core inflation and its adjusted version, quarterly data, 2007 – 2015 (% change comparedto the same quarter of the previous year)
2.5

2.5 2.5

Euro area

United States

2.5

2.0

2.0 2.0

2.0

1.5

1.5 1.5

1.5

1.0

1.0 1.0

1.0

0.5

0.5 0.5

0.5

0.0

0.0 0.0
2008

2010

2012

2014

0.0
2008

2010

2012

2014

Core inflation
Core inflation adjusted for energy

Source: calculations of Darvas (2016), based on data from Eurostat and the European Central Bank.

There are various channels through which the ECB’s quantitative easing influences inflation. The asset
purchases alter yields and spreads, rebalance portfolios, depreciate the euro exchange rate (Figure 7), have
wealth effects and serve as a devise to make forward guidance more credible. All these measures will
increase both demand for and supply of money, which will likely impact both growth and inflation (Darvas,2015)4.

4 While the above mentioned channels are likely at play in Europe, I would like to highlighth that the situation in the euroarea is different than it was in the US when quantitative easting has been launched. In the US, yields were higher that timeand also mortgage market plays a crucial role in the US than in the euro area.
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Figure 7: Real effective exchange rates (average 1970-2015 = 100), January 1970 – November 2015
160

160

140

140

120

120

100

100

80

80
Euro
US dollar
Pound sterlingJapanese yen

60

70

75

80

85

90

95

00

05

10

60

15

Source: updated dataset of Darvas (2012b). Note: based on consumer prices, calculated with respect to 41
trading partners.

The fall of the real exchange rate of the euro (Figure 7) will not only help the aggregate export performanceof the euro area, but also help intra-euro real exchange rate corrections. Further intra-euro adjustment isnecessary but not sufficient (Darvas, 2012c). Intra-euro adjustment requires lower inflation and wage
increases in the periphery than in core countries. But if the periphery has too-low inflation, debt
sustainability is in danger and unemployment could increase if deflation is not going away. The euro
depreciation can boost exports, particularly in Germany, which should lead to wage increases due to tightlabour markets. Due to the still high unemployment in the periphery, the impact of euro depreciation on
wages should be minimal. It is also expected that euro depreciation increase the imported inflation.
Overall, while many new initiatives have been made in the EU and the most acute phase of the crisis is overnow, the EU institutional framework was rather ineffective in dealing the crisis. While unemployment isfalling since early 2014, it is still very high. Investment activity and inflation are low, while the outlook is
weak. The recovery and job creation in the USA started much earlier and much more forcefully than in theEU.

4. The harmful impact of short-term troubles on long-term growth5
Europe has a long-standing growth problem, but there is a major risk that short-term economic troubles will
damage further the long-term growth potential, for six main reasons.
First, persistently high unemployment is eroding skills, discouraging labour market participation, thereby
undermining the long-term growth potential. Youth unemployment, which is at record high in a number ofcountries, is especially alarming as a long period of unemployment after graduation, when a worker should

5 This section is based on Darvas (2013).

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Review of EU Asia Pacific Studies

No.2&3 (March, 2017)acquire the first working skills, can undermine the whole career of a worker. EU leaders promised to act
decisively against unemployment, yet no result is seen so far.
Second, business research and development (R&D) activities are rather pro-cyclical, i.e. firms spend muchless on these activities in an economic downturn, especially when the timing of recovery is seen remote.
But a long period of withheld R&D reduces the efficiency of companies. Since 2007, total factor
productivity is sinking in most of Europe. At a lower efficiency, the growth of supply can be slower when
demand returns.
Third, weak economic growth and weak bank balance sheet are mutually reinforcing each other, withnegative implications for long-term growth. A weak economy leads to bank losses, thereby deterioratingbank balance sheets. Banks with weak balance sheet tend to roll-over the dubious loans of their existingclients, instead of realising further losses (a process frequently called “zombificaion”), and do not grant
credit to young and innovative firms. Thereby, struggling firms that do not generate much growth are kept
alive, but new and more productive firms are unable to grow. Similar developments characterised Japan in
the 1990ies that has led to a lost decade. Europe committed to shore-up banks, but policies so far was
clearly inferior to the US, where bank restructuring was largely completed by 2009. It needs to be seen if
the European Banking Union will be able instrumental in avoiding the zombificaion of weaker banks in theeuro area.
Fourth, before the crisis, household and corporate debt increased substantially and reached too-high levels
in a number of EU countries. But private debt deleveraging has been much slower in Europe than in the US
since the crisis. History shows that deleveraging episodes can be protracted and can act as a drag on
growth. Economic stagnation in the short run makes it more difficult for the private sector to deleverageand thereby can protract the period of deleveraging and undermine growth in the medium term.
Fifth, stagnation in Europe undermines the attractiveness of Europe for investment. When investment
moves to other locations instead of Europe, the long-run growth potential of Europe is weakened.
And sixth, a protracted period of weak growth and high unemployment are undermining the EU citizens’
trust in the ability of EU institutions to provide useful policy advice. It can also undermine the trust in
democracy, which is the fundamental principle on which the EU is built (Figure 8). Thereby, it weakens
domestic commitments to vitally important but painful structural reforms, which are also fostered by EU
institutions. Backtracking on structural reforms would weaken the long-term growth potential.
(10 March 2016)

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Figure 8: Evolution of satisfaction with democracy
90
80
70
60

50
40

2014

2013

2012

2011

2010

2009

2008

2007

2006

2002

0

2005

10

2004

20

2003

Northern Europe (DK, SE, UK)Core euro area (AT, BE, FI, DE, NL)
FranceSouthern euro area (GR, IT, PT, ES)

30

Source: update, using Eurobarometer data, of Alonso (2013). Note: average % of respondents who replied 'very'and 'fairly' (among those who responded) to the question if he/she is satisfied with democracy in his/her own
country. This question was not asked in 2008.

References
Alonoso, Sonia (2013), ‘The growing economic and ideological breach between Northern and Southern EU
countries is pushing Europe towards a perfect storm’, LSE blog 22 July 2013,
http://blogs.lse.ac.uk/europpblog/2013/07/22/the-growing-economic-and-ideological-breach-between-northernand-southern-eu-countries-is-pushing-europe-towards-a-perfect-storm/
Darvas, Zsolt (2012a) ‘The ECB’s magic wand’, Intereconomics: Review of European Economic Policy 47(5),266-267.
Darvas, Zsolt (2012b), ‘Real effective exchange rates for 178 countries: a new database’, Bruegel Working
Paper 2012/06
Darvas, Zsolt (2012c), ‘Intra-euro rebalancing is inevitable, but insufficient’, Bruegel Policy Contribution
2012/15
Darvas, Zsolt (2013), ‘The harmful impact of short-term troubles on long-term growth’, Bruegel blog, 16 May
2013, http://bruegel.org/2013/05/the-harmful-impact-of-short-term-troubles-on-long-term-growth/
Darvas, Zsolt (2014), ‘Can Europe recover without credit?’ Society and Economy 36(2), 129-149
Darvas, Zsolt (2015), ‘Does money matter in the euro area? Evidence from a new Divisia index’, Economics
Letters 133, 123-126.
Darvas, Zsolt (2016), ‘Has ECB QE lifted inflation?’ Bruegel blog 12 January 2016,
http://bruegel.org/2016/01/has-ecb-qe-lifted-inflation/
Darvas, Zsolt and Olga Tschekassin (2015) ‘Poor and under pressure: the social impact of Europe's fiscal
consolidation’, Bruegel Policy Contribution 2015/04.
Wu, Jing Cynthia and Fan Dora Xia (2016) ‘Measuring the Macroeconomic Impact of Monetary Policy at the
Zero Lower Bound’ Journal of Money, Credit, and Banking 48(2-3), 253-291.
Véron, Nicolas (2015), ‘Europe’s radical banking union’, Bruegel Essay and Lecture Series

Review of EU Asia Pacific Studies No.2&3 (March, 2017):17－28.
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Comments
Kentaro Kawasaki1
The paper proposed by Dr. Zsolt Darvas gives detailed and skillful explanations on recent
European economy, institutional frameworks and policy response to deal with the “triple crisis” inEurozone. When the newly-elected Greek prime minister, Alexis Tsipras calls a confidence voteabout the EU bailout deal in 2015, a public sentiment might show that many among other Euro
member states harbor a negative stereotype toward the Greek people and the future of the Eurozone
economy. The skepticism on sustainability of the common currency union became more widespreadbecause, obviously, the European policy makers did not have a magical wand to address the Greek
issues. The pessimistic views revealed on the titles of articles on tabloids or elites papers might
easily spark a populistic or nationalistic sentiment against the regional integration in Europe. Thismight make difficult to foster further economic growth in the EU, while the other developed
economies such as the US could have recovered and moved to the next phases of economic growth.
However, the source of triple crisis, the balance of payments crisis, the banking crisis and thesovereign debt crisis, which the EU has faced, are not Euro-specific issues at all. Speaking of thebanking crisis and the sovereign debt crisis, most of the developed countries had faced similar
problems in the years after the global financial crisis. Also, the balance of payment crisis would
possibly happen in any economies, when the huge capital inflows follow the asset bubble in thefinancial market and sudden capital outflows leads the fall in asset prices and exchange rates.
Therefore, this paper does not address primitive discussions about the possibility of collapsing the
Economic and Monetary Union, which is the Euro-specific regime. Obviously, the author regards
that the lack of political and social cohesion among the Eurozone countries, rather than the single
currency, makes it difficult to foster further growth,
What are the lessons of the Eurozone crisis? The banking crisis could be included into thesovereign debt crisis, because the banking problem should be calmed by the public funds injections.
The public injections could solve short-term problems for financial environments, by mitigating
liquidity constraints, credit constraints, and market pessimism and current losses on the balance
sheets of the damaged banks. However, the injected money could not expand future gains, orincrease competitiveness of the banking sector, and it would only accumulate the government debt.
Moreover, to support the economic recovery and assure sustainable economic growth in the longrun, the governments had to expand their fiscal expenditures as investments for their future. The
huge amount of money financed by the government bonds turns the banking problems into thesovereign debt problems soon or later. The acceleration of government debt accumulation might
become severe as the sovereign debt crisis.
Therefore, one of the lessons from the Eurozone crisis is the sovereign debt. As the author
pointed out, it was a major step in crisis resolution that the ECB has become now ready to purchasegovernment bonds of stressed countries as a lender of last resort for sovereigns. This was cruciallyhelpful to the Periphery countries which had accumulated huge government deficits. Afterlaunching Outright Monetary Transactions, market pressures on the CDS for government bonds
seem to have become eased to the levels before 2012.
Apparently, the other lesson of crisis is the balance of payment crisis.
This paper is spared for the justification and evaluations for “Monetary policy measure.” This
topic is related to the questions such as how the EU member states can solve the low growth problem.
When the central banks in the developed countries adopt the inflation targeting monetary policy,
they assume that the monetary policy might affect the future expectations through the effect of
forward guidance. The announcements of the longer-term political commitment to the inflation rates

1

Faculty of Business Administration, Toyo University. e-mail: kawasaki-k@toyonet.toyo.ac.jp.

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No.2&3 (March, 2017)by the central bank contribute to increasing current demand. The forward guidance is regarded as amore powerful tool to stimulate economic demand than the traditional monetary policy tools.
As the author pointed out, the ECB’s political commitments have been very weak so far. To
successfully adjust productivity competitiveness in the Southern European countries, the inflation
there has to be even lower than in the core countries. Although the ECB’s commitment to 2%
inflation rate might be enough for the core countries’ economies to stimulate their demand, the level
might be too high for the periphery to prompt a decrease in the relatively high wage level. If theaverage euro inflation rates were too low, the forward guidance effect would be weak. Although the
ECB’s monetary policy supports economic growth as an engine, the dilemma originated from this“one-size fit all” policy measure might be a crucial obstacle for further economic growth.
As the Fed introduced the unemployment rates as another political measure to continue themonetary easing effectively, the ECB should not focus their monetary policy target on inflation only.
Especially, the historically very high unemployment rate in the mid and periphery Euro countries
should be addressed by other political options.
However, the policy response by the EU institutions, such as the Junker investment plan, wasineffective in addressing the high unemployment problem in the periphery. As the author pointed
out; “the actions against insufficient investments in the EU were for long more a slogan than a realaction plan.” The effective investments should be implemented. Expanding investments would be
one of growth engines to foster further economic growth in Europe.
After mid-2015, the European countries have faced the European refugee crisis and a fear of
terrorism. Hence the readers would ask that whether the Eurozone crisis is over, or it is the calm
before another storm. How can the EU member states handle these new challenges? The author
mentioned in the introduction; “The support for further solidarity and integration is limited. Morenationalistic approaches dominate, while the support for democracy is weakening in the hardest hit
countries. This development is especially worrying, since democracy is the core principle on which
the EU is built.”
Under these difficult situations, each of the member states has to control or manage reactionary
sentiments against the immigration issue. The immigrants from outside Europe might make it
difficult for the intra-euro adjustment to foster economic growth. Once the regional collective
actions on refugee issues fail, “anti-EU sentiments” among the EU member states would arise andnever disappear. It would become a fateful crisis. Therefore, the EU member states have tostrengthen their political and social cohesion to handle these new challenges, subjecting to further
economic stability in Europe, as Dr. Darvas has argued.

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Post global financial crisis Ireland:A ‘model’ of economic recovery?
Bernadette Andreosso-O’Callaghan

Introduction

During the first phase of the so-called ‘celtic tiger’ expansionary period (1994-2000), Ireland enjoyed thefastest growth rate of all OECD countries. The catching-up of the country towards the highest per capita
GDP levels in the European Union was made possible by a successful growth model of rapid
industrialisation-by-invitation with large inflows of inward foreign direct investment (FDI) being invested
in the country, mostly from the USA, in line with the long phase of economic prosperity enjoyed by the USA
at the time, the longest indeed in its economic history (Field, 2007). This was followed by a second economic
boom period (2000-2007/08), period during which economic growth and employment growth were fuelledby credit expansion and by an unprecedented property boom (Nolan et al., 2014), a phenomenon that can in
short be referred to as the period of ‘financialization’ of the Irish and other western economies (Krippner,
2005; Orhangazi, 2008; Zwan, 2014). The economic success was such that according to The Economist(2005) magazine, Ireland ranked first in 2005 in terms of the magazine’s Quality of Life Index based on
variables such as material wellbeing, job security, political stability and security.
The ‘financialisation’ of the Irish economy during the second ‘celtic tiger’ period, with its oversizedproperty and banking sectors, was gradually becoming apparent with the analysis of several key
macroeconomic indicators. First, the construction industry accounted for 9 per cent of GDP in 2007 (CSO,
2008). In the second quarter of 2007, the average price of a new house in Ireland increased to its highest
level at a staggering €331,000 (CSO, 2015), compared with an annual pre-tax average industrial wage of€32,616 at the time (CSO, 2007). Second, the level of household’s indebtedness increased dramaticallyduring the ‘celtic tiger’ period. For example, credit card debt soared from €102 per capita to €707 in 2008
(Russell et al., 2012). In 2008, the extent of the private debt problem was exceptionally high in EU terms,
and it was still the fifth highest in the euro-area in 2013 (Whelan et al., 2015). Third, an over-sized banking
sector was visible through the building-up of non-performing loans (NPLs) which eventually became themain issue to tackle in the aftermath of the property collapse. NPLs were valued at €64bn in the Autumn
2009, representing more than 40 percent of yearly GDP at the time, although their pre-crisis cost was closeto €90bn. The setting up of the National Asset Management Agency (NAMA) at the end of 2009 was aimed
at recuperating as much value as possible from these distressed assets. Although many of the NAMAmanaged properties were gradually being sold, the domestic banks were nevertheless left with the issue ofproblematic mortgages. The stock of mortgages in arrears peaked in Q3-2013, but during the first quarter ofReview of EU Asia Pacific Studies No.2&3 (March, 2017)© 2017 EUSI Tokyo & Tsuda College. All rights reserved.

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No.2&3 (March, 2017)2014, more than a quarter of all loans (27 per cent) were still ‘non-performing’, with the Irish banking sector
continuing to report losses (BNP Paribas, 2014) despite the massive injections of public money. As
investigated by McCarthy (2014), in 85 per cent of reported mortgage arrear cases, the head of the household
was actually in full employment. This situation inherited from past beggar-thy-neighbour (or totallyirresponsible) behaviour implies that non-performing housing loans are a lasting problem of contemporary
Ireland and that they are placing enormous constraints on bank loans for domestic investment.
Ireland officially entered the recession in 2008 as the country experienced negative growth in GDP
over the first two quarters of that year (CSO, 2012). As argued elsewhere, what started as a subprime crisisin the USA became eventually a euro crisis thanks to propagation effects materialising through the Irish door
(Andreosso-O’Callaghan, 2013). A negative growth trend ensued as real GDP growth fell in 2009 to between
a low -6.4 per cent, according to Department of Finance figures, and -7.1 per cent (ESRI, 2010).
Consequently, residential construction declined in cumulative terms by approximately 80 per cent between
2006 and 2012 (BNP Paribas, 2014).1 According to CSO figures, unemployment rose from less than 5 percent in 2005 to nearly 15 per cent in 2012, investment rates fell to an all-times low and domestic consumption
shrank severely.
The objective of this contribution is to present briefly the main policies introduced aimed at dealing
with the crisis and their impact (part II). Part III will discuss the current puzzle characterising the current
Irish economy, which can be summarised as: jobs without growth and growth without jobs. The analysis is
aimed at uncovering what is behind the relatively high growth rates of 2013 and 2014 and what trends canbe foreseen for the near future. Do these trends allow the observer to see the Irish economy as a ‘model’ of
post-2008 crisis economic recovery?

II.

Policies introduced to deal with the crisis and their impact

Quick-fix policies first looked at the hot issue of potentially zombie banks crippled with their NPLs. The
NPLs of these banks, including those of the most vulnerable of them - Anglo-Irish Bank which was
eventually let to ‘wind down’ - were transferred to the NAMA structure, the newly-created bad bank. Whencoupled with the Irish government bank guarantee of September 2008,2 this implies that, in spite of theunprecedented severity of the crisis, most of the Irish (domestic) banking structure remained unchanged.
Through a massive injection of taxpayers’ funds, the Irish banking sector was recapitalised (and nationalized
partially in some instances) so as to keep instilling confidence in the euro-area market. Other measures suchas the reform of bankruptcy, authorisation of home repossessions (although very marginal when comparedwith Spain and other countries), loan restructuring (such as a moratorium on debt servicing) have also been
introduced to deal with the problem of mortgage arrears. Not allowing any Irish banking institutions to
1 Note that real estate prices started rising again between the summer 2013 and December 2014.
2 The Irish government announced on 30 September 2008 a guarantee of all banks’ loans and deposits to the height of€440bn, or nearly three times the country’s annual GDP at the time.

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collapse à la Lehman Brothers implied the acceptance in November 2010 of the IMF, European Central
Bank and EU Commission’s forced €67bn bail-out package with stringent macroeconomic conditions
attached to it, institutionalising thereby a prolonged period of economic austerity. These austerity policies
encompassed the downsizing of the public sector, the increase in personal income tax, of indirect tax, andthe introduction of other taxes such as a property tax and a so-called ‘Universal Social Charge’, as well as
the controversial water charges. Meanwhile, the 12.5 per cent corporation tax rate remained unchanged, as
this has been repeatedly presented in EU circles as the ‘fig-leaf’ of Irish industrial policy (AndreossoO’Callaghan et al., 2014). Finally, other important measures have centred around the idea of allowing Ireland
to become once again price competitive on a world-wide basis. This has implied a downward pressure on
labour costs (or internal devaluation) in the hope that growth would be rejuvenated through exports.
Interestingly, the export-led growth model, which at the very same time was very much criticised in Chinesepolitical and economic circles as being rather passé, was becoming fashionable again in an EU economy thatonce boasted among the highest GDP per capita performance.
Seven years after the burst of the Irish property bubble, the impact of the sharp ‘adjustment’ on theeconomy as a whole leads to a series of rather mixed results. As shown in table 1, growth seems to haveresumed since 2011 – although it dipped again into negative figures in the following year - , and the various
equilibria in public finance (a primary objective in EU circles), have been restored with for example ashrinking exchequer deficit. Note that the exchequer deficit at 5.7 per cent of GDP in 2013 is seen in theeyes of the EU Commission as being, for a large part, of a structural nature. The explosion of the general
government debt (at 123.3 per cent of GDP in 2013) has eventually become less of a concern with the change
in the presidency of the European Central Bank in November 2011 and its eventual and gradual initiation ofa quantitative easing policy; the concomitantly unprecedented low interest rates have meant that, for example,
10 year interest rate yields on Irish government bonds fell to a low 1.18 per cent in May 2015.

Table 1: Macroeconomic Indicators - Ireland (annual % change unless otherwise specified, 2006-14)
2006 2007 2008 2009 2010 2011 2012 2013

2014

5.5

4.9

-2.6

-6.4

-0.3

2.8

-0.3

0.2

2.7

2.9

3.1

-1.7

-1.6

1.2

1.9

0.5

4.8 (e) DoF, Dublin
Eurostat,
0.3
Luxembourg

4.0

4.9

4.1

-4.5

-1.0

2.6

1.7

0.5

0.2

(3) General
government debt(% of GDP)
24.6
(4) Unemployment
rate
4.5

24.9

44.2

64.4

87.4 111.1 121.7 123.3 110.5(e) DoF, Dublin

4.7

6.4

12.0

13.8

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33

14.6

14.7

13.1

11.3

Source

CSO, Dublin

CSO, Cork

Review of EU Asia Pacific Studies

No.2&3 (March, 2017)(5) Investment(GFCF)(6) Household final
consumption
expenditure

9.4

1.4

-16.7 -26.9 -21.2

-4.5

8.6

-1.8

14.5

6.6

6.7

-0.2

-1.1

-1.4

-0.4

1.1

-5.9

0.4

(7) Exports

Own
Eurostatbased
calculations.
CSO for2014
Eurostat,
Luxembourg
CSO, Own
Calculation

0.0
2.8 -3.2 -0.7 4.5
1.7
0.5 -5.1
2.4(8) Current
account (% of
CSO for 2014
GDP)
-3.6 -5.4 -5.7 -3.1 0.6
0.8
1.6
4.4 4.9 (e) DoF, Dublin(9) Exchequer
Surplus/Deficit(% of GNP)
1.4 -1.0 -8.0 -17.8 -13.6 -18.1 -10.5 -7.8
NA
DoF, Dublin(10) Government
budget balance (%of GDP)
2.9
0.2 -7.4 -13.7 -30.1 -12.6 -8.1 -5.7 -3.7 (e) DoF, Dublin
Key: DoF: Department of Finance, Dublin. CSO: Central Statistics Office, Cork and Dublin. HCPI:Household Consumer Price Index. GFCF: Gross Fixed Capital Formation.

These macroeconomic indicators show overall an improvement in the fundamentals of the Irish economy,
although they do not allow the analyst to discern a definite linear trend. The ability of Ireland to exit the bailout package on 15th December 2013, a sign that the country had ‘delivered’ in terms of economic reforms,
must nevertheless be appraised in parallel with a number of other performance indicators; we will focus here
on socio-economic as well as manufacturing investment and innovation indicators. These indicators are ofprimary concern to any government interested in the issue of sustainable (or long-term) economic
development.
With regard to the socio-economic impact of the adjustment measures, how detrimental to social
cohesion have these austerity measures been? What is striking about the Irish adjustment package is that thedifferent measures have fallen disproportionately on the labour factor of production, with declining earnings
due to wage cuts particularly in the public sector, and therefore with declining net incomes explained also
by a high fiscal burden (Callan et al., 2013). Not surprisingly, the Gini coefficient, as a first measure ofsocial cohesion, shows how inequality has risen more in Ireland as a result of the different policy measures,
when compared with the EU as a whole (Figure 1). What is also astonishing about such figures is that income
inequality did not recede during the ‘celtic tiger’ period, but that it has in fact even been increasing duringsome of the ‘celtic tiger’ years, as shown in figure 1.

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Figure 1. Gini Coefficient – Ireland and the EU (2003 – 2012)

Source: EUROSTAT, Luxembourg.

Whether the resulting phenomenon is that of a ‘middle class squeeze’ remains an open question. The
differentiated impact of the austerity measures on the different income groups, age groups or social classes
is studied by Whelan et al. (2015). This study uses a common measure of poverty, which is 60 per cent ofmedian equivalised household income, combined with economic stress and material depravation variables
to assess the full extent of the crisis on poverty.3 Whelan et al. (2015) identify five income categories4, andby using different econometric tests, the authors arrive at the following main conclusions, highlighting thelife-cycle characteristics of households. Income stress levels have increased across all income groups for the
35 to 64 years old group. For the younger cohort, i.e. those aged less than 35 years, only the income poor
have seen a decreased in their level of income stress. For the older cohort (65 years plus), income stresslevels have decreased for the less well off (the income poor), and also quite paradoxically for the affluent
class. As a result, the ‘middle class squeeze’ is rather, in the Irish case, a ‘precarious class squeeze’ and a‘lower middle-class squeeze’.
Another long-term performance indicator relates to investment and innovation policy. According to
CSO data, the rate of Gross Fixed Capital Formation (GFCF) averaged 22 per cent of GDP over the period

3 Equivalised implies taking into account the composition of the household with the first adult being given a weight of 1, each

additional adult 0.66 and each child 0.33. Economic stress variables include the ability of households to pay their mortgage
and other debts and to their ability to save. Material deprivation variables encompass for example the ability to possess or buy
certain basic goods and services such as heating for the house. The data are drawn from the Survey on Income and Living
Conditions (SILC) for Ireland, which is a voluntary survey, covering between 4,300 and 6,000 households between 2004 and2011.
4 These categories are as follows 1. Income poor or less than 60 % of median equivalized income, 2. Precarious income
class or 60–75 % of median equivalized income, 3. Lower middle income class or 75–125 % of median equivalized income,4. Upper middle income class or 125–166 % of median equivalized income, and 5. Affluent class or with an income greaterthan 167 % of median equivalized income.
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1971-2008 and fell to a low 10 per cent in 2011 and 2012. This is less than half the OECD average, half the
euro-area average and substantially lower than that of other crises-stricken countries, such as Italy and Spain.
As shown in Table 1, the contraction of GFCF was particularly severe in 2009 and 2010, whereas thisvariable continued to decrease by between 2.4 and 1.8 per cent in 2013, according to either BNP Paribas(2014) or EUROSTAT data respectively. What is somewhat reassuring is that the severe drop of 2008-2010
has been followed by a surge of investment in 2014. Here again, the sinusoidal path of the GFCF variable
since 2006 does not unfortunately allow us to bring a solid conclusive avenue. These unprecedented low
investment rates tend to introduce and accentuate the phenomenon of de-industrialization, which has become
an uncontested and visible phenomenon in the EU as a whole since the crisis, even allowing for the small
statistical discrepancy arising from its measurement.5 A changing international division of labour which, through shifting comparative advantages due to labour cost differentials leads the different EU countries tospecialize increasingly in services areas such as the UK in financial services -, is the main reason for deindustrialization in the EU as a whole. In the case of Ireland, the case for policies aimed at sustaining andfostering a strong (domestic) manufacturing base has been reiterated at the outset of the global financial
crisis (see Andreosso-O’Callaghan and Lenihan 2011). The rationale for these policies is well-known and itlies in the fact that, despite industrial change, the manufacturing sector still remains the core element of thevalue added chain:-

In terms of nurturing skills, as well as a certain industrial tradition (Marshall, 1899).

-

In terms of its driving effect, through derived demand, on the services sector and on the economy
as a whole.

-

In terms of its contribution to R&D which typically represents more than 60 per cent of a country's
total (private-sector) R&D spending (Kroker and Lichtblau, 2013).

Consequently, a strong manufacturing base is paralleled with a reservoir of highly skilled workers and it
supports the demand that it generates for business-related activities and for other services. Conversely, ashrinking manufacturing sector weakens the whole future industrial potential of a country and increases thevulnerability of a country.
Uncertainty in terms of the viability of an industrial model in the future can be gauged also from some basic
innovation indicators. Table 2 (in the Appendix), shows a number of input and output indicators ofinnovation for the years 2006-2013. Input indicators, such as the growth in the number of researchers in
relative terms, show a decrease in 2009-2010, whereas the expenditure on education as a share of grossnational income (GNI) has been either contracting in 2010 or flat since 2012. Output indicators such as
patents and gross value added (VA) of both education and scientific research and development show a

5 For more on this issue, the interested reader can refer for example to Heymann and Vetter (2013). Note that the boundaries

between manufacturing and services have tended to become somewhat blurred, with the increased incidence of outsourcing in
the past few decades and with services companies driving some of the current change (Google for example entering thebiotechnology sector, in the area of age-related diseases; see Berger, 2014).
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negative performance during most of the 2006-2013 period. 6 In particular, although the gross VA ofscientific R&D has kept increasing between 2008 and 2010, it has declined since. Some of the increase
visible during these years can be explained by already committed funding for research as opposed to a newwave of capital injection for R&D purposes.7 The decline of the gross VA in Irish education for most of theperiod under review is probably the most striking observation emanating from Table 2. Moreover, grossdomestic expenditure on R&D has declined during the period 2009-2012 (Table 3), with most of the decline
explained by a drop in the higher education sector.

Table 3 - Gross domestic expenditure on R&D by source of funds in Ireland (based on current

euro figures)
2007
Total (funding sector), of which: 9,91
Business enterprise 36,36
Higher education 654,72

2008
13,61
52,00
-7,00

2009
-2,77
-12,28-19,35

2010-2,81-18,50-20,002011-11,00-15,34-19,582012-0,14-15,22-19,692013
1,00-15,21-19,69Source: OECD (2014) Science Technology and Industry Outlook, Paris
Whereas, thanks to its ‘celtic tiger’ period, Ireland had once managed to start pulling itself in the league ofother innovating countries such as the UK (although still considered as an ‘innovation follower’), theadjustment policies in response to the 2008 crisis seem to have seriously jeopardized this trend. As a resultof policies that focused primarily and exclusively on the financial and banking sector, Ireland now stands
out as a country left profoundly hurt when it comes to its innovative performance and potential. As Table 4shows, the relatively low GERD to GDP ratio at the beginning of the period declined from a small peak at
1.69 per cent in 2009-2010; this needs to be appreciated in the background of a decreasing, or at best constant,GDP. The situation is such that in 2012, Ireland’s ratio was lower than that of the EU-28 average andsubstantially lower than that of a new and poorer EU-member country such as Slovenia.

Table 4: Gross Expenditure on R&D (GERD) as a percentage ofGDP (2007-2012), Ireland compared to other small EU economies
2007 2008 2009 2010 2011 2012
Denmark
2.58 2.85 3.16
3 2.98 2.98
Finland
3.47
3.7 3.94
3.9
3.8 3.55
Greece0.6 ..
..
..
0.67 0.69
Ireland1.28 1.45 1.69 1.69 1.61 1.66
Slovenia
1.45 1.66 1.85
2.1 2.47 2.63
Sweden3.43
3.7 3.62 3.39 3.39 3.41
European Union (28 countries)
1.76 1.83 1.91 1.91 1.95 1.98
Source: OECD (2014) Science Technology and Industry Outlook, Paris.

6 Data on patents must however be analysed with some caution as they are subject to the cyclical feature embodied in ‘patent

cliff’ (see BNP Paribas, 2014).
7 As has been the case since with, for example, the Irish Government’s announcement in March 2011 of euros 24 million being

injected in view of developing five different areas of scientific research. These corresponded to already committed funds.
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The implementation of the so-called ‘smart economy’ initiative (Department of an Taoiseach, 2008) thatwas still predicated on sustained investment in research and development seems to have been called into
question. With a much reduced margin of manoeuvre in terms of public spending as evidenced by theconditional bail-out package and its aftermath, the Irish Government stopped its injection of funds in thearea of research and third level education (Table 3). Timid industrial policy measures such as the enterprisestabilisation fund aimed at stimulating GFCF, the back to work allowance as well as the jobs initiative
announced in May 2011 that comprises a reduced VAT rate for jobs in the tourism sector, and the internshipscheme have been insufficient measures that have not satisfactorily addressed the pressing double issue ofdomestic investment revitalisation and human capital development.

3. Explaining post crisis economic growth in Ireland
After prolonged negative growth during the years following the crisis (Figure 2), the growth rate of
GDP stagnated in real terms at 0.2 per cent in 2013 and is estimated by the Central Statistical Office to havereached 3.5 per cent in 2014 (4.8 per cent according to EUROSTAT figures).

Figure 2. Growth rates 2001-2013

Source: CSO, 2015, Cork.

During the post-crisis period, the evolution of GNP growth rates has been rather puzzling. Given
the large multinational enterprise sector of foreign-owned firms transferring their profits generated in Ireland,
there has traditionally been a substantial difference between GDP and GNP measures in Ireland, with theformer outstripping the second measure by 16 per cent over the past 10 years or so (BNP Paribas, 2014). In
2012, a change in this trend appeared with GNP growth rates outpacing stagnant GDP growth rates. GNP
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grew by 1.9 per cent in 2012 (when GDP was still contracting) and by 3.2 per cent in 2013 (when GDP wasstagnating). According to FitzGerald (2013), a large part of the explanation in these differences resides inthe domiciliation (in Ireland) of US public limited companies (plcs). By establishing a legal presence in
Ireland, the profits of these companies, mostly generated in the rest of the world, are paid to them in Irelandand taxed in Ireland, with the help of double taxation agreements and although their tax liability for the profit
repatriated in Ireland would theoretically arise in other jurisdictions. In fine, the domiciliation exercise allows
these companies to enhance their value and consequently the recorded inflows of these domiciled plcs’
retained earnings (or profits) into the economy are solely attributed to their foreign owners. From amacroeconomic viewpoint, the effect is that domiciliation raises the current account surplus in the Irish
balance of payments and increases the level of nominal GNP with no benefits at all in terms of investment
or jobs to the Irish economy.

Figure 3. Unemployment rate 2003-2013

Source: Central Statistical Office, Cork, 2014.

These recent trends in GDP and GNP growth rates tend to create a disconnection between economic
growth and employment growth. As can be gathered from figure 3, employment rose in 2013 although real
GDP stagnated. During that year, the agri-food sector was the biggest provider of new job opportunities
which explains a small part of the growth in GNP in 2013 (growth-less jobs). During 2014, employment
growth was only slightly more vigorous than during the previous year but GDP growth reached an estimated
3.5 to 4.8 per cent (jobless growth).8 As of December 2014, the official unemployment rate is down to 11.1
8 The year 2014 has been a relatively good year on the jobs front in Ireland. Some 14,000 full-time jobs were created duringthat year, but this has to be examined in the background of about 7,000 jobs destroyed in the economy for the same year. Some
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per cent with 239,500 unemployed people. However, if one adds the 75,600 unpaid or low-paid people inpublic internship schemes and other schemes, the unemployment rate reaches 14.6 per cent (Finfacts
Business News Center, January 2015). In addition, the CSO Quarterly National Household survey showsthat some 124,000 part-time workers (or 6 per cent of the labour force) wish to be in full-time employment.
When these full-time positions are taken into account, the rate of effective unemployment would reach 20.6
per cent (without taking into account the figures denoting the large outflow of labour since 2008).
At this juncture, it is worth examining what factors are behind what is commonly referred to as the ‘economic
recovery’ in Ireland, judging by positive GDP and GNP (depending on the case) growth rates. We have seen
that, overall, supply-side explanatory factors such as investment (GFCF) and technological innovation havebeen lethargic, a factor explained further by credit rationing for domestic firms combined with limited direct
investment inflows. It is clear that most of the explanation for the recovery must be found on the demandside, namely consumption, either domestic or foreign.

Figure 4. Consumer spending and total disposable income in Ireland (1998-2013)

Source: Trading Economics.Com, based on Central Statistics Office Figures, Cork.

estimates show that the Irish economy would need to create 40,000 full-time jobs every year to reach the objective of full-time
employment defined as being 2.1 million fully employed people (this corresponds to the pre-crisis figure). In 2014, the labourforce actually declined, a phenomenon which is attributable to the fact that more individuals in the 16-24 age cohort decided
either to stay in education or to go back to education.
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As shown in figure 4, personal consumption declined by 2.5 per cent between 2008 and 2013 (at current
prices). Household consumption continued to fall by 0.8 per cent in 2013 and stagnated during the firstquarter of 2014 (BNP Paribas, 2014). During 2014, average earnings continued to fall, in spite of someindustries experiencing pay growth such as in the case of the hospitality sector (+5.3 per cent). The
November 2014 budget was the first post-crisis budget that has given some consideration to domestic
demand as a potential engine of future economic growth. This might explain the small increase of 1.1 percent of household consumption expenditure during that year as shown in table 1.
Needless to say, a final important explanatory factor that accounts for a great deal of the recovery
is foreign demand. In particular, the role of exports by multinational enterprises in the pharmaceutical sector
needs to be acknowledged. One characteristic of the ‘celtic tiger’ has been, owing to its size, its over-relianceon international markets. This trend has tended to be amplified by the reactive policy measures after 2008.
This reliance is such that the country’s ratio of total exports of goods and services to GDP stood at more than
114 per cent in the first quarter of 2014 (this compares with 40.1 per cent for Portugal, 31.3 per cent for
Spain, 28.8 per cent for Italy and only 28.4 per cent for Greece, according to Eurostat external trade figures).
Figure 5 shows an improvement in the trade surplus from 2008, although here again, a definite linear trend
cannot be inferred.

Figure 5. Trade performance (1991-2014. Goods exports, imports and balance)

Source: CSO, 2015, Cork.

The positive trade balance has been consolidated since the advent of the global financial crisis and the recent
Irish export performance is remarkable particularly in 2014 with an increase of more than 5 per cent overthe previous year when world trade was almost flat. The main products accounting for the surge of exports
have been dairy products and baby food (to China) which is consistent with the employment growth figures
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and some of the GNP figures discussed above. According to the Irish Exporters Association, the largest
single exporters are nevertheless drawn from IT-related and pharmaceutical fields. These are Google (€17bn
exports in 2014), Microsoft (€15bn), Johnson and Johnson (€10.5bn) and Pfizer (€5bn). The main exportoriented industry is pharmaceuticals representing 28 percent of total Irish export. Unfortunately, a vigorous
export-oriented sector has not been a sufficient vehicle for invigorating renewed growth trends in the Irish
economy, at least to the extent that was envisaged by the IMF, ECB and EU Commission in 2010.

Conclusions
Severe adjustment policies inflicted upon the Irish economy after the burst of its property sector in 2008
have led to rather mixed results. The various equilibria in the public finances have been successfully restoredwith for example a debt to GDP ratio declining substantially since 2014. Real GDP growth has been positivesince 2013 and unemployment shrank (although more on paper than in reality) by nearly a third since its
peak in 2011. What is of utmost importance in the Irish case is that, in the case of most of its macroeconomic
indicators and with the exception of exports, definite (linear) trends have not as yet been discernible. For
example, real GDP and GNP performance has tended to follow a sinusoidal path, which on the one handmirrors the fragility of recovery in the euro-area, and which on the other hand masks some specific featuresof the Irish economy such as the disconnection between economic growth and employment growth, without
commensurate productivity growth. An indisputable commendable performance is in terms of tradeperformance, partly a result of the rediscovery by the Irish government of the key role that a sector such as
the agri-food sector can play in an economy and partly as a result of the ‘internal devaluation’ policy.
Whether these mixed results were worth the severe adjustment policies is highly debatable. All they suggest
is a disproportion existing between the meagre results achieved (if one focuses solely on the Irish economy)
and the severity of the adjustment costs which, as we have shown here, are twofold. First, by falling
disproportionately on the labour factor (and on households), adjustment policies have tended to increase thedisparities in terms of income distribution and they may have further jeopardised social cohesion in Ireland.
Second, adjustment policies seem to have tolled the bell of the EU Lisbon Strategy; indeed, innovation,
human capital formation and the availability of credit for innovative indigenous firms has not been verymuch a priority on the agenda of Irish policy making since the crisis. In particular, low investment rates inscientific research and development for a few years are of particular concern, as they damage seriously theability of a country to embark upon a sustainable economic development path.

Acknowledgements
The author is indebted to Christopher Dathe, Euro-Asia Centre, University of Limerick, for his invaluable
help in updating the statistical information used in this study. The usual disclaimer applies.
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2008

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0.8%

-2.8%

4.0%

3.4%

2.6%

8.9%

-2.7%

1.1%

0.7%

2.4%

-3.5%

2009

-1.4%

-1.4%

2010

1.4%

5.7%

-2.0%

3.8%

-1.8%

-2.2%

1.2%

-2.1%

-1.6%

-4.9%

-1.7%

2.2%

2.1%

2.2%

1.1%

0.0%

4.7%

2011 2012-4.6% 17.6% 29.2%

4.0% 13.5% 20.3%

2.7% 12.6%

2007

2.3%

8.2%

0.0%

3.4%

2006

Derived from
-2.2% CSO

Derived from
-1.1% CSO

2013 Source
Derived fromWorldbankNA data
Derived fromWorldbankdata
0.0%
Derived fromWorldbank- data29.7%

No.2&3 (March, 2017)

Derived from
-1.0% CSO
http://databank.worldbank.org/data/ accessed on the 7th May 2015 and CSO available at http://www.cso.ie/

Gross Value Added of Scientificresearch and development andof education (Constant BasicPrices)Gross Value Added of Scientificresearch and development(Constant Basic Prices)
Gross Value Added of
Education (Constant BasicPrices)Patent applications (residents
and non-residents)

Education expenditure (% of
GNI)

Researchers in R&D (permillion people)

Annual % change (unlessotherwise specified)

Table 2 – Selected innovation indicators for Ireland

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Prospect of New EU Member States for the Euro Adoption: Based on
Small Countries’ Experiences
Yoji Koyama

1. Introduction
In May 2004, 8 countries from CEE, i.e. Poland, the Czech Republic, Slovakia, Hungary, Slovenia,
Estonia, Latvia and Lithuania were admitted to the EU. In January 2007 Romania and Bulgaria, andin July 2013 Croatia were admitted to the EU. Among 11 New EU Member States (NMS) from CEE,
5 countries adopted the euro one after another, first Slovenia (2007) followed by Slovakia (2009),
Estonia (2011), Latvia (2014) and Lithuania (2015). One of the important challenges facing NMS afterEU accession is to join the Economic and Monetary Union (EMU), i.e. adopt the euro, after having
satisfied the Maastricht convergence criteria. At present 6 out of 11 NMS from CEE have not adopted
the euro yet. They are not allowed the right to opt out as the UK and Denmark have had, and they arerequested to eventually adopt the euro. These countries have their own problems.
This paper considers the prospect for euro adoption by reviewing the experiences of NMS whichhave adopted the euro and by presenting main issues which have been discussed in the book that I
have edited (Koyama, 2016).

2. Experiences of NMS which have already adopted the Euro.
1) Positive Experiences
In the case of Slovakia, for a while, prior to the EU accession (1997-1999), the country was classified
as the second wave due to a delay in reforms in the country. Finally the distinction between the first
and the second waves was removed and Slovakia became able to join the EU in 2004 together withother countries from CEE. Due to its bitter experience in 1997-1999, Slovakia actively chose its early
entry into the EMU in order to get rid of its uneasiness of non-EMU membership and joined the EMU
in 2009. The automobile industry, in which foreign automobile producers invested during the periodof the Dzurinda government, has been leading exports from this country, and therefore, the Slovak
economy has been doing well, although its economic growth was interrupted for a while by the 2008
global financial crisis.

2) Bitter Experiences of Two Small Countries
Critical situations in periphery countries in Southern Europe including Greece (Ireland is included inthis case) have attracted attention, but situations in NMS in CEE were also serious. Here cases of 2
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countries, Latvia (population as of 2014 is a little less than 2 million) and Slovenia (a little more than
2 million) are discussed. Inflows of foreign capitals in these countries took the following routes: 1)
inward foreign direct investment (FDI); 2) portfolio investment; and 3) other investments (funds
transfer from parent banks to local branches and between banks), among which 1) and 3) are important.
An analysis of the movement in inflows and outflows of capitals is represented by Latvia’s case.

LatviaLatvia, one of the Baltic States, has had common characteristics with Estonia and Lithuania. After the
independence from the Soviet Union in September 1991 Latvia aimed actively at participation in theWestern economy, joined the EU in 2004 and adopted the euro in January 2013. The Baltic States haveactively attracted foreign capitals. Foreign capitals, which had flowed into these countries since themid-1990s, greatly contributed to their economic development bringing about 2-digit economic
growth rates in the mid-2000s.
The share for manufacturing has been very small. FDI inflow concentrated mainly in non-tradable
sectors such as retail trade, real estate and financial services. At the same time, Nordic banks advanced
to the Baltic States. Swedish banks in particular were very active. Nordic banks’ strategies toward theBaltic States were viewed by Estonian economists as follows: “The Nordic banks opted for aggressive
business strategies to gain market share and set nominal interest rates and other loan conditions at
levels quite similar to those in their home markets (Hansson and Randveer, 2013, p. 6). All of theBaltic States were hit hard by the 2008 global financial crisis and recorded a 2-digit negative economic
growth in 2009. Among them Latvia’s case was the most serious.

Figure 1

GDP Growth Rates in 3 Countries

160.0
140.0
120.0
100.0
Latvia80.0

Slovenia

60.0

Croatia

40.0
20.0
0.0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: Prepared by the author based on data from the Eurostat.

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In Latvia the economic growth rate was as high as 12.2% in 2006. The inflation rate soared reflecting
a consumption boom and a housing bubble. As the inflation rate was so high, from the end of February
through early March 2007 the Lat, the Latvian currency, came under pressure of depreciation on theforeign market and the central bank was forced to intervene in the market for the first time in several
years. The government of Latvia finally switched its policy to manage aggregate demand more actively
and launched a package of measures geared to delivering a durable reduction. The restrained policies
began to be effective in autumn. Property prices started to decline and by October were around 12%
lower than at the start of 2007. Thus the housing bubble bust. The Lehman shock in September 2008
dealt the Latvian economy a final blow.
Looking at Table 1, we can find that FDI inflow turned negative in the 4th quarter of 2008 and in
the section of other investment assets-banks recorded negative values for three consecutive quartersfrom the 4th quarter of 2008, meaning net outflow of capital during these periods. Without resorting
to devaluation of the Lat, the country responded to this crisis by its people’s desperate efforts toimprove its export competitiveness by internal depreciation (through the reduction of wages, pension
and public services). Latvia has often been mentioned as a successful example of the country which
has accomplished a V-shape recovery after the crisis (see Figure 1), but we should not forget thetremendous sacrifice such as the exodus of about 10% of population to foreign countries since theoutburst of the global financial crisis. The public debt as a percentage of GDP in 2014 is 40.7%, which
is not serious, but the external debt exceeding 140% GDP is a cause for concern.

Table 1
Inflows and Outflows of Capitals in Latvia： From the Fourth Quarter of 2007
through the Second Quarter of 2009
2007

2008

2009

Q4 07

Q1 08

Q2 08

Q3 08

Q4 08

Q1 09

Q2 09

Current account-771,444-627,842-627,651-533,233-324,662

42,254

478,811

Trade balance-739,399-584,950-562,515-583,441-487,146-138,120

1,853

FDI inflow

190,939

270,322

269,921

209,708-143,453

15,812-128,980

Portfolio investment

19,530302,142-163,085

19,723

19,39843,532

48,170Assets-banks-853,090

638,142-356,208

342,011-86,743492,653-215,311

Liabilities-banks

1,148,314-304,627

899,064

240,324-575,445-1,293,496-501,244

Other investment

Source: Bank of Latvia, Quarterly Bulletin Latvia's Balance of Payments, issues of 4Q 2008 and 3Q
2009.

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Slovenia
Having inherited the tradition of self-management socialism from former Yugoslavia, this country is
characterized by neo-corporatism (cooperative relationship among government, managers’ associationand trade unions’ associations), quite different from other post-socialist countries. Its transition to amarket economy was carried out in a gradualist way and privatization was implemented with priority
being given to insiders. This country has had a relatively high level of technology and strong
international competitiveness. Most of Slovenians have been rather cautious about the sale of theirproductive assets to foreigners. Other countries in CEE have been willing to invite FDI in order tosupplement insufficient domestic capitals and absorb advanced technology and managerial know-how.
In contrast, Slovenia has not been so enthusiastic in attracting FDI. Rather this country has been moreenthusiastic in outward FDI since early time. With exception of 2002 and 2004, the amount of outward
FDI exceeded that of inward FDI until 2007. When it was admitted to the EU in May 2004 it had
already satisfied the Maastricht convergence criteria and after having joined the ERM II in June in thesame year the country was admitted to the EMU, i.e., adoption of the euro in January 2007 earlier thanany other NMS. In that sense it was the best performer among NMS. I would like to add that until themid-2000s its current account had been almost balanced, the budgetary deficit had been small andboth public debt and external debt had been relatively small (Table 2).
The euro adoption combined with a neoliberal courses taken by the center-right coalition
government caused a sudden increase in inflows of foreign capital, and a bubble economy. In the caseof this country, rather banks’ borrowing on international financial wholesale markets played a more
important role. Slovenian banks borrowed short-term capitals at low interest rates and then provided
domestic companies with loans in large quantities. This small country with an open economy was hit
hard by the reversal of international capital flow after the 2008 global financial crisis. Although theeconomy picked up somewhat in 2010-2011, it fell into a serious depression in 2012 under a “doubledip” recession in the eurozone. Since then the Slovenian economy recorded negative economic growth
for two consecutive years. A larger proportion of loans provided to the construction sector andfinancial holding companies became non-performing. It was three major banks under state control that
actively gave loans to these companies. These banks suffered from a huge amount of non-performing
loans.

Table 2
Changes in Public debt and External debt in 3 Countries
Year
LatviaSlovenia

2004

2008

2009

2010

2011

2012

2013

2014

Public debt

14.9

19.8

36.7

44.5

42.8

41.3

39.8

40.7

External debt

92.7

130.0

157.1

166.2

147.0

137.6

133.7

141.6

Public debt

27.2

22.0

35.0

38.6

46.9

53.7

70.8

80.8

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External debt

56.7

105.3

113.3

114.4

111.2

119.1

116.0

124.2

Public debt

37.8

29.3

35.8

42.2

63.7

69.2

80.8

85.1

External debt

71.6

83.6

97.7

103.6

103.7

103.0

105.6

108.4

Notes: Public debt by definition of the EU; External debt is in gross value.
Source: Current Analyses and Forecasts, wiiw, various issues.

The government embarked on the rescue of the banking sector. Transferring most of the nonperforming loans to a newly-established “bad bank”, the government injected fresh capitals into thesebanks. Due to this, the country’s budgetary deficit finally amounted to a staggering 14.4% of GDP in
2013. Thus the public debt increased rapidly from 22% of GDP in 2008 to 80.8% in 2014. At the sametime the gross external debt also increased rapidly from 56.7 % of GDP in 2004 to 105.3% in 2008
and to 124.2% in 2014 (Table 2). In order to decrease the public debt the country has been obliged totake austerity measures. In addition, the Troika (European Commission, ECB and IMF) is pressing thegovernment to promote privatization in the area of infrastructure and make the labor market more
flexible

Lessons from the Two Small Countries’ Experiences
The small countries in CEE were at the mercy of massive cross-border capital inflow, which caused
bubbles in the mid-2000s, suddenly stopped when the Lehman shock occurred in 2008 and thenreversed. Due to a decrease in the budget revenue, an increase in social expenditures and thegovernments’ support of domestic banks, the budget deficit expanded. The above-mentioned facts tellus the following two points: firstly, there should be some regulation on cross-border capital flow, atleast on short-term cross-border capital flow. Secondly, instead of the principle of home country
supervision, Eurozone-wide financial supervisory institutions should be created. Thirdly, austerity canno longer be maintained in the EU member states, and consequently their policy changes are inevitable.

3. Important Issues which have been discussed in the Book
Attitude toward the entry in the EMU
As Gabriela Dragan points out, Sweden fulfils all Maastricht criteria except for the exchange ratecriterion. It seems that Sweden has deliberately not fulfilled the convergence criteria by not joining
the ERM II, thereby postponing its entry into the Eurozone. The economic support for Greece throughthe EFSF was a considerable burden for the Eurozone member states. Many people expressed
dissatisfaction over contributions to the EFSF. In Slovakia, for example, there was a complaint, “In
spite of lower income, Slovakia would have to allocate a lot of money in support of a larger country’s
support”. Finally the proposal by the government was accepted by the parliament in exchange for the
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Prime Minister’s resignation1. The “threat of solidarity contributions for Greece”2 is affecting theissue of the EMU entry by non-euro NMS. Probably, these countries are hesitating to enter into theEurozone and for the time being are adopting a ‘wait and see strategy” following Sweden’s example(Chapter 9). Most of the non-euro NMS have not set their target dates for euro adoption. It isnoteworthy that in such a situation Romania remains the only non-euro member state which hasformally set a target date for euro-adoption, which is January 1, 2019. As Dragan says, it might beused in public discourse toward reforms for its likely catalytic effect.

Problems concerning Convergence
As Ryszard Rapacki, Gabriela Dragan and Hiroshi Tanaka point out, a nominal convergence is notenough for entry into the EMU. The Maastricht convergence criteria are called explicit criteria, and aconvergence viewed from the angle of these criteria is called a nominal convergence. Economic
literature has made an important distinction between nominal convergence, assimilated with thefulfilment of the Maastricht criteria, and real convergence. Real convergence is usually understood as
the convergence of real variables, such as GDP per capita, and in a broader sense, as the fulfilment of
optimum currency area criteria, such as trade openness or labor productivity (Chapter 9). In addition,
there is institutional convergence. Both real and institutional convergences are called implicit
convergences. Rapacki, Dragan and Tanaka stress the necessity for real convergence and institutional
convergence (Chapters 5, 7 and 9).
Dragan argues that the Maastricht convergence criteria are necessary conditions but not sufficientconditions for entry into the EMU, which requires real convergence. According to her, there were
expectations that if a country entered, then a convergence and catching-up would emerge, but they are
not automatic results of the EU accession. She argues that the long-term sustainability of the Eurozone
will strongly depend not only on the respect of new fiscal rules or stronger coordination of economic
policies, but particularly on the EU’s capacity to reduce its internal economic divergence (Chapter 9).

Macroeconomic Stability
Dragan argues that macroeconomic stability should be considered a prerequisite rather than a final
goal in the convergence process (Chapter 9). Generally speaking, the European Commission, the ECB
and central banks in EU member states were not alert to the bubbles at that time. The banking
supervision system was not well-developed.

Industrial Policy
1Asahi Shimbun, October 12 and 13, 2011.

2

Professor Mejstrik’s power point presented at the 9th World Congress of ICCEES, held in Makuhari on August 6,
2015.
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The Croatian economy recorded negative growth for 6 consecutive years from 2009 through 2014 (seeFigure 1), the longest depression among post-socialist countries in CEE. As Croatia has had anindustrial structure quite similar to that of Greece, the active use of industrial policy is desirable inorder to upgrade its industrial structure (Chapter 8). In addition to the EU’s own funds (StructuralFunds and Cohesion Fund), it is necessary for the EU to take the necessary measures to induce private
funds to be invested into this country. This point also applies to NMS in less developed South Eastern
Europe, i.e. Romania and Bulgaria.

Loss of Monetary Autonomy
By joining the EMU, i.e. the Eurozone, NMS lose adequate space for their own monetary policies.
More exactly speaking, EU member states lose monetary autonomy when they join the ERM II.
Mentioning this point, Mencinger argues: “By entering the EU in May 2004 and the ERM II in June
2004, Slovenia also formally lost its monetary autonomy. … In a decade and a half, a newly born
national economy turned again to a regional economy”. However, “the loss of monetary autonomy” istaken in various ways depending on the people and countries. According to Vanya Ivanova, forexample, Bulgaria has already lost its monetary autonomy since 1997 when the country adopted thecurrency board regime, and the only instrument of state influence on the economy since that time has
been the state budget. Even if the country joined the EMU, such a situation would remain unchanged.
Rather, by joining the EMU the Bulgarian central bank will be able to carry out open market operations
and to extend loans to the commercial banks (without the formal restrictions imposed by the currencyboard) and will get full access to the EU financial assistance mechanisms, such as the ESB andemergency liquidity assistance for financial institutions. In addition, she claims that once the BNB
participates in the determining of the monetary policy within the Eurozone, it will actually have agreater influence on the Bulgarian monetary environment than that at present. Bulgaria’s position issimilar to that of the Baltic States which had been incorporated into the Soviet Union for about a half
century, and regained their independence only in September 1991. In addition, Lithuania also had thecurrency board regime until its entry into the EMU. It seems that these countries willingly entered theeconomic area of the EU by placing more emphasis on a complete withdrawal from the economic areaof Russia rather than the loss of monetary autonomy by their entry into the EMU.

4. Conclusion
As Mejestrik’s expression the “threat of solidarity contributions for Greece” explains the current
situation well, the Eurozone crisis starting from the Greek crisis has been seriously affecting theEurozone enlargement. Dragan says, “The Greek crisis has demonstrated that the admittance of an
unprepared country would not be the correct solution either for the acceding country or for theadmitting club”, and she emphasizes the importance of necessity for accomplishment of substantial
convergence criteria. Also many other authors emphasize the importance of necessity for
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accomplishment not only of Maastricht criteria of nominal convergence but also of criteria of
substantial and institutional convergence.
The Czech Republic is in a position very close to the EMU membership in terms of nominal andsubstantial convergence. However, Vaclav Klaus, the former President of the Republic, was a famousfor Euroscepticism, and the Czech government continued to take a negative attitude toward the euro.
It is noteworthy that with the appearance of a pro-Euro new President of the Republic in 2013 thegovernment and monetary authorities are taking a positive attitude toward the euro. However, if thiscountry adopts the euro it is most likely that the euro will be adopted after around 2020. Rapacki saysthat the decision on the Euro adoption in Poland remains strictly political. This point also applies toother non-Euro NMS.
I think that in order for non-Euro NMS to adopt the euro it is dispensable for the European
Commission to formulate a new strategy for the economic development in the EU periphery including
NMS. In this regard, wisdom which should replace austerity measures is urgently required. Without
this, the Euro adoption by non-euro NMS will not make substantial progress.

References
Hansson and Randveer (2013), Economic Adjustment in the Baltic Countries, Easti Pank, Working Paper
Series, 1/2013.
Koyama, Yoji (ed.) (2016), Eurozone Enlargement: Prospect of New EU Member States for the Euro
Adoption, NY: Nova Science.

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Part IISpecial Lectures: Background of the European Integration

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International Monetary System revisited 20 Years later

Toru Iwami
1.

Introduction

Let me begin with briefly comparing the current international monetary and financial situations withthose of twenty years ago. Why twenty years? The initial reason is simply personal. In a book 1
published in 1995, I discussed the tripartite monetary regime composed of the US dollar, D-Mark andyen, which was widely discussed around 1990. In the meantime, however, the structure of the world
economy has undergone great changes, and what I mentioned in the book requires now not small-scale
revisions. One clear example is the fact that now twenty years later, discussions of the similar regime
is focused on the US dollar, euro and Renminbi (人民元). 2
The question of what caused such a remarkable change in the international monetary relations isseemingly not difficult to answer. Firstly, D-Mark was replaced by the newly born common currency,
euro. Secondly, Japanese yen has declined to a rather minor position along with the lost two decadesof its national economy, whereas China has risen to the second largest economy in the world and still
increasing its weight.
The sole currency preserving the key role in international transactions is the US dollar. What factors
have enabled such a position, despite its unstable exchange rate and a large scale of US international
debt position? Another issue is the future of the euro and the Renminbi. Naturally there remain otherquestions, one of the most important of which is how the international monetary and financial system
would work, and what would be its impact on the world economy at large in the near future. I will
discuss the first part of questions in the section 2, and the second question in the following section 3,
respectively.

2. The Rise of a Currency on the International Stage
What happened to the international status of the major currencies during the last two decades is shownin the Table 1: the share of the US dollar is almost unchanged in terms of foreign exchange turn-overand bank deposits, but it rather increased in terms of international reserves. The euro, on the other
hand, maintains the second position, although surpassing the dollar in trade invoicing. While the shareof yen has declined, what attracts our attention is the fact that Renminbi still stands as a negligible
currency. Below is explained the characteristics of each currency, which leads to a more general
1
2

Iwami (1995).
For example, compare Tavlas (1998) and Eichengreen (2010).

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discussion on the conditions for a currency to acquire a dominant international status, in my definition,
as a key currency.
Why the US Dollar has maintained its major positions?
The textbook taxonomy of functions of money, namely unit of account, means of payment, and storeof value, holds good also for international transactions. A currency preserving an advantage in eachfunction is bound to rise on the international stage, through the selection by economic agents.
The first factor for a currency to enjoy a leading international position is the economic scale of theissuing country. A larger national economy leads to a larger volume of transactions in that currency,
either through trade or investments. During the past decades, the relative scale of the US economy has
indeed declined clearly in terms of the merchandise trade, but rather stabilized in terms of the nominal
GDP. The Eurozone, on the other hand, has declined in both terms, despite its trade share still
occupying almost a quarter of the world total (Table 2). China is growing remarkably faster thandeveloped countries, and predicted to overtake the United States in the near future. From this trend
seen, the share of Renminbi is far smaller than its national economy would warrant, whereas thedecline of the yen seems to be a natural course of the trend.
The next factor for a currency to be used as a unit of account and store of value is a stable relative
prices, in other words, stable exchange rates. Its advantage is supposed to be increased by a transparent
and reliable monetary policy. Yet, the exchange rate of the US dollar has been fluctuating widely, andthe US economy has recently shown large scale deficits in the current account of the balance of
payments and experienced a financial crisis, characterized as the largest one since the Great
Depression. Despite these facts, the sustained position of the US dollar is sometimes explained fromthe so called “inertia”3. But it is not clear yet, what the “inertia” actually means, and how it is created.
Is it simply an outcome of the conservative sentiments of the economic agents?
For being a trade currency, in other words, means of international payments, those facilities such as
spot- and forward foreign exchange markets, hedging and liquidity supply are all indispensable. Global
transactions, or network externalities, strengthen international status of the dollar as well. The falling
oil prices, and thereby export value of the oil producing countries, on the other hand, will reduce, atleast for the time being, the share of the US dollar in the world trade.
In the case of financial transactions in particular, wide and deep financial markets, open and freefrom governmental controls, providing sophisticated financial goods; those factors actually favor the
dollar. Even during the financial turmoil after the Lehman bankruptcy, liquidity needs for the financial
settlements increased demand for the dollar. Since financial transactions are accompanied by the scaleeconomy, those denominated in the dollar extends to a far wider range than the US national economy
itself actually requires.

3

Goldberg (2010).

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The use of euro has increased to an extent that corresponds to the growing economic transactions
within the Eurozone and with neighboring countries. The latter tend to select euro, as an anchoring
currency, unilaterally without being promoted by any commitments of the European Central Bank
(ECB). In this sense, the foreign trade relations of the EU countries are worth noting. More than a half,
almost 60% is exported intra-regionally, a major part of which is supposed to be settled in euro. As forthe global interregional trade (export and import) in 2010, those between EU and the NAFTA (NorthAmerican Free Trade Area) stand as the largest at 638.8 billion dollars, followed by the second one
between EU and China of 500.7 billion dollars, and the third between NAFTA and China of 480.1
billion dollars.4 For the trade with the NAFTA, a de facto US dollar zone, Eurozone countries cannot
insist on payments in the euro. Moreover, as the subprime-loan crisis revealed clearly, European
investors were so deeply involved in the American financial bubble that required naturally payment in
the US dollar.
It is true that financial markets in Europe are no less wide, deep and transparent than US counterparts.
Yet, payment in euro is not easy for the trade with China and East Asia, where trade and financialtransactions are historically based on the US dollar, in particular in the case of economic triangle
relations across the Pacific as discussed below. In this sense, the international use of the euro as a tradecurrency is almost confined to Eurozone and neighboring countries.
The future of euro, now enjoying the position of the second major international currency, depends
critically on its credibility of the financial and political stability in the region.5The instability wasrecently heightened by the difficulties in debt service of the Greek public bonds in the early summerof 2015. The government supported by popular sentiments cannot easily introduce restructuring
schemes required by the EU and other creditors. Not only rescheduling but also the hair cut of the
Greek public debt seem to be inevitable at the moment, but the latter might cause in the future a chain
effect on Portuguese, Spanish, and probably Italian debts.
As is widely discussed, the lack of consistent fiscal policies or a united fiscal policy of the member
countries is bound to cause the instability of the euro. The difference in fiscal and monetary stancemost clearly appears between northern creditors, Germany, the Netherlands, and Finland, on the one
hand, and southern debtors, on the other. However, this difference already appeared during the initialstage of the monetary integration in the 1980s and 90s.
For the European countries, except for Germany, one of the motives to introduce a common currency
was to put a brake on the obstinate, anti-inflation policy imposed by the German Bundesbank. The defacto D-Mark zone in Europe had a tendency of not solely low inflation, but also a high unemployment
rate in the periphery. Helmut Kohl, the German Chancellor then, opted for an appeasement throughaccepting the united currency, despite the strong resistance from the Bundesbank and public opinions.

4
5

METI (2011), p.90.
See Tavlas (1998), for example.

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The national security of the united Germany would be promoted within the framework of the coming
EU. The current difficulties seem to be a recurrence of the history before the monetary unification,even with some differences that the German economic power has so far grown remarkably and thecrisis today is triggered by the large scale deficits on the part of Greece.
It is worth recalling that the West-Germany was allowed debt-reduction in the postwar year of theearly 1950s. This episode can be a starting point for negotiations of another debt bail-out within Europe.
Once the compromise is attained, the next step is naturally narrowing the gap of fiscal stance that
requires debtor countries to restructure their public expenditure, in particular of social welfare such aspension payments.
Renminbi and Yen
In order to understand the international monetary relations in East Asia, we have to note the growing
triangular transactions, trade and financial, across the Pacific. One important factor is the horizontal
division of labor in electronics and automobile industries. The South-east Asian countries, China andKorea import parts and semi-manufactured goods from Japan, and then export manufactured goods toUnited States as well as within the region, while Japan for itself export manufactured goods toneighboring countries and across the Pacific.6 The trade surplus thereby created flows back to theUnited States as international reserves and investments in the US market. This triangular link is theactual basis for the US dollar to sustain its dominant position in the region, despite the decline of the
US economy relative to growing Asians.
Chinese authorities recently took a further step to increase the international use of Renminbi, inparticular for trade invoicing. Since July 2009, they have liberalized transaction in the off-shore
markets mainly in Hong Kong, while the on-shore markets are still tightly regulated.7 The main hurdle
for Renminbi to rise to a higher international position corresponding to the size of its national economy
is the strict regulations on financial transactions, undermined also by less transparent and credible
policy of the monetary authorities.
Interesting to note in this respect is the reason why the Japanese yen did not enjoy an international
status reflecting its economic scale (the second largest national economy then) until the turn of themillennium. Japanese monetary authorities took steps to introduce wide-range liberalization schemes
as proposed by the US-Japan Dollar-Yen Committee established in 1984.8 Yet, the preference for the
yen was almost limited to the Japanese firms. The largest trade and financial partner then, UnitedStates, naturally preferred transactions in its currency and the Asian countries, on their part, largely
depend on the dollar instead of the yen, because their largest economic counterpart was also the UnitedStates. The basis for selecting an international currency was, and still is the economic relationshipacross the Pacific as discussed above. Moreover, the largest import item of Japan is fossil fuel (oil and
METI (2011), p.95 ff.
See for example, ECB (2011), pp.41-3.
8 Kawai and Takagi (2011).
6
7

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natural gas) that is traded globally in the US dollar. Thus, the limit for international use of yen is
attributed to trade (and partly financial) linkage.
The second element to note is political. The Japanese government was not strong enough to strive
for the internationalization of its currency, despite its announced official view admitting it. Japan rarely
dared to launch into an initiative in economic diplomacy, rather sitting in the shadow of the UnitedStates. A rare occasion was the idea of the Asian Monetary Fund (AMF) during the Asian currency
crisis. It finally collapsed, however, because of the American disapproval. Its main function was later
realized in the form of the currency-swap arrangements, named the Chiang Mai Initiative (CMI).
In contrast to the case of yen, the political element will strengthen the position of Renminbi. Chinese
government does not hesitate to show their strong will if necessary. Its regional use among theneighboring countries will grow, in particular when supported by the governmental initiative, to suchan extent that constitutes a big challenge for Japanese yen. Globally seen, however, the internationaluse of Renminbi will not progress easily, because of the strict regulations.

3. How to manage a sound international monetary system and the world economy
Discussions on each currency so far do not provide us yet enough insights into the prospects for theworld economy at large. Indeed, a sound international monetary and financial system is an importantprecondition for a sustained economic development, whereas vice versa, instability in the world
economy puts a heavy stress on the working of the global financial markets. In this regard, we have tolook carefully at asset markets, such as stocks and real estates in both China and the United States.
Moreover, the recurrence of euro crisis would be another large risk factor for the internationalmonetary and financial system. To avoid these potentially unstable factors from growing to actual
perils, we have to search out a new basis for international cooperation that reflects the changing global
power structure, economic as well as political.
Economic transformations during the past three decades
From a longer perspective seen, the future of the system is to be reinterpreted in the context of the
new trend in the world economy that took shape from the 1980s onwards; namely globalization and“financialization.” 9 Although the latter concept is not widely used among economists, it actually
implies a tendency that the financial sector has occupied an ever growing share in the economy onboth national and international level. Since the economic “globalization” has appeared mostdramatically in international financial markets, these two concepts are closely interconnected. The
United States and United Kingdom took initiative for the “financialization” with successive
deregulation measures. The result is growing domestic financial claims of these two countries relative

9

For more details, see Iwami (2014).

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to their GDP from the mid-1980s (Figure 1). The increased international use of the US dollar isnaturally a byproduct of this tendency, which resulted in the financial instability, however.
Another aspect of this “financialization” has appeared as the “de-industrialization” of the developed
economies, in particular in the United States and United Kingdom, in the sense that manufacturingsector has shifted to the emerging countries, East Asia for example. The emerging countries, together
with some of the Europeans and Japan, flow their surplus generated by increased manufacturingexports back to the United States, thereby stimulating financial expansion. Although financial
instability is potentially another side of the coin of this changing economic structure, the world
economy as a whole enjoyed the benefits from these transactions as far as the financial expansion kept
its pace.
Comparing the current situation with thirty years ago, the core of the problem in the mid-1980s was
how to stabilize the international monetary order with guiding the overvalued US dollar to a softlanding. Although American banks had not fully recovered from the overhung debts of Latin America,
financial markets of the developed countries were far more stabilized than thirty years later. Today incontrast, exchange rates of major currencies is not a matter of serious concerns. More important is thequestion how to avoid a recurrence of financial crisis of the 2008 scale, on the one hand, and to sustain
a continuous economic recovery, on the other hand. While the actual effects of financial re-regulation
initiated by Volker Plan is not yet clear, the euro credit crisis is another factor of careful attention.
Unconventional monetary policies, so-called QQE (quantitative and qualitative easing),of major

central banks, Federal Reserve Board, Bank of Japan, and later ECB, have so far contributed tofinancial stability in the short-run, but it is yet unforeseen what repercussions of the exit process fromthese policies would bring forth in the medium- and longer-run. A reversal of international capital
flows might cause a large-scale blow to the vulnerable group of emerging economies, which might inturn cause not small repercussions on the developed countries. In the process, unpredictable
movements of asset prices would appear.
More generally speaking, to be carefully considered is conditions for a multi-polar system to worksmoothly, without a burst of bubbles or other financial disorders. In the long-run, creation of a unified
international key currency might be indeed desirable, but it is not necessarily a condition for the world
economy to be stabilized. A side-evidence is the history of the pre-1914 world, when the gold standard
was based not solely on the pound-sterling, but also the French Franc and the Mark sharing the reserve
currency function, as Eichengreen stressed (2010). The reason why this multipolar currency system
worked rather well is attributed to the credibility of the system, in other words working of the selfadjusting capital flows, and international cooperation among major currency countries in emergency.
Today, are such stability factors actually attainable?
One example is the aftermath of the financial crisis of 2008. Compared with the Great Depression in
the 1930s, the extent and speed of the downturn after 2008 in terms of the world industrial production,
foreign trade and share prices showed quite a similar or even larger scale. However, the recovery from
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the trough was in recent times remarkable and rapid.10 This difference can be explained by the lessons
for the policy makers learned from the 1930s; the flexible, discretional stabilization policies, on the
one hand and international cooperation such as realized by the G-20 summit of 2009 in Pittsburgh, on
the other hand. Yet it is not always warranted that emerging countries, in particular China, would
behave in a desirable manner.
Political-economy aspect
Lately Chinese government seems to have decided to enlarge its influence on the global scene. One
peculiar example is a challenge to the postwar international financial regime of the Bretton Woods.
China is supposed to have no clear image of the new international monetary system. Former president,
Hu Jin-tao (胡錦濤) once spoke that the SDR should be assigned a larger role. The US congress, inthe meantime, has not approved and would not like to approve amendment of the IMF charter thatwould strengthen the voices of the BRICs, in particular China. China then opted for a bypath outsideof the Bretton Woods, one example of which is the idea of BRICS Bank and the AIIB (AsianInfrastructure Investment Bank) proposed by Xi Jing-ping (習近平). They could be rivals to the WorldBank and its regional organization, the Asian Development Bank (ADB).
It is true that the Asian countries need a wide range of infrastructure building (electricity, roads,
railways and ports) in order to sustain their high-speed economic growth. The AIIB is expected tofacilitate inflows of the large scale regional savings into their economic growth channel, which is as amatter of fact reasonable.
This scheme would lead to a new international monetary order. As stated above, a large part of oversaving in East Asian countries has hitherto flowed to the United States, because of building monetary
reserves and preparing for liquidity needs in times of emergency like a currency crisis, with a result offinancing the US current account deficits. In order to channel this flow back to the region, the financial
facilities of Asian currencies should be improved.
Yet, we have to note also remaining concerns about the new regional development bank. Its lending
policy might not pay enough attention to human rights, and other important issues such as poverty
reduction and preservation of the environment, as the public construction and urban development
projects in China hitherto revealed. There is also a possibility that it might contribute mainly to theChinese national interests. Because of its location in the east end of the Eurasian continent,
infrastructure building in the region would be, directly or indirectly, bound to pave transport routes
toward Beijing.

4. Concluding remarks
The international monetary system is a reflection of the global economic power structure, in thesense that the economic strength of a country forms a basis for the international use of its currency.
10See Eichengreen and O’Rourke (2010).

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Yet, the economic strength in this sense does not imply solely such factors as economic scale orcompetitiveness in a narrower sense. The scale economies, network externalities, and “inertia” all playa significant role. Political factors also influence the international status of a currency. The last factor
is, in my view, in recent times gaining weight.
The changing global power structure requires a new form of international cooperation, on the one
hand, but the emerging economic powers strongly want to change the framework, rules of the gameso far imposed, on the other hand. The latter aspect makes an international cooperation rather difficult
to be materialized. Compared to the global level, the regional cooperation within the Eurozone istheoretically easier, because the membership of the monetary integration presupposes initial common
interests. With the time elapsed, however, difference in the economic performance blocks cooperationthat existed before. If the regional cooperation becomes harder in Europe, it would be far more difficultin Asia, where efforts for regional integration are historically short and have not yet attained the similarlevel as in Europe.
Not only in the region, but also on the global scene, the important point is how China will behave.
Without a sound international economy, its economic performance will not attain a level satisfactory
enough for the Communist party. For that reason and to that extent, the new superpower is expected
to behave in a cooperative manner. However, if it sticks to the potential desire of expanding national
interests, it might result in another unstable factor.

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Reference
Auboin, M. (2012), “Use of Currencies in International Trade: Any Changes in the Picture?”, Staff
Working Paper ERSD-2012-10, World Trae Organization
European Central Bank (2011), The International Role of the Euro, July
Eichengreen, B. (2010), “Managing a Multiple Reserve Currency World”, mimeo
Eichengreen, B. and K.H. O’Rourke (2010), “A Tale of Two Depressions: What do the new data tell us?”
http://www.voxeu.org/article/tale-two-depressions-what-do-new-data-tell-us-february-2010update
Goldberg, Linda S. (2010), “Is the international role of the US dollar changing?” Current Issues in
Economics and Finance, 16-1, Federal Reserve Bank of New YorkIlzkovitz, Fabienne (1994), Recent Developments in the international use of currencies: Towards a
tripolar regime?, European Commission
Iwami, T and M. Kawai (1990), “Key Currencies and International Monetary System” (in Japanese),
Keizaigaku Ronshu (Journal of Economics), University of Tokyo, 56-2, 3
Iwami, T (1995), Japan in the International Financial System, Macmillan Press
Iwami, T (2014), “On the Problems that Confront the Current World Economy,” (in Japanese), Keizaigaku
Ronshu (Journal of Economics), University of Tokyo, 79-4
Kawai, M. and S. Takagi (2011), “ The Renminbi (RMB) as a Key International Currency?: Lessons fromthe Japanese Experience,” Notes Prepared for the

Asia-Europe Economic Forum, Paris

METI (Ministry of Economy, Trade and Industry) (2011), White Paper of the International Trade andCommerce, Japan
Reinhart, C. M. and K. S. Rogoff (2009), This Time is Different, Princeton University Press
Tavlas, George S. (1998), “The international use of currencies: The US Dollar and the Euro,”Finance andDevelopment, June

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Table 1. Shares of Currencies in International Use (%)
US $

£

CHF

DM

Euro

Yen

RMB

Foreign reserves
1990

55.6

3.5

1.4

19.2

-

9.1

-

2010

61.5

4

0.1

-

26.2

3.8

n.a.

Foreign exchange turnoverApr-89

45

7.5

1

13.5

-

13.5

-

2011

42.5

6.5

3.2

-

19.6

9.5

0.5

15.3

-

4.8

-

- ca.39ca.3

0.2

Trade invoicing
1992

47.6

5.7

n.a.

2010

ca.35

ca.8

ca.2

Bonds issued (1989) and outstanding (2010)
1989

49.7

7.5

7.3

6.5

-

9.4

-

2010

38.2

n.a.

n.a.

-

26.7

15.3

n.a.

Loans outstanding
1989

77.2

6.5

0.4

3.2

-

5.4

-

2010

54.1

n.a.

n.a.

-

19.1

2.3

n.a.

1989

69.7

2.3

3.6

11

-

3.9

-

2010

60.5

n.a.

n.a.

-

21.6

1.4

n.a.

Deposits

Source: IMF, Annual Report, Iwami and Kawai (1990), Ilzkovitz (1994), Tavlas (1998),
ECB (2011), Auboin (2012)
Table 2. Shares of Nominal GDP and Merchandise Exports (%) 1980 and 2013

Nominal GDP

Merchandise Exports

year

1980

2013

1980

2013

USA

23.9

22.7

11

8.4

Eurozone*

23.7

17.1

30.6

24.7

China**

2.8

12.9

1.9

14.5

Japan

9

6.6

6.4

3.8

Source: UNCTAD, Handbook of Statistics 2014.
Note: *For 1980, countries joining Euro as of 2013. ** including Hong Kong.

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Figure1. Domestic claims of financial institutions relative to nominal GDP (%)

Source: IMF, International Financial Statistics CD-ROM, Economic Report of the U.S.

President.

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Richard Coudenhove-Kalergi and Japan: A Brief History1
Hidenori Tozawa

Introduction
Richard Coudenhove-Kalergi (hereafter RCK) has been celebrated as one of the “Founding Fathers” ofEuropean integration more in Japan than in contemporary Europe. This unique situation in Japan isunderstandable; his mother Mitsuko was a celebrated Meiji-era born women, who has become a legend forJapanese xenophiles. There are many books, plays, TV series on Mitsuko. A recent example is the musicalwritten by Shuichiro Koike, Takarazuka theatrical group, 2012. There was the solo-play by Kazuko
Yoshiyuki as well, which was performed also on the 100th anniversary of RCK’s birthday in Gstaad in 1994.
Another recent example is the girly comic (manga) by Waki Yamato published in 1973 and 1996, entitled“Lady Mitsuko”. This “Mitsuko” legend has not only affected Japanese women, but also Japanese
historiography on European integration; almost every textbook on the EU begins with RCK’s Paneuropa,
which might be rather exceptional in contemporary Europe.
However, RCK himself is not paid as much attention in Japan as his mother is. Nowadays, some interesting
aspects of the relations between RCK and Japan are almost forgotten; that is, for example, RCK’s influence
on Japanese policy toward Asia in prewar Japan, and his relations with Dr. Kajima, the former prime
ministers Hatoyama, and Sôka-gakkai in postwar Japan.
1.

RCK’s reception in prewar Japan

1) Morinosuke Kajima
Morinosuke Nagatomi (later Kajima) was born in 1898 as the fourth son of a rich landowner’s family in
Ibogawa, Hyogo (which is famous for its sômen.) He graduated from the University of Tokyo and entered
the diplomatic service in 1921. He was posted to Berlin as a young diplomat between 1922-25. On the ship
going to Europe, he met Seiichi Kajima, who would be his father-in-law some years later.
In Berlin, his main tasks were to gather and analyze information on German politics. He happened to readthe article of RCK (Pan-europa: Ein Vorschlag) in the Vössische Zeitung, and reported its content, withexcitement, to the ambassador, Kumataro Honda. Ambassador Honda seemed uninterested in the article,
but he surprised Morinosuke with the words, “I know Richard. I knew the Coudenhove-Kalergis when I
1

The original version of this lecture was published in: Human Security(Tokai University Strategic Peace andInternational Affairs Research Institute), No.9 (2004/2005), pp.163-169. Some parts of the paper are modified
and updated.
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was posted to Vienna. I will let you meet him, if you want to.” When RCK visited Berlin some time later,
Ambassador Honda arranged the meeting between Morinosuke and RCK at his residence. Morinosuke wasquite excited not just by talking with RCK, but also with his wife Ida. Morinosuke was not just moved, butalmost felt admiration for RCK.
Just before coming back to Japan in 1925, Morinosuke visited RCK in Zell am See, central Austria.
According to Morinosuke, RCK told him, “I will organize Pan-Europe; you shall organize Pan-Asia. One
day when our tasks are accomplished, then we, Pan-Europe, will present Indonesia to you for ourfriendship.”
When Morinosuke arrived in Japan, he had almost finished translating Paneuropa into Japanese. Though hehad some difficulty in finding a publisher for the translation, he finally managed to publish it in 1926 fromthe Japanese Association for the League of Nations.
About the same time, he got married to Ume Kajima. He was posted at the Embassy in Rome between
1926-8, and after coming back to Japan, he quit the diplomatic service and ran for the House ofRepresentatives. He advocated “Pan-Asia” during the election campaign, but nobody in the Hyogo 4th
constituency understood him. He was defeated twice. After the bad defeat, he became active in his family
enterprise, Kajima-Gumi, which he managed to make into one of the biggest construction companies inJapan. He also got a doctorate from the University of Tokyo for his thesis on diplomatic history and worked
as a commentator for international affairs from time to time on the national radio or in journals.
Ironically, RCK and Morinosuke went the opposite way from that time. In 1938, the headquarters of
Pan-European Union was assaulted and occupied by Nazis, and RCK was forced to go into exile in the
USA in 1940. On the other hand, Japan became an ally of Nazis Germany in 1938. Morinosuke tried toinfluence Japanese politics toward East Asia, first as a commentator, and he entered the Konoe government
in 1940. Until then, his pan-asian concept had been more influenced by German “Lebensraum” ideology
than RCK’s Pan-europa. I can’t tell if Kajima knew about RCK’s activity in exile, or if RCK knew about
Kajima’s activity. However, the letter from RCK to Kajima in 1961 strongly suggests that both sides lost
contact completely.
2) Others
The publishing of the translation of Paneuropa was made possible partly because two prominent scholars
on international law had helped Morinosuke: Hikomatsu Kamikawa at the Imperial University of Tokyo,
and Kazuo Matsubara at Tohoku University. (After World War II, Kamikawa, together with Kajima,
founded the Japan Institute for International Affairs.) Curiously though, both scholars were rather cautious
toward RCK’s Paneuropa. Kamikawa wrote in 1926, “Paneuropa will do harm to the League of Nations”.
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This negative judgment was due to the fact that positive attitudes toward the League of Nations were
dominant among Japanese intellectuals in the 1920s. At the latest in 1933 when Japan left the League of
Nations, the tide had changed and scholars like Kamikawa had become more and more nationalistic.
However, Morinosuke’s translation attracted some readers even in prewar era, which would influence thereception of RCK after the war.
2. RCK’s reception in postwar Japan1) Ichiro Hatoyama and YUAI (Young Men’s Association for Fraternity)
After World War II, another important interlocutor between RCK and Japan appeared; Ichiro Hatoyama,
who became the 5th prime minister in postwar Japan. He had been “purged” (banned from holding a public
office) by the GHQ (American occupational force) in 1947, just before he seemed about to be nominated as
the prime minister. The reasoning for this purge was not really solid, which was often the case at that time.
The purge lasted more than 5 years. Those were the days of simple life and of deliberation for Hatoyama,
as the Japanese saying “Seikô-Udoku” (working as a farmer on sunny days, reading books on rainy days)
could best describe. Hatoyama worked as a farmer in Karuizawa, a summer resort which is located about
200 km north of Tokyo. One day, Hatoyama got a book of RCK. This copy of the book, “Totalitarian Stateagainst Men” reached Hatoyama after a long journey. RCK gave the book to Minister Kikuji Yonezawa in
Lisbon, Portugal, in 1940, thanking him for his help in getting a visa out of Europe. Yonezawa gave thebook to Shigeharu Matsumoto, who was a famous journalist and later founded the International House ofJapan (Kokusai Bunka Kaikan)2. During his stay in Karuizawa in the summer of 1950, Matsumoto gave thebook to Kesazo Ichimura, professor of Waseda University. (Photo: Ichimura Memorial House, former
residence of Fumimaro Konoe.) Ichimura, as a nephew of Keijiro Amemiya, a railroad tycoon, inherited
vast estates in Karuizawa and opened the Cultural Village in Minamihara, where prominent scholars,
intellectuals, and artists share the summer villas. (Nobuyuki Idei, the former CEO of Sony, was brought up
here as a son of a Waseda University professor.) As soon as Ichimura had a quick look at the book, hedecided to recommend the book to Ichiro Hatoyama and cycled to Hatoyama’s residence at once. Ichimura
wanted Hatoyama to translate the book and publish it, which would be a rare case for a Japanese prime
minister.
Hatoyama’s translation of the book “Totalitarian State against Men” appeared in 1953, under the title ofJiyû-to-Jinsei (literally, “Liberty and Life”). Hatoyama was moved especially by its last chapter,“Revolution for Fraternity”. He decided to organize a movement for the revolution for fraternity, and hefounded YUAI (Young Men’s Association for fraternity) in December 1953. These Association attracted2

http://www.i-house.or.jp/

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young people who were interested in political activities and skeptical of left-wing movements. The
membership amounted to officially nearly 100,000 at its height. In 1954, they had RCK as the honorarypresident. YUAI members were eager to study RCK’s works and soon wanted to invite RCK to Japan.
However, their eagerness could not be materialized easily, as the communication between Europe andJapan was tenuous and expensive at that time.
2) Kajima’s ‘rediscovery’
Kajima had been purged between 1946 and 1951 by GHQ as well. He, with his wife Ume, concentrated on
activities for their construction company. He tried hard to modernize the Japanese construction business,
and also to get grand state projects, with the help of their connections with prominent politicians. He wasreally an entrepreneur and made Kajima Corporation, one of the biggest companies in Japan. One proof of
his entrepreneurship is the Kasumigaseki Building (venue of the conference). At the time of construction ofthis building, few people believed that a skyscraper would be possible on a land of earthquakes as in Japan.
Thus, Kajima was quite busy in managing his company, and after his purge was lifted, he became amember of the House of Councilors (Upper House) in 1953. Though his wife Ume took over running of
Kajima Corporation, Morinosuke became busier as a politician. As I mentioned before, most probably,
Kajima didn’t know RCK’s postwar activity until the late 1950s. As YUAI’s relation with RCK
strengthened, YUAI and Kajima came to know each other, through RCK’s suggestion.
Kajima seemed quite surprised to know that RCK was (alive and) so active after World War II. RCK musthave been surprised to know that a young diplomat had become a politician and owned the biggest
construction company in Japan. In their correspondence in March 1961 (which were the first exchanges
after W.W. II), both sides expressed surprise and wanted to see recent photographs. From that time, the oldrelationship was revitalized and Kajima became eager to publish the translation of RCK’s works.
Kajima was also helpful for YUAI’s relation with RCK. As he knew that YUAI found difficulty in inviting
RCK to Japan, Kajima involved his old friend Yukinori Maeda, the president of NHK (the publicbroadcasting company in Japan). Maeda was a foreign correspondent of Asahi Shimbun in the prewar era
and acquainted himself with Kajima in Rome. Maeda himself was inspired by reading Paneuropa andestablished the Asian Broadcasting Union (a cooperation scheme) in the 1950s. He agreed to Kajima forco-sponsoring RCK’s visit to Japan.
3) RCK’s visit to Japan
One may ask the reasons why RCK decided to visit Japan in 1967, after some 60 years since he left Japan
at the age of 2. Three reasons could be pointed out. Firstly, the situation in Europe: French president de
Gaulle’s “chaise vide” policy against the EEC in 1966-7. Although RCK was supportive of de Gaulle’s
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European policy, RCK found it more and more difficult to make his activities consistent with de Gaulle’s,since European federalists came to regard him as “anti-European”. The second factor was the increasing
number of Japanese visitors to Europe; as the Japanese economy recovered and grew, more people could
have a chance to visit RCK personally and reminded him of the invitation. The third and most direct reason
might be for the Nobel Peace Prize. During his stay in Japan, Otto von Habsburg tried to work on the Nobel
Prize committee in Europe. Some parts of RCK’s visit to Japan were designed to play up his candidacy.
RCK’s two weeks’ visit to Japan in 1967 was quite sensational. He appeared twice on NHK’s TV programs,
and gave a series of lectures in Tokyo, Onomichi, Hiroshima etc. His activities were covered by the media
in detail. He became a symbol of European integration (and world peace) and Mitsuko was labeled “Motherof the EEC”. (Following Maeda’s instruction, a famous NHK producer, Naoya Yoshida, made adocumentary on Mitsuko and her seven children in 1972, with the most popular actress Sayuri Yoshinaga as“Mitsuko”.)
4) Sôka-gakkai
During his stay in 1967, RCK met the president of Sôka-gakkai, Daisaku Ikeda. This meeting was arranged
because RCK wished strongly, though Kajima or YUAI were reluctant. RCK was interested in
Sôka-gakkai’s rapid development, admiring that some religious faith in Japan was growing rather strongly,
which would mark a sharp contrast with the European situation. According to RCK, he was struck by
Ikeda’s strong personality, and probably, Ikeda was moved by RCK as well.
Sôka-gakkai invited RCK to Japan in 1970. This time NHK, the public broadcasting company, had to keepa distance from the religious organization. Nor were Kajima or YUAI involved. As a result, this second
visit to Japan was virtually non-existent in media. As I couldn’t get enough documents so far, I can’t tellwhat happened between RCK and Sôka-gakkai. Nor can I tell how their relations went afterward in detail:reviewing with RCK’s archives, however, the relation between RCK and Japan seemed almost
monopolized by Sôka-gakkai between 1970-72. In 1971, the comic (manga) Kalergi Haku (Count Kalergi)
was published by Ushio publishing, which is affiliated to Sôka-gakkai. This comic influenced the younger
generation and therefore had a prolonged effect among Japanese people.
5) Discourse toward European integration in Japan thereafter
Even after RCK passed away, RCK’s contribution to European integration has been commemorated fromtime to time, with “Mitsuko” being one of the favorite heroines of Japanese popular culture. Following
President Maeda’s instruction, a famous NHK producer, Naoya Yoshida, made a documentary on Mitsuko
and her seven children in 1972, with the most popular actress Sayuri Yoshinaga as “Mitsuko”.
In 1971, the comic Kalergi Haku was published by Ushio publishing, which is affiliated to Sôka-gakkai.
This comic influenced the younger generation and therefore had a prolonged effect among Japanese people.
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As “Mitsuko” is often labeled “Mother of the EU” and adored, RCK’s achievements tend to be appreciatedonly idealistically.
Sôka-gakkai invited RCK to Japan in 1970. This time NHK, the public broadcasting corporation, had tokeep a distance from the religious organization. Nor were Kajima or YUAI involved. As a result, thissecond visit to Japan was virtually non-existent in media.
6) The temporal revival of YUAIAs RCK passed away in 1972, the relation between Pan-Europe and Japan faded away. The president of
Pan-Europe Union was taken over by Otto von Habsburg (and later succeeded by a right wing of CSU),
whose activity would be very different from RCK. Otto’s pan-europe got a spectacular success of the
Pan-European picnic in August 1989 at Sopron which triggered the fall of Berlin wall, though RCK himself
got into oblivion.
In the meantime, RCK was not forgotten in Japan, thanks to his legendary mother Mitsuko. And then, all ofa sudden, RCK was mentioned frequently in the real politics in Japan. Yukio Hatoyama, a grandson of
Ichiro Hatoyama, became the Prime Minister in September 2009. His philosophy and policy has beenstrongly influenced by YUAI. The core of Hatoyama’s foreign policy was an “East Asian Community”,
which was directly influenced by RCK.
Now we all agree that the Democratic Party of Japan as a ruling party was a failure, although there are
discussions about the reasons. I agree that Prime Minister Naoto Kan was a catastrophe, Prime Minister
Noda was a puppet of Ministry of Finance or other bureaucrats, but I don’t agree with those who criticizes
Hatoyama as a “traitor” or else. Still, I know the general sentiments in Japan, especially the feelings ofrightward-inclined younger people including many of my students.
Closing Remarks
The motives of European integrations depend on a philosopher or actor; so is the case with RCK. His Pan-Europe movement included imperialistic, expansionistic, anti-communistic (and nostalgic after the WorldWar II) motives, but also cosmopolitan and peace-oriented for sure.
Those various motives influenced many actors in Japan differently; Kajima was moved by RCK’s noblesse
oblige attitude in order to save declining Europe and then advocated his imperialistic version of Pan-Asia.
Though Ichiro Hatoyama did not choose RCK himself, some parts of RCK’s anti-communistic andaristocratic philosophy struck him and he organized the YUAI movement. When his grandson advocated
YUAI some 55 years later, Yukio Hatoyama used YUAI (fraternity) not as a anti-communistic (norReview of EU Asia Pacific Studies No.2&3 (March, 2017): 66－73© 2017 EUSI Tokyo & Tsuda College. All rights reserved.

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Review of EU Asia Pacific Studies

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anti-egalitarian) slogan, but rather anti-libertarian motto. RCK was interested in Sôka-gakkai; its
expansionistic dynamism might have been RCK’s dream.
Nowadays, RCK’s aspiration toward a united Europe is in crisis; so is the important legacy by him in Japan,that is, an East Asian Community. Though the crises in Europe and Asia look like having different
backgrounds, it might have the common roots, like deepening of competitive society in the age ofglobalization. I hope we can find a better way-out, and learn each other to overcome conflictive situations.

Selected Bibliography
Hatoyama, Ichiro (1957), Hatoyama Ichiro Kaikoroku (Memoirs), Tokyo: Bungeishunjyû.
Kajima, Morinosuke ed. (1970), Coudenhove-Kalergi Zenshû (Complete Works), 9 Vol., Tokyo: Kajima InstitutePublishing.
Kajima, Morinosuke (1972), Kajima Morinosuke Gaikôronshû (Anthology on International Affairs), 12 Vol.
Tokyo: Kajima Institute Publishing.
Kajima-Morinosuke-Tsuikairoku-Kanko-Iinkai (1976), Kajima Morinosuke Tsuikairoku (Homage to Kajima
Morinosuke) , Tokyo: Kajima Institute Publishing.
Kajima Kensetsu (1977), Kajima Morinosuke: Sono Sisô to Kodô (His Philosophy and Activity), Tokyo: Kajima
Institute Publishing.
Kajima, Morinosuke et al. (1971): Coudenhove-Kalergi: le pionnier de l'Europe Unie, avant-propos de Henri
Rieben. Lausanne: Centre de recherches européennes.
Kamikawa, Hikomatsu (1927), Locarno-Shugi to Pan-Europa Shugi no Idô (Differences between Locarno-ism
and Paneuropa) in: Kokusaihô-Gaikô-Zassi (Journal of International Law and Diplomacy), Vol.26, No.1.
Kamikawa, Hikomatsu (1944), Daitôa-Kaigi to Daitôa Kyodô Sengen (Conference of in: Kokusaihô-Gaikô-Zassi(Journal of International Law and Diplomacy), Vol.43, No.1.
Kimura, Ki (1971), Coudenhove Mitsuko Den (Biography), Tokyo: Kajima Institute Publishing.

Coudenhove-Kalergi, Richard (1928), “China und Europa” in: Paneuropa

4/ 6, Juli-Aug. 1928, pp.4 - 10.

Coudenhove-Kalergi, Richard (1932), “Ostasien” in: Paneuropa 8/ 6, Juni 1932, pp.179 – 187.
Coudenhove-Kalergi, Richard (1938), “Japans Alexanderzug” in: Paneuropa 14/ 1, Jänner 1938, pp.5 - 9.
Coudenhove-Kalergi, Richard (1938), Kommen die Vereinigten Staaten von Europa, Glarus
Dokumentationsarchiv des Österreichischen Widerstandes, ed., 1995, Österreicher im Exil USA 1938-1945. Eine
Dokumentation. 2 Bd. Wien: DÖW.
Eppel, Peter (1988): “Österreicher im Exil 1938-1945”, in: Talos, Emmerich et al eds. NS-Herrschaft inÖsterreich 1938-1945. Wien: DÖW.
Frommelt, Reinhard (1977), Paneuropa oder Mitteleuropa. Einigungskalkül deutscher Wirtschaft und Politik
Review of EU Asia Pacific Studies No.2&3 (March, 2017): 66－73© 2017 EUSI Tokyo & Tsuda College. All rights reserved.

72

Review of EU Asia Pacific Studies

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1925-1933, Stuttgart: Deutsche Verlags-Anstalt.
Gehler, Michael (1998), “Richard Coudenhove-Kalergi, Paneuropa und Österreich 1923-1972”, in: Wohnout
Helmut ed. Demokratie und Geschichte. Jahrbuch des Karl von Vogelsang-Institutes zur Erforschung derGeschichte der christlichen Demokratie in Österreich Jg.2 , Wien: Bóhlau, pp.143-193.
Gehler, Michael (2002), Der lange Weg nach Europa. Darstellung + Dokumente, Innsbruck: Studienverlag,
pp.143-193.
Kring, Alfred (1936), “Japan als Schüler und Lehrer des Abendlandes” in: Paneuropa 12/ 1, Jänner 1936, pp.23 25.
Posselt, Martin (1987-9), “Richard Coudenhove-Kalergi: Teil 1- 10”, in: Paneuropa Deutschland.
de Rougement, Denis (1966), The Idea of Europe, New york: The Macmillan Company.
Schöndube, Claus (1981), “Ein Leben Für Europa. Richard Graf Coudenhove-Kalergi”, in: Jansen, Thomas/
Mahncke, Dieter eds. Persönlichkeiten der Europäischen Integraton. Vierzehn biographische Essays.Bonn:
Europa Union Verlag.
Théry, Franck (1998), Construire l’Europe dans les années vingt—L’action de l’Europe paneuropéenne sur lascène franco-allemande, 1924-1932, Genève: Institut Européen de l’Université de Genève.
Ziegerhofer, Anita,(1996), “Die Paneuropa-Bewegung der Zwischenkriegszeit”, in: Österreichisches Jahrbuch
für Politik 1996, pp.573-94.
Zurcher, Arnold John (1958): The Struggle to unite Europe 1940-1958, New York: New York University Press.

Review of EU Asia Pacific Studies No.2&3 (March, 2017): 66－73© 2017 EUSI Tokyo & Tsuda College. All rights reserved.

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Part III
Presentations in the ConferenceReview of EU Asia Pacific Studies No.2&3 (March, 2017):75-85Ⓒ2017 EUSI Tokyo & Tsuda College. All rights reserved.

75

0%

1%

2%

3%

4%

5%

6%

7%

1995

2.1%
2.5%

1996

1.7%

2.4%

1997

2.7%

3.6%

1998

2.9%

3.4%

1999

3.0%

3.4%

EU15

2000

3.9%

4.5%

2001

2.1%

4.2%

Greece

2002

1.2%

3.4%

GDP growth rate

2003

1.3%

5.9%

2004

2.4%

4.4%

2005

1.9%

2.3%

2006

3.1%

5.5%

2007

3.0%

3.5%

was growing at a faster rate than the EU average (3.9% vs 2.4%)• Growth model based on consumption and external borrowing• Greece joined the, then, EEC in 1981 and adopted the euro in 2001
• 1980s and early 1990s: slow growth• From the mid-90’s to the beginning of the crisis, the Greek economy

Source: Eurostat*

Panos Tsakloglou (Athens University of Economics and Business)
Marianthi Anastasatou (Council of Economic Advisors)

High growth rates before the crisis

March 2015

P APER PRESENTED AT THE EUSI T OKYO INTERNATIONAL C ONFERENCET OKYO , 8 TH AND 9 TH MARCH 2015

THE GREEK DEBT CRISISAND ITS AFTERMATH

-16

-14

-12

-10

-8

-6

-4

-2

0
-2.2

-3.3 -3.5

-2.7

-3.6
-7.7 -7.2-6.5 -6.5-5.8

Current Account(% GDP)-7.6-14.6-14.9-11.4

accession, increased afterwards

3.9 3.4 4.4 4.3 3.7

2.0

0.7

-0.7
-1.0-1.6-2.0-2.6

GG balance

GG primary balance

-15.6

-4.8
-3.1-3.7-3.9-4.5-4.8-5.5-5.7
-5.7
-5.9
-6.5
-6.7
-10.5
-7.6
-9.1
-9.8

2.2

General Government
Balance (% GDP)

• Until 2000, low current account deficits• External deficit trended upwards in the period 1995-2008• General Government Deficit, although contained before Euro

Twin deficits•Growth prospects and challenges•Recent developments•Socioeconomic costs of adjustment•Structural reforms•Developments in 2013 and 2014

•External rebalancing•Fiscal consolidation•Getting into the debt crisis

Source: Eurostat, Ameco**

Review of EU Asia Pcific Studies
No.2&3 (March, 2017)1*

107.5 107.2

112.9

*

 In 2010 Greece could not tap the international markets anymore New government; revelation of large deficits (Greek statistics);
ambivalent reaction

0.0

20.0

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76*Approx. 18 bn refer to IMF’s rollover and thus don’t add up to the public debt

 The global financial crisis revealed the chronic problems of the Greek
economy Structural rigidities; loss of competitiveness Growth model based on consumption and borrowing 53.5% haircut; Net write-down 54 bn;
Real effects of PSI: Duration; Interest Rates; Public December 2012: Debt buy-back (net benefit: 21 bn)

 Largest loan in history
245* bn Euro (221 bn Euro already disbursed)
198 from Euro Area countries
 47 from the IMF*
 Private Sector Involvement (PSI) to reduce the public debt
by 107 billion EUR via bond swapping

Getting into the debt crisis•Growth prospects and challenges•Recent developments• Socioeconomic costs of adjustment•Structural reforms•Developments in 2013 and 2014

•External rebalancing•Fiscal consolidation•Getting into the debt crisis

First Program (GLF) : Liquidity
Second Program (EFSF) : Solvency

 Different Approaches

Loans in exchange of Fiscal Consolidation and Structural Reforms

 Two Programs: 2010 & 2012

101.2
97.4 98.9

 Forced to seek borrowing from our European partners and the IMF

79.1

103.4 103.7 101.7

In 2009, early elections due to implicit government inability to pass
the budget

2008 first year with negative growth rate

Greece hit by banking crisis only indirectly

40.0

71.7 74.0

99.2 97.2 97.0 99.4 96.6
94.5 94.0

129.7

*

Getting into the debt crisis

60.0

80.0

100.0

120.0

140.0

Public Debt (% GDP)In 1990-2009, public debt rose by 60 p.p. of GDP

Source: Eurostat, Ameco*

Public debt

Review of EU Asia Pcific Studies
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2

•
•

-20

-15

-10

-5

0

5

10

-10.8

-4.9

2010

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77

-3.2

-2.9

1.6

2014*

-2.1

-0.7

4.5

2016*

4
2
0
-2
-4
-6
-8
-10
-12
-14
-16

2009

-14.7

2010

-9.5

-4.2

2011

-5.7

-3.6

EA

2012
Greece

-2.1

0.1

2013

-1.2

3.1

Structural budget balance,
General Government (% GDP)• currently one of only three EA countries with structural surplus(together with Germany and Luxemburg)• substantially higher than the EA average

2014

-1.1

2

2015

-1.1

1.6

* Economic Program Targets

3.0

2015*

Structural balance improved by almost 17 p.p. of GDP in 2009-2014

Source: Ameco. ESA2010

*

-1.3

0.8

2013

General Government Primary Balance

-6.4

2012

Fiscal consolidation was carried out instrong pro-cyclical conditions

-2.3

2011

-9.4

General Government Balance

-15.6

-10.4

2009

General Government Fiscal Accounts 2009-2016(% of GDP)

General Government Deficit shrank by 12.4 p.p. of GDP
General Government Primary Deficit shrank by 11.2 p.p. of GDP

In 2009-2014,

Source: European Commission, 4th Review, 4/2014*

Fiscal adjustment

Cumulative change in the structural primary fiscal balance 2014
over 2009 (% of GDP)

In 2009-2014 Greece achieved the biggest cumulative change in the structural
primary fiscal balance in the Euro area

0

4
2

10
8
6

12

14

16

18

11.4

9.9 9.6

9.0 8.8

7.6 7.4

6.5 6.5
3.6 3.6 3.3 3.1

4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0

3.6

3.3

2.8

2.5
1.9 1.8 1.8

1.6 1.6 1.5 1.5

1.3 1.2

Rate of average annual
cyclically adjusted primarybalance improvement(% GDP per year)

1.0

In 2009-2014 Greece achieved the highest and fastest cumulative fiscal consolidationin the developed world in recent years:
of 17.9 p.p. of GDP
at an annual rate of 3.6 p.p. of GDP on average

17.9

Scores of cyclically adjusted
primary balance
improvement (% GDP)

Source: AMECO, * excludes financial sector support

Note: Fiscal consolidation episodes as defined in OECD Economic Outlook 81*

The biggest and fastest fiscal consolidation
among OECD countries

Source: European Commission, Berenberg calculations*

The biggest cumulative fiscal
consolidation in the EA

Review of EU Asia Pcific Studies
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Review of EU Asia Pacific Studies No.2&3 (March, 2017):75-85Ⓒ2017 EUSI Tokyo & Tsuda College. All rights reserved.

78

80

85

90

95

100

105

110

115

120

125

•

2000

2001

2002

2003

Ireland

2004

2006

Greece

2005

Spain

2007

2009

Portugal

2008

2011

EA18 (18 countries)

2010(relative to 37 industrial countries, 2001=100)

Nominal unit labour costcompetitiveness lost during 2000-09

2012

2013

• Main problem leading to the crisis: low competitiveness• Between 2010 and 2013 Greece managed to regain the labour cost

Labour cost competitiveness isrecovering

Source: General Accounting Office, European Commission…equally split between expenditure cuts and revenue increases

Source: Ameco

*

*

2014

2015

Recovery•Growth prospects and challenges•Recent developments•Socioeconomic costs of adjustment•Structural reforms•Developments in 2013 and 2014

•External rebalancing•Fiscal consolidation•Getting into the debt crisis

Current
Account insurplus in2013 for the
first time after
many
decades

Current
Account
Deficit fell by
15.5 p.p. ofGDP between
2008 and
2014

*

2004

-5.6

-3.2

-0.5

2005

-7.4

-4.1

-1.2

2007

-14.0

2008

-14.4

2009

-10.9

-7.7

-3.9

2010

-9.9

-6.1

-2.1

5.5
2.9

2011

2012

-4.6 -2.4-9.9

Current Account Balance

-9.4

-5.8

-10.0

-6.8

Current Account Balance (excl. oil & GG net interests)

2006

-10.9

-6.9

-4.0

0.2

Current Account (% GDP)

Current Account Balance (excl. oil)

2003

-6.3

-4.0

-1.9

Source: Bank of Greece

-20

-15

-10

-5

0

5

10

4.8

2013

0.6

7.3

5.5

2014

1.2

8.0

Current account deficit has been eliminated

*

% GDP

Measures amounting to over 30% of GDP

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4

*

*

• -3.9% GDP growth compared to expected -4.2%• Unemployment rate started to decline in the last quarter of the year after more than three
years of constant increases• General Government balance -3.2% of GDP compared to a target of -4.1%•Fiscal consolidation•External rebalancing•Developments in 2013 and 2014

Review of EU Asia Pacific Studies No.2&3 (March, 2017):75-85Ⓒ2017 EUSI Tokyo & Tsuda College. All rights reserved.

79

1/1/08

1/1/09Source: Bloomberg0
1/1/07

5

10

15

20

25

30

35

40

45

1/1/10Germany
GreeceIreland
Italy
Portugal

1/1/1170

60

Further issuance of €1.5 bn in 3-yr paper in July (3.38% coupon), plus another €1.7 bn (5-yr and 3-yr) in
exchange of T-bills in September• In Q1 2014, the four systemic banks raised additional capital of 8.5 bn €, comfortably inexcess of the needs identified by the supervisor (6.4 bn €), and placed medium-term bonds
for the first time since 2009 to boost their liquidity (2.25 bn €), .

Source: Eurostat

80

90

100

110

120

Euro area (19 countries)

GreeceEconomic Sentiment Indicator

Resulting in improvements in “soft”
economic indicators• In April and after four years with no access to the international capital markets, the Greeksovereign raised €3 billion at a coupon rate of 4.75% through the sale of 5-year bonds that
was almost seven times oversubscribed.

• 10-year bond yields declined further by 250 bps• Improvement in public finances continued• Unemployment rate remained on a decreasing path (2.3 p.p. cumulative decline since peak)• 3.8 bn Current Account surplus in Jan-Sep 2014 compared to 2.4 bn in Jan-Sep 2013

• 0.7% GDP growth in Q3 2014 compared to -0.3% in Q3 2013.
(nine month data suggest that annual growth rate of 0.6% is conservative)

Performance in the first three quarters of 2014 also promising:

Developments in 2013 and first threequarters in 2014

•Growth prospects and challenges•10-year bond yields declined by 298 bps

1/1/12

1/1/13

95,3

101,2

1/1/14• €5.8 billion of public sector expenditure and tax refund arrears to private enterprises and%households cleared.
50•Socioeconomic costs of adjustment•Recent developments• 0.7% GDP surplus in the Current Account compared to expected -0.8%•Structural reforms• General Government primary surplus 0.8% of GDP compared to a target of 0%

Performance in 2013 better than expected:•Getting into the debt crisis*

Developments in 2013 and first threequarters in 2014

1/1/15

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Percentage points

Responsiveness rate

Responsiveness rate adjusted for the difficulty to undertake reform

Responsiveness to Going for Growth recommendations across OECD countries, 2011-12

Change in responsiveness to OECD growth recommendations , 2008-11

Source: OECD, Economic Policy Reforms: Going for Growth

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
-0.1
-0.2
-0.3

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

PRT

NZL
GRC

IRL

Overall reform responsiveness over the period 2007-14

Despite the fact that in the first three years of this period there were, virtually,no reforms

KOR

DNK

AUS

AUT
MEX

SVK
HUN

POL

ESP

Source: OECD, Economic Policy Reforms: Going for Growth

*

CAN

JPN

CZE

FIN

FRA

EU

GBR
CHE

ITA

*

Structural Reforms

NLD

Structural Reforms• But, still, a long way to go• Improvement in all “league tables”: World Bank, Lisbon Group and, especially,
OECD (esp. “Going for Growth”)

DEU•Growth prospects and challenges• Some of the reforms truly drastic; others less so

SWE•Socioeconomic costs of adjustment

tax administration, labour market, product market, pensions,social protection, health care, business environment, local government,
education, public administration, privatizations, etc

BEL•Structural reforms

TUR•Recent developments• Since 2010 reforms in every sector of economic activity:

Any thing but true

• Usual accusation: “Greece is not adopting structural reforms”

USA•External rebalancing• Greece in very low positions in international competitiveness rankings•Fiscal consolidation

Lack of structural reforms (since 2001)• Main contributing factor for competitiveness deterioration:•Getting into the debt crisis

*

ISL

80
LUX

Review of EU Asia Pacific Studies No.2&3 (March, 2017):75-85Ⓒ2017 EUSI Tokyo & Tsuda College. All rights reserved.
NOR*

Structural Reforms

Review of EU Asia Pcific Studies
No.2&3 (March, 2017)6*One of the largest declines in GDP
ever recorded•Growth prospects and challenges•Recent developments

Source: Ameco•Socioeconomic costs of adjustment
2004

4.4

2005

2.3

2006

5.5

2007

3.5

2008

-0.2

2009

-3.1

2010

-4.9

2011

-7.1

2012

-7

2013

-3.9

GDP growth rate

External balance of goods and services

2003

5.9

Total consumption

2002

3.4

Change in inventories and net aqcuisition of valuables

2001

4.2

Gross fixed capital formation

2000

4.5

Contribution of GDP components to growth

0.6

2014

Review of EU Asia Pacific Studies No.2&3 (March, 2017):75-85Ⓒ2017 EUSI Tokyo & Tsuda College. All rights reserved.

81

2015

2.9

• Of secondary importance: composition of austerity measures and timingof structural reforms• Dauville and, especially, Grexit• But; also, political factors• Fiscal multipliers• No haircut; short adjustment period; no private sector wage cuts

• Faults in the design of the program (esp. the first)• Why this outcome?

• Deep recession probably inevitable; but not so deep

• To close the, very large, fiscal gap revenue increases and spending
cuts

Was the (severity of the) recession
inevitable

-15

-10

-5

•Structural reforms

5

10

Between 2008 and 2013 the Greek GDP declined by almost aquarter, but started growing again in 2014

0

•Developments in 2013 and 2014

•External rebalancing•Fiscal consolidation•Getting into the debt crisis*

Adjustment has come at a very highsocio-economic cost

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82

2011

Greece

2013

EU28

2014

2012

2010

2009

2008

*

2015

0

20

40

60

80

0

10

20

2008

2008

2010
EU28

2009
EU28

2010
Greece

2011

2006

2007

2008

2009

2010

2011

2012

Non Performing Loans (lhs)
Restructured loans (lhs)
Performing Loans (lhs)
NPLs as % of Total Loans (rhs)
NPLs incl. Restructured as a % of Total Loans (rhs)2013Source: Bank of Greece

Source: European Commission

0%

0

10%

100

0

15%

5%

20%

150

25%

200

30%

35%

40%

250

33.3

45%

300

350

400

2013

39.9%

2012

2013

50

(domestic residents, mil. Euros)

Loans

The deposit base has been eroded with a peak-to-troughdecline of almost EUR 84 billion (one third of the base)
One out of three loans is non-performing

Total Deposits & Repos

2012

50

100

150

200

250

300

Greece2011

Youth unemployment

2009

Long term unemployment rate(% of active population)

Deposits were depleted andnon-performing loans increased

Source: European Commission, Winter Forecast 2014

0

5

10

15

20

25

30

Unemployment rate

Bn €Review of EU Asia Pacific Studies No.2&3 (March, 2017):75-85Ⓒ2017 EUSI Tokyo & Tsuda College. All rights reserved.

bn.

2016

• Long-term unemployed 18% of the active population or 65% of all unemployed• Youth unemployment the highest in the Euro-area (58%)• Unemployment in 2013 above 27% of the labour force*

As a result, unemployment skyrocketedmeasures)• Gini index of inequality rose by 4% (despite relatively well-targeted• Share of population at risk of poverty or social exclusion rose from
27.0% to 34.8%(due to sharp decline in economic activity and part reliance on tax increase forfiscal consolidation)• Average disposable income declined by over 35%

Between 2009 - 2013:*•Growth prospects and challenges•Recent developments•Socioeconomic costs of adjustment•Structural reforms•Developments in 2013 and 2014

•External rebalancing•Fiscal consolidation•Getting into the debt crisis

Source: Eurostat, EU-SILC*

Sharp worsening of social indicators

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8

*

*

•Recent developments•Structural reforms• Heightened political uncertainty / reversal of earlier trends• Collapse in public finances

Review of EU Asia Pacific Studies No.2&3 (March, 2017): 75-85Ⓒ2017 EUSI Tokyo & Tsuda College. All rights reserved.

83• Increase labour market flexibility and security• Emphasis on innovation• Tradable services• Shipping-related activities* Source: KEPE, IOVE, McKinsey

Well educated human capital is the real comparative advantage

Not all sub-sectors exhibit the same comparative advantage
Sub-sectors outside the below periphery might exhibit comparative advantage• Energy• Metal and construction materials
industries• Logistics and interoperability• Reinforcement of social cohesion• Acceleration and improvement in the justice system* Source: KEPE, IOVE, McKinsey• Fight against corruption and enhancement of reliability and transparency• Investment in human capital• Reorganization of public administration and improvement of the services to the citizens• Improvement of tax policy• Facilitation of international trade-extroversion• Valorization of public property-privatizations• Research, technology andinnovation• Primary sector and agro-foodindustry• Elimination of barriers to entry- reinforcement of competition and competitiveness• Pharmaceuticals• Creation of favourable investment climate and facilitation of business activities

Horizontal reforms

To shift the resources of the Greek economy to higher value added
production, the studies suggest further reforms

Growth prospects 2/2•Growth prospects and challenges• Tourism

Independent studies suggest excellent growth prospects

Need to shift resources from consumption to investment and increase
substantially the share of exports in GDP

Growth prospects 1/2• Growth reversal / increase in unemployment• Stalemate in negotiations with the “Institutions” (Troika)• Talk of Grexit returned• Greece cut off (again) from international capital markets• Socioeconomic costs of adjustment•External rebalancing• Left/right gvt replaced centre-right/centre-left coalition• Deposit outflows (20 bn; over 10% of GDP) / severe lack of liquidity• Bond spreads rose sharply•Fiscal consolidation•Getting into the debt crisis• Early elections / SYRIZA victory; promises to end austerity, reverse
reforms and and cut debt**

• Failure to elect President of the Republic• Break down in negotiations with Troika

Performance since the last quarter of 2014:

Developments since Q4 2014

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ItalySpain

Euro area

Germany
Loans to sole proprietors

Consumer Loans

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84

160

180

2012

2014

2016

Public Debt (% GDP)

2018

2020

2022

2024

2026

2028

Establishment of R&D centres by a number of multinational firms in Greece

Several structural fund supported programs targeted to young scientists with highqualifications

Brain drain2022 if needed EU commitment to help Greece reduce debt to substantially below 110% of GDP in

GDP vs 4.6% on average for Euro Area periphery peers)

60

80

100

120

140

2030

 Manageable in the medium term Long average maturity (17 yrs)
 Low average interest rate (2%)
 Only 29 bn held by the private sector
 Approx. 80% of the public debt with the official sector
Source: European Commission
 Low debt servicing costs for the next 8 years (approx. €6 billion per annum or 3% ofDebt sustainability

Long term: Debt sustainability & brain drain

Challenges
*

2.1

2.3

2.4

2.2

2.9

3.4

3.9

3.7

2.2

2.2

2.2

2.2

Greece

2.9

3

3.2

3.5
3.3

4.2

0.3

1.3

EA-18

1.6

4.7

Inflation rates (HICP)

2.7

3.1

1

2.5

-0.8

0.8

-0.9

1.3

0.3

1.2

• Greece made an enormous adjustment in restoring
internal and external balances in a short period of time
• The economy is in a far healthier state than it has been
for a long time
• The whole effort aims to shift resources from consumption
to investment and increase substantially the share ofexports in GDP• Bold structural reforms have already been implemented
but the reform effort needs to continue• But, will the process continue?
• Political uncertainty, discontinuity and growth prospects

Concluding

Source: Eurostat-2

Banks were fully recapitalized, restructured or resolved; have already re-accessed capital markets

Creation of specialized Development Fund (IfG) in cooperation with EIB, KfW and private sector
institutions, targeting SMEs and infrastructure projects-1Increased EIB lending, particularly for SMEs

1

2

3

0

Source: Bank of Greece

Credit to corporations

Housing Loans

Credit to private sector

45Large Greek firms started tapping international markets (recently reversed)

Decline in savings reversed (recently reversed)

Sharp decline in sovereign risk (recently reversed)

Source: ECBGreece

-5

-10

2000

2.19

But, ceteris paribus, deteriorates Debt/GDP ratio

2001

0

2002

2.74

2003

3.35

2004

4.25

Increases purchasing power of consumers

2005

5

2006

5.38

2007

6
5
4
3
2
1
0

Improvement in competitiveness

2008

10

2009

Credit growth

2010

15

2011

Interest rates on loans to NonFinancial corporations- May 2014
(new business, 1 to 5 yrs, over 1 mil)2012

Medium term: Deflation2013

Short term: Liquidity constraints

2014

Challenges

2015

Challenges

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Thank you for your attention

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863

 Negates political nature of problem

 Asymmetrical adjustments(Draghi’s announcement in September 2012)

Faculty of Social Sciences

 Expand mandates of ECB and European Commission

4

Faculty of Social Scienceso Democratization of (decision-making in) Europe

expand role of EIB, public investment programo Necessity of economic growth and complementarity:

o Euro-bonds (common financing of public debt)

o Nationalization of banks

 Regulation of financial marketso Write-off of unsustainable debt, debt audit

 Macro-economic co-ordination, budget control Fiscal and economic union: Minister of Finance

TOWARDS A TRUE SOCIAL EUROPE:
POLITICIZATION OF DEBT

Faculty of Social Sciences

The contemporary crisis is of a comparable structural
nature, is already leading to large scale social and politicalunrest in Southern Europe, may well lead to the collapse of
the Euro-zone and even the European Union, andeventually to a return of the “ solutions” of the 1930s.

TECHNOCRATIC EUROPEANISATIONHENK OVERBEEKTSUDA COLLEGE, TOKIO 9 MARCH 2015

EUROPE AT A CROSSROADS:IS AUSTERITY DESTROYING THE EU OR CAN IT REVITALISE IT?

The Great Depression of 1929-1945 led to street war
between Communists and Fascists, to victory of Nazism,
and to World War II. The solution came only after 1949,
among other things thanks to European integration.

BACK IN 2012

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5

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27.2

S&D
Social-Democratic

Faculty of Social Sciences

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87
Faculty of Social Sciences

9%36.3 % ( + 9.4)
6.3 % ( - 0.6)
24 % ( - 10)
8 % ( - 12)
17 %
28 %
12.9 %
14 %Linke
SyrizaGolden Dawn
Hungary: Fidesz
JobbikNetherlands: PVV
Spain:
Podemos
Sweden: SD
UK:
UKIP

Greece:

30 %
6-7 %

France:NF
Germany: AfD

RIGHT WING IN RECENT ELECTIONS OR POLLS:

 Rising confrontation

 Rise of populist left-wing movements in Mediterranean
Europe Rise of nationalist right-wing movements in North-Westand Eastern Europe

38.1

EPP
Christian-Democratic

9.2
10.8
11.1

ALDE
Liberal
GUE/NGL / GreensLeft-Green
EFDD / NI
Populist Right

Faculty of Social Sciences

13.3

13.6

8.9

9.3

25,4

29.4

Share of vote2014 in %Faculty of Social Sciences

The problem is notfinancial but political.

Golden Dawn and theirlikes are waiting in thewings.

The North – South
divide must be bridged,
and Syriza andPodemos offer us achance to turn aroundbefore it is too late.

CULTURE CLASH OR NORTH-SOUTH DIVIDE?

8.0

12.3

11.4

7.3

25.0

36.0

Share of vote2009 in %source: http://www.europarl.europa.eu
6

--

ECR
Conservative

Share of vote2004 in %Political resilience? Mixed picture

Bron:

Party group

EUROPEAN PARLIAMENT ELECTION RESULTS 2004-2014

Social resilience: emerging new forms of communal spirit

SOCIAL AND DEMOCRATIC RESILIENCE ?

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Faculty of Social Sciences

Reconceptualise the relationship between national andEuropean democracy so that we will take decisive steps inthe direction of a truly democratic multi-level polity in the EU.

Can this be done within the EMU?

Leave short-sighted austerity and market
fundamentalism behind and take substantial steps towards
a social Europe:
1) An agenda for growth and equity
2) Regulation of financial markets, creation of public banks3) A common asylum and migration policy

TOWARDS A NEW DEAL FOR EUROPE?

Faculty of Social Sciences

Faculty of Social Sciences

Europe is at a crossroads: its survival as a project is at stake: Europe will need to come to terms with the limits to its
expansion to the East and to the South Monetary union on current terms is destroying Europe by
exhausting society’s resilience, deligitimating any idea ofEuropean solidarity, and playing into the hands of rightwing nationalism We need a New Deal, and we need it by June when newterms will have to be agreed for Greece’s continued
membership of the Eurozone, leaving short-sighted
austerity and market fundamentalism behind.

‘Europe’ has always been a transnational political project,
aimed at safeguarding peace, democracy and rule of law inEurope through market integration and shared prosperity.

1) International Ruhr Authority - ECSC - EEC (1945 –1958)2) SEA – TEU – Lisbon Treaty (1986 – 2009)3) Eastern Enlargement (1990 – 2015)
4) Monetary Union (1990 – 1997 – 2015)
5) Limits of Project: Turkey – Caucasus – Ukraine

EUROPE AT A CROSSROADSEUROPE AS A POLITICAL PROJECT

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Part Ⅳ
Supplement

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Crisis! What Crisis? The “German Model”
facing economic and financial challenges since the 1990s
Werner Bührer

Looking at the latest figures concerning Gross Domestic Product (GDP), unemployment, national budget,or public and private investments in Germany (see Frankfurter Allgemeine Zeitung, 16 January 2015, p.
19), in the spring of 2015 the German government and the German public seemed to have no reason to beunsatisfied:
GDP in 2014 increased by 1.5 percent compared to 2013. The expected average in the Euro zone was 0.8
percent respectively 1.3 percent in the EU altogether.
The rate of unemployment amounted to 4.7 percent, which was the lowest rate since the German
unification in 1990.
Public and private investments increased by 3.7 percent in 2014 compared to 2013.
Germany was besides Luxembourg the only EU member state with a balanced national budget.
As historian Adam Tooze already put it some years ago: “With the euro in crisis, Germany has come toseem like a lone island of fiscal stability in Europe. Its debt levels are modest, its government bonds aresafe havens for investors around the world, and it has avoided the kinds of private credit booms andhousing bubbles that have destabilized the rest of the continent” (Tooze, 2012: 23). My following remarks
will concentrate on some of the characteristics and features of the German economy and economic policythat may help to understand why Germany performed quite well, at least compared to most other EU
member states. I am trying to explain (1) what is meant by the term “German model” and to what extent it
was adapted to and modified by the challenges of globalization and German unification. Then I will
mention (2) some of the reasons why most Germans are so interested in or, as some foreign observers
would say: obsessed, with monetary and financial stability and how these views influenced the German
attitude towards European economic and monetary cooperation since the early 1970s. Following is anattempt to focus on those (3) political measures and reforms that were at the moment held responsible forthe current record of success. In conclusion I will touch upon (4) some of the problems that are expected toendanger the remarkable performance of the last years – because, so the warning by the above quoted
commentator, “for all the talk of its financial strength, Germany has so far squandered the opportunity tosecure long-term economic growth...Berlin may have secured a dominant place in Europe, but it has notmade adequate provisions for the future.” (Tooze, 2012: 23-24).

1) Strengths and weaknesses of the “German model”
It is surely known that Germany, together with the majority of the OECD-countries including Japan,
according to the “variety of capitalism”-approach figures among the “coordinated market economies”. Insuch economies, “firms depend more heavily on non-market relationships to coordinate their endeavours
with other actors”. These “non-market modes of coordination generally entail more extensive
relational...contracting, ...based on the exchange of private information inside networks, and more relianceon collaborative, as opposed to competitive, relationships to build the competencies” of the individualcompany (see Hall/Soskice, 2001: 8). During the second half of the 1970s the German version of capitalism
was referred to as the “German model” (Modell Deutschland). This model consisted of five important
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elements: “a strategic focus on individualized high-quality production; strong trade unions” – and employer
associations on the branch and the national level, one may add – “with an institutionalized presence in thepolity at large and in the enterprise; stable employment in an efficient, jointly administered internal labour
market; a flexible socio-technical system of work; and a market-independent system of industrial skill
generation” (Streeck, 2009:109; see also Dyson, 2001; Rödder, 2013). In order to identify thecharacteristics of the “German model”, another scholar stressed the peculiarities of the German “production
regime”, especially highly qualified regular workforce, institutionalized bargaining between “capital” and“labor” respectively employer associations and trade unions, co-determination on the company level, asystem of “principal banks” (Hausbanken) as providers of cheap credit to German companies, long-term
finance methods, “stakeholder value”, corporatist structures based on powerful business associations andtrade unions, long-term capital investment, and modest cartel regulations (see Abelshauser, 2003: 99).
Especially the system of industrial relations, in principle based on the willingness of trade unions andemployers to cooperate and compromise, was often regarded as explanation of Germany’s economic
success – although it is of course impossible to quantify exactly the impact of the “social partnership”regime on economic growth and political stability. This way of discussing and regulating matters of
economic and social policy was established in the early 1950s, and it survived several “difficult” situations
until today.
The good reputation of the “German model” in the late 1970s and the first half of the 1980s was, of course,
the result of the superior performance of the German economy, at least as compared to the more liberal,
free-market capitalism of the United States and the United Kingdom. But even in those years critics pointed
to some potential weaknesses, for example the rigid system of collective wage bargaining, the inflexible
regime of employment protection, and an economic structure still dominated by a “somewhat oversized
manufacturing sector, so that even industries in which West Germany had lost previous comparativeadvantage did not have to shrink all that drastically” (Giersch/Paqué/Schmieding, 1992: 222). These
problems became more crucial since the mid-1980s when unemployment and public debts rose to newhighest levels. As in the United States and in Great Britain the German government, since 1982 led by aconservative-liberal coalition under Chancellor Helmut Kohl, tried to solve these problems by new
economic and social policy measures inspired by the so-called neoliberal paradigm, for example by cutting
down social expenditures and welfare state regulations, by making working conditions such as working
time and rules of dismissal, and by de-regulation and privatization in general (see Rödder, 2013). But incontrast to the United States during the presidency of Ronald Reagan and Margret Thatcher’s United
Kingdom the change of policy was, due among other reasons to the Christian-Social orientation of theChristian Democrats and their employee dominated electorate, quite moderate.
In 1990, when the unification of West and East Germany was put on the agenda, economic prospects werefavourable. The years 1988 –1990 brought an average real GDP growth of 3.9 per cent p.a., “a rate notknown since the late 1970s, with price inflation far less of a threat than at that time”. Investment in plantand equipment “picked up again and reached a growth rate of 6.8 per cent p.a. in 1988-1990, more than in
any three consecutive years since the early 1970s”. In these three years, employment increased by a“respectable” total of 1.4 million jobs, which led to a reduction of the unemployment rate by almost two
percentage points. “Although the core of long-term unemployment largely remained untouched, a new
dynamics of the labour market became visible” (Giersch et al., 1992: 276). So one may perhaps understandwhy Chancellor Kohl was quoted with the grandiose announcement that the unification would be paid outof the petty cash (Portokasse). But this turned out to be a terrible miscalculation.
After the unification of the Federal Republic of Germany and the German Democratic Republic (GDR) in
October 1990 the “normal” problems caused by the process of globalization – increasing thecompetitiveness of the unified economy – were superseded and intensified by the economic and financial
effects of the integration of the East German economy. “Unification hit German politics and the German
economy unexpectedly and required them to address, from one day to the next, problems of a kind andReview of EU Asia Pacific Studies No.2&3 (March, 2017)© 2017 EUSI Tokyo & Tsuda College. All rights reserved.

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magnitude that were entirely unprecedented”. As a result, “unification was carried out as a transfer to theformer GDR of exactly the same West German institutions that by the late 1980s had already begun toshow critical signs of exhaustion and dysfunction” (Streeck, 2009: 207, 209). The introduction of the DMark in the former GDR “at a politically expedient but economically catastrophic rate” (ibid: 211) was oneof the major wrong decisions causing “extraordinarily high unemployment rates” and “declining rates of
economic activity that were to become emblematic of East Germany in subsequent years” (ibid: 212).

2) The obsession with monetary and financial stability
During the 20th century Germany went through three dramatic monetary reforms combined with more orless drastic devaluations: 1923, 1948, and 1990. Whereas the first two were experienced by all Germans,
the last one affected only the citizens of the former GDR. These experiences may explain to certain degree
why monetary stability became one of the key elements of German identity (see Taylor, 2013): The DMark was seen as symbol of the economic and political rebirth after the Second World War and was used
to replace other, more or less discredited pillars of national pride. So when, in 2001, the Euro replaced the
D-Mark, scepticism in Germany was strong and widespread.
It is not possible here to discuss the reasons of the inflationary process in Germany after the defeat of 1918.
Surely, the heavy burden imposed on Germany by the Treaty of Versailles – 269 billion gold marks, nearly
200 percent of GDP – was one of its major causes. Important in the context of my paper is, that “thehyperinflation, that reached its chaotic climax in Germany in 1923came to be seared, seemingly forever, inthe country’s collective consciousness”. This fear of inflation was nowhere deeper than in Germany, andthis German fear, as political scientist Barry Eichengreen recently observed, “translated into European
policy, given the Bundesbank-like structure of the European Central Bank (ECB) and the desire of its
French president, Jean-Claude Trichet, to demonstrate that he was as dedicated an inflation fighter as any
German” (Eichengreen, 2015: 36, 8).
The second experience of inflation occurred after the Second World War. When, in 1933, the National
Socialists had seized power, their ruthlessly expansionary monetary policy had created an inflationarypressure that could only be held in check to a certain degree by the price freeze of 1936. In addition, “thefinancing of the war through the printing press pushed up the money supply roughly tenfold”. At the end of
the war, industrial production had dropped to about a quarter of its pre-war level. So, “with more money
chasing fewer goods at fixed prices, Germany found itself in a state of ‘repressed inflation’. The official
money lost it’s value not via rising prices (open inflation) but via a spreading reluctance to accept thismoney as a medium of exchange” (Giersch et al., 1992: 20-21). This gave rise to “black markets”, wherecigarettes replaced the Reichsmark as the standard means of payment. In order to stop this development andto create a stable and trustworthy currency, the three Western occupying powers enacted a currency reformin the Western zones of occupation in 1948. It consisted of a “drastic contraction of the money supply by
the introduction of the Deutsche Mark”, a “restructuring and consolidation of existing private and publicdebt”, and the “establishment of strong institutional safeguards against future inflationary policies”. This
currency reform scaled down private cash balances and bank deposits by a factor of ten. Official Prices,
wages, rents and social security payments remained unchanged (1 Reichsmark = 1 D-Mark). Since theSoviets implemented a currency reform with similar effects to private savings accounts in their zone ofoccupation, again all Germans lost most of their savings. What reinforced the German’s “stability
obsession” in addition were the institutional safeguards established by the Western Allies against futurefinancing of public debt by money creation: “First, the Bank deutscher Länder (i.e. the new central bank,later renamed in Deutsche Bundesbank) became the sole provider of legal tender; contrary to the wishes ofmany German experts, the new central bank was to be independent from government and all other politicalbodies. And second, the Military Governments explicitly forbade excessive budget deficits” (ibid: 36-37).
So the American, British and French authorities, too, contributed to the German “obsession” with monetarystability.
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The third monetary reform happened in course of the German unification. Whereas wages, pensions andrents remained unchanged (1 East German Mark = 1 D-Mark), the savings of most former GDR citizens, tobe exact those between 14 and 58 years of age, exceeding 4.000 East German Mark were divided in half
(ibid.: 263; see also Waigel/Schell, 1994). Although the devaluations of 1948 and 1990 did not havetraumatic effects similar to those of the hyperinflation of 1923 – in part, because in both cases conditions
soon turned better for the majority of Germans – these experiences kept alive German worrying aboutstable money. These anxieties were revitalized when, in the late 1980s and the early 1990s, the discussions
and negotiations about a common European currency intensified.
German concerns about safeguards for a stable single currency taken into account, Chancellor Kohl
supported the idea of a European Monetary Union (EMU) as “a means to anchor Germany firmly anddurably in the European integration framework and to make the European integration process and with it
the European peace project ‘irreversible’”. German unification, of course, reinforced this readiness tointensify European integration. To be sure, “growing economic interdependence and the economic interestsof export-oriented companies and German banks help to explain the German willingness to head for
EMU”, too. The decision to move ahead towards EMU came against the background of the fall of the
Berlin Wall on 9 November 1989: “This coincidence gave rise to the interpretation that Germany had tosacrifice the D-Mark for French support for German unification. This interpretation, however, does notstand up to the empirical evidence”, since the process leading towards EMU had been well underway since
early 1988, “with Germany in the highly prominent role of a promoter, not a reluctant follower”(Krotz/Schild, 2013: 192-193). Even more, German considerations concerning monetary cooperation canbe traced back till late 1960s and the early 1970s.
At the European summit at The Hague in December 1969, German Chancellor Willy Brandt presented
proposals for a two-stage evolution towards EMU with economic convergence first, and moves towards
EMU in a second stage. A committee was set up to outline the details. The resulting report, called after its
chairman, the Luxembourg prime minister, Pierre Werner, “foresaw achieving EMU in three stages by
1980 and advocated parallel progress on monetary cooperation and economic convergence” (ibid: 186).
Although the monetary disorder during the final years of the Bretton Woods system prevented further
progress along the lines of the “Werner plan” at that time, discussions in the German Foreign Office give
evidence to the interpretation that Germany was from the beginning supporting plans to foster monetary
cooperation and to create some sort of European union with a single currency. Although German officials
preferred to harmonize economic policy and to overcome imbalances among the members of the European
Economic Community before starting towards monetary cooperation (AAPD 1970, 2001: 380), nobody
raised fundamental objections. Another Foreign Ministry edict declared as a German goal to create a“community of stability and growth”, but stressed the necessity of harmonizing and coordinating economic
aims and economic policy within the Community. Such a harmonization and coordination was seen as“prerequisite of further measures of monetary policy”. To guaranty a common, stability-orientated policy,“monetary measures should not be given priority” (ibid: 1435). Again, although it is obvious that Germany
preferred to harmonize and coordinate economic, budget and finance policies before starting towards EMU,
German government officials agreed to the basic economic and political goals as formulated in the “Wernerreport” (ibid:1878). So to maintain that Germany sacrificed the D-Mark for French and other EU members’
support for German unification is indeed not in accord with empirical evidence. Germany’s main
motivation for a single currency was in the early 1970s as in the 1990s, as political scientist Andrew
Moravcsik put it, “to promote its own economic welfare through open markets, a competitive exchange
rate, and anti-inflationary monetary policy”. And most German business and government leaders believed
then and believe now “that the European economy would best be supported by independent central banks
that are like their own Bundesbank, which almost always prioritizes low inflation over growth or
employment” (Moravcsik, 2012: 55).

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No.2&3 (March, 2017)3) Did Germany win the Euro Crisis?
As mentioned in the beginning: Not only has the German economy “bounced back from the 2008-9
financial crisis – with revitalized export industries and record-low unemployment – it has done so whilemost other European economies are still reeling” (see for this and the following, including quotations,
Reisenbichler/Morgan, 2013). The common wisdom is that Germany’s success is the “hard won reward forstrict economic management”. Yet “fiscal conservatism” and “structural reforms” alone do not account forGermany’s export-led growth, “which in fact is largely the product of adjustments in business and labour
relations that reinvigorated German industries”. The country also owes much of its economic rebound “tothe specific structure of the EMU and even to the labour and financial fallout of the euro zone crisis”. But
Chancellor Merkel’s drive for austerity is rather risky: “Although it seems to be working to Germany’s
advantage, it has failed to lift up a recession-hit Europe”. Germany, however, benefits from an
economically healthy Europe, because it exports roughly 40 per cent of its products to this area. Therefore,
replacing the traditional austerity-oriented policies by more growth-oriented policies for the rest of Europe
might be advantageous to the German industry, especially car industry and mechanical engineering.
When looking for the sources of Germany’s remarkable performance, most commentators point to the quite
radical labour market reforms and fiscal conservatism. The labour market reforms of the early 2000s, also
known as the “Agenda 2010”, were implemented by a coalition government of Social Democrats andGreens led by Gerhard Schröder (see Nawrat, 2012). It consisted of a set of welfare and labour-market
measures that cut benefits and made it easier for firms to create “less-well protected and often temporary
low-wage jobs”. These measures obviously contributed to the reduction of labour costs and encouraged
more people to work since unemployment benefits and welfare aid declined considerably. To quote once
more political scientist Barry Eichengreen: “Only Schröder as Social Democrat could have convinced
Germany’s still powerful trade unions “that wage moderation, decentralized bargaining, and a reformed
welfare state were in their interest”. Following the 2003 reforms, unit labour costs in German
manufacturing stopped rising, “reflecting strong productivity growth and the unions’ newfound acceptanceof wage moderation” (Eichengreen, 2015: 96). To a certain degree the Agenda 2010 symbolized a turningaway from the “German model” because of the deregulation of the labour market and the reduction of
public spending. Nevertheless, this was not a completely new policy. Especially the conventional
orientation to consent and co-operation concerning industrial relations was not abandoned. So you could
say that the “German model” was adapted to the requirements of globalization, but not replaced by acompletely new arrangement.
Meanwhile, fiscal responsibility, mandated by the German constitution and stipulated by the so-calledstability law of 1967, supposedly underwrote Germany’s strong economic performance. German
policymakers, especially Christian Democrats, therefore have preached “austerity and structural labourmarket changes as the model for other European countries looking to foster competitiveness, boost growthand increase employment” (see for this and the following, including quotations, Reisenbichler/Morgan,2013). In addition, decade-long adjustments in business and labour relations coupled with Germany’s placein the Monetary Union contributed to Germany’s economic revival, too: Long before the ‘Agenda 2010’reforms, “German manufacturing firms, faced with growing global competition, started to impose wage
restraints and adjust working time and pay while granting job security for skilled workers”. With the“grudging consent” of trade unions, companies developed a series of flexible instruments that allowed them“to tweak working hours and pay to their economic needs, instead of touching workers’ employment
protection”. In other words, job security was granted in return for labour concessions. To be sure: suchdeals would have been impossible without strong trade unions, but nevertheless willing to compromise –and being able to compromise.
In addition, Germany has been able to use its place within the EMU to boost its exports: Given its “highly
coordinated collective-bargaining institutions”, Germany has already had a “clear advantage over other
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European states in restraining industry-wide wages”. This “form of internal devaluation – an equivalent tocurrency devaluation based on depressing wages – has fuelled an export boom and made the German
economy more competitive than other euro zone countries”. In short, for now, “Germany enjoys the best of
all worlds – a competitive manufacturing sector and low unemployment, minimal borrowing costs infinancial markets, a balanced budget in 2014, and a growing skilled workforce”.
To sum up, some of those institutions and regulations that had been under harsh criticism during the second
half of the 1980s and during the 1990s because of their inflexibility and their restraints to competition now
proved to be – at least for a couple of years in the past and maybe for some years to come – the sources andguarantors of Germany’s economic revival and success. This is especially true for the industrial relations
regime including powerful trade unions. Even the imbalance of the economic structure in favour of theindustrial sector and to the disadvantage of the services sector, often fiercely criticized by economists,seemed to have lessened the impact of the financial crisis of 2008-9 on the German economy.
4) Future Threats to the German Performance
Today Germany is dominating the European Union more than ever. In 2014, Germany’s share in Euro zone
GDP was about 29 per cent, in EU GDP 21 per cent (see Frankfurter Allgemeine Zeitung, 16 January 2015,
p. 19). In 2015 and 2016 these shares remained nearly unchanged. And apart from the bare figures, as a
German commentator recently emphasized, “Europe acts according to patterns and rules coined byGermany” (Bonse, 2015: 5). This hegemony has been put into effect less by certain German officials
holding top positions inside the EU apparatus (see “Die EU spricht deutsch”, in Frankfurter Allgemeine
Zeitung, 26 June 2014), but more by rules and regulations. The result is “a system tilted toward German
priorities: low inflation, austerity, and the repayment of creditors” (Moravscik, 2012: 66). This system,
however, did not bring growth and stability to all the other EU members. And in the meantime, the socalled refugee crisis and the Brexit shock caused violent turmoil in Germany and in the EU. Seriously
alarmed, historian and political writer Timothy Garton Ash therefore asked recently: “Is Europe
Disintegrating?” (The New York Review of Books, 19 January 2017). So the Germans indeed should be
worried about the future. Not only are they challenged by EU partners like Greece or Poland and, alreadydetermined to leave, Britain. In addition, the new American administration under President Donald Trump
is attacking the Merkel government’s economic and trade policy. On top of these troubles Germany facessome enormous domestic long-term problems: “Its workforce is shrinking, its energy sector needs to be
remade, and its public infrastructure has gone too long without improvement” (Tooze, 2012: 23). But there
are other fault lines underlying Germany’s economic model (see ibid: 24-6):
Germany is enjoying a huge trade surplus, but in contrast to the 1950s and 1960s the country is investing
abroad rather than at home.
Even though the German population is rapidly aging, the government has underinvested in human capital.
Germany’s spending on primary and secondary education remains below the average for OECD countries;
Germany loaned far more to foreigners to buy German goods than it spent on the education of its own
children.
Germany’s birth rate is low – in 2009, only three other countries in the OECD had fewer babies per
woman.
Following Japan’s Fukushima nuclear disaster in 2011, Germany resolved to close all its nuclear plants by
2022. The government aims to cover 35 percent of the country’s energy needs with renewable energy by
2020. This energy transformation will likely end up costing over 200 billion euro.
According to OECD surveys income inequality in Germany has risen twice as rapidly as the OECDaverage.
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Political scientist Henrik Enderlein added to this list deficiencies of “reforming eagerness”(Reformfreudigkeit) concerning especially digitalization or services (“Dampf machen”, in: Süddeutsche
Zeitung, 23 April 2016).
As Moravcsik believes, the best way for Germany to surmount these problems would be a bold strategy for
growth – for Germany and the rest of Europe as well. This would imply to “treat austerity not as apermanent economic policy but as a form of shock therapy”. In order to come up to its responsibility as
Europe’s present-day “hegemonic” power Germany should aim to leave future generations “not only withfewer liabilities but also with the makings of a better world” (ibid: 30). But there are other proposals andideas. Martin Schulz for example, social democratic candidate for the position of chancellor in theparliamentary elections in September 2017, has announced to correct “errors” of Chancellor Schröder’sAgenda 2010 (“Die Agenda 2010 im Check”, in: Süddeutsche Zeitung, 1 March 2017). Trump and his
advisers, on the other hand, ask of the German government to stop its alleged “reduction in wage levels”
and its “monetary dumping” (Uwe Jean Heuser, “Falsche Feinde”, in: Die Zeit, 16 February 2017). Of
course, both proposals met with harsh criticism. So at the moment there are many ideas – but a reallyconvincing plan how to deal with all the pressing problems is still missing.

References:
Abelshauser, Werner, 2003: Kulturkampf. Der deutsche Weg in die Neue Wirtschaft und die amerikanische
Herausforderung, Berlin: Kulturverlag Kadmos.
Akten zur Auswärtigen Politik der Bundesrepublik Deutschland 1970 (AAPD), 2001: München: Oldenbourg
Verlag.
Bonse, Eric, 2015:‘Europa tickt deutsch‘ Blätter für deutsche und internationale Politik, Vol. 60, No. 3, 5-8.
Dyson, Kenneth, 2001: ‘The German Model Revisited: From Schmidt to Schröder’, German Politics, Vol. 10,
135-154.
Eichengreen, Barry, 2015: Hall of Mirrors. The Great Depression, the Great Recession, and the Uses – andMisuses – of History, Oxford/New York: Oxford University Press.
Giersch, Herbert/Karl-Heinz Paqué/Holger Schmieding, 1992: The Fading Miracle. Four Decades of Market
Economy in Germany, Cambridge/New York: Cambridge University Press.
Hall, Peter A./David Soskice (eds.), 2001: Varieties of Capitalism. The Institutional Foundations of Comparative
Advantage, Oxford/New York: Oxford University Press.
Krotz, Ulrich/ Joachim Schild, 2013: Shaping Europe. France, Germany, and Embedded Bilateralism from the
Elysée Treaty to Twenty-First Century Politics, Oxford/New York: Oxford University Press.
Moravcsik, Andrew, 2012: ‘Europe after the Crisis. How to Sustain a Common Currency’, Foreign Affairs, Vol.
91, No. 3, 54-68.
Nawrat, Sebastian, 2012: Agenda 2010 – ein Überraschungscoup? , J. H. W. Dietz Nachf.: Bonn.
Reisenbichler, Alexander/ Kimberly J. Morgan, 2013: ‘How Germany Won the Euro Crisis. And Why Its Gains
Could Be Fleeting’, Foreign Affairs Snapshot, June 20.
Rödder, Andreas, 2013:‚‘“ Modell Deutschland”1950-2011. Konjunkturen einer bundesdeutschen
Ordnungsvorstellung‘, in: Tilman Mayer/Karl-Heinz Paqué/Andreas H. Apelt, Modell Deutschland, Berlin:
Duncker & Humblot, 39-51.
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Streeck, Wolfgang, 2009: Re-Forming Capitalism. Institutional Change in the German Political Economy,
Oxford/New York: Oxford University Press.
Taylor, Frederick, 2013: The Downfall of Money. Germany’s Hyperinflation and the Destruction of the Middle
Class, New York: Bloomsbury.
Tooze, Adam, 2012: Germany’s Unsustainable Growth. Austerity now, Stagnation Later, in: Foreign Affairs,Vol. 91, No. 5, p. 23-30.
Waigel, Theo/Manfred Schell, 1994: Tage, die die Welt veränderten. Vom Mauerfall zum Kaukasus. Die
deutsche Währungsunion, Bruckmann: München.

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No.2&3 (March, 2017)EUSI Tokyo International Conference (EU Economics Project)“Responding to Challenges for the Euro-zone: Resilience of Europe and
New Perspectives of the EU Studies”
Venue: Sendagaya Campus, Tsuda College

Day One 8th March, 2015
Preconference Seminars :Special Lectures and Academic Meeting

Day Two 9th March, 2015
Plenary Session“Responding to Challenges for the Euro-zone:＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊＊
Lecture Series “Thinking about Economics: On EU Studies”
EUSI Tokyo Economics Unit & Tsuda College FD Support Seminar
23rd February, 2016

Venue: Kodaira Campus, Tsuda College

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No.2&3 (March, 2017)EUSI Tokyo International Conference (EU Economics Project)
Programme
8th & 9th March, 2015 at Tsuda College, Sendagaya Campus“Responding to Challenges for the Euro--zone: Resilience of Europe and
New Perspectives of the EU Studies”
8th March, 2015㻌㻌 Day One
Preconference Seminars :Special Lectures and Academic Meeting
Moderator: Takamoto Sugisaki
Registration
Opening Remarks
Takamoto Sugisaki, Professor Tsuda College, EUSI Tokyo,
Welcome Speech
Kyoji Kawasaki, Former Director, EUSI Tokyo, Professor, Hitotsubashi University
Special Lecture"Richard Nikolaus Eijiro Graf Coudenhove--Kalergi and the Pan--Eu
uropa Movement" (Tentative)
Hidenori Tozawa
Professor, Tohoku University, School of Law
Special Lecture"Asia--Pacific View Point on the Euro and Globbal Monetary System"
Toru Iwami
Emeritus Professor, Tokyo University, School of Economics"EUSI Tokyo Activities" by Satoshi Fujikawa, Secretary General of EUSI Tokyo
Meeting for the Conference and Publication by Takamoto Sugisaki

㻌

9th March, 2015
Day Two: Plenary Session “Responding to Challenges for the Euro-zone:
Resilience of Europe and New Perspectives of the EU Studies”
Venue: Sendagaya Campus,, Tsuda College
Moderator: Rene Duignan (Delegation of the European Union to Japan)

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No.2&3 (March, 2017)

Takamoto Sugisaki, Professor Tsuda College/ EUSI Tokyo

Welcome SpeechMari Kunieda, President, Professor,Tsuda College
Opening Address
Viorel ISTICIOAIA-BUDURA
Ambassador, European Union Delegation of the European Commission to Japan
Keynote Speech
Takamoto Sugisaki, Professor Tsuda College, EUSI Tokyo,<Opening Lecture>“Financial Dimensions in History: Europe's Crisis in Historical Perspective"
Youssef Cassis
Professor of Economic History, Joint Chair Department of History and Civilisation
Robert Schuman Centre for Advanced Studies, 䠡䠱䠥

Session 1

Session 1 New Challenges for the Euro--zone Today(Chair: Marie-Bernadette Andreosso-O'Callaghan)“Update on European Economic Situation”
Zsolt Darvas
Senior Fellow, Bruegel - Brussels European and Global Economic Laboratory
DiscussantKentaro Kawasaki, Associate Professor, Toyo University“Reviewing the Situation in Greece: The Greek Debt Crisis and its Aftermath”
Panos Tsakloglou
Professor, Department of International and European Economic Studies (DIEES)
Athens University of Economics and Business
DiscussantSara Konoe, Associate Professor, Kansai University

Session 2 Varieties of Economies and Their Resilience:(Chair: Panos Tsakloglou)

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No.2&3 (March, 2017)“Financial Crisis and Recovery in Ireland”
Marie-Bernadette Andreosso-O'Callaghan
Professor Jean Monnet Chair of Economics at the University of Limerick, Ireland
Discussant: Rene Duignan (Delegation of the European Union to Japan)“The German Case after 2007--08 International Financial Crisis”
Werner Bührer
Professor,Technische Universität München, TUM School of Education
Discussant:Ryosuke Amiya-Nakada, Professor, Tsuda College
Session 3 Round Table “Social Cohesion and its Resilience in Europe:
Economic, Political and Social Dimensions ”(Chair: Takamoto Sugisaki)
ProposalHenk Overbeek
Emeritus Professor of International Relations
Department of Political Science and Public Administration
Academic Director, VU-Renmin Minor in Contemporary China Studies,
VU University Amsterdam
Comment

Zsolt Darvas

Q&A Discussion
Discussants: Ryosuke Amiya-Nakada
Marie-Bernadette Andreosso-O'Callaghan
Werner Bührer
Youssef Cassis
Zsolt Darvas
Rene Duignan
Sara Konoe
Henk Overbeek
Panos Tsakloglou
Hidenori Tozawa, Professor, Tohoku University

Closing Remarks
Rene Duignan
Ryosuke Amiya-Nakada
Takamoto Sugisaki,

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Lecture Series “Thinking about Economics: On EU Studies”
EUSI Tokyo Economics Unit & Tsuda College FD Support Seminar
15th January, 2016,‘E.F. Schumacher’s Critique of Modern Economics and His Idea of Meta-Economics’
Nagamitsu Miura (Emeritus Professor, Tsuda College)
23rd February, 2016
‘The Euro-Crisis and the Struggle in Greece’
Soko Tanaka (Emeritus Prof. Tohoku University)
25th February, 2016
‘Money in the Modern Capitalism’
Katsuhito Iwai (Visiting Prof. ICU, Emeritus Prof. Tohoku University
26th February, 2016
‘Prospects on the Introduction of Euro into the New EU Entrants’
Youji Koyama (Emeritus Prof. Niigata University)102Review of EU Asia Pacific Studies (REAPS)
No.2&3 (March,2017)EUSI Tokyo