Author | Shao Yu Chief Economist and Assistant to the President of Orient Securities, Director of China Chief Economist Forum; Chen Dafei Is the head of the postdoctoral workstation of Orient Securities and the chief researcher of wealth management headquarters
Source | China Forex, No. 17, 2022
Write the words on the front
My research interests are overseas macro and multi-asset allocation, and for nearly a year and a half, I have focused on the United States, and the Fed is just a "gripper". Europe has also written several topics intermittently, but not enough focus and systematization. After the Fed's manuscript is sorted out, it is planned to write about Europe with the European Central Bank and the euro as the starting point. Its complexity is fascinating.
In the process of studying the history of international currency, I have always believed that the gold standard is still an important reference for thinking about international monetary issues. The euro's super-sovereignty has some similarities with gold, but the mechanisms of currency issuance and creation are obviously different, and it would be interesting to study it in comparison. The euro was born in 1999 and was fully circulated in 2002. Over the past 20 years, Europe's overall performance has been lackluster due to factors such as imperfect institutions and political considerations. In the next 20 years, if the eurozone does not advance, it will retreat!
After 20 years, due to the continued impact of the Russian-Ukrainian conflict, the exchange rate of the euro against the US dollar fell below the parity relationship again on July 13, 2022. Short euro orders are still accumulating. To make matters worse, the ECB has had to tighten monetary policy under high inflationary pressures, casting a haze over Europe's economic outlook. Unlike the European debt crisis, Germany, as the "locomotive", happens to be at the center of the energy crisis triggered by this geopolitical conflict, and the deterioration of terms of trade is likely to reverse its long-maintained trade surplus.
Can the ECB save the euro from danger again? How will a post-Merkel Germany handle the conflict of interests between Germany and the eurozone? Can the pan-Europeanists seize the moment of peril to deepen european integration reforms, or can nationalists unleash a new wave of anti-integration? On the occasion of the 20th anniversary of the full circulation of the euro, looking back at the birth of the euro and its 20 years of practice in the process of post-war European integration has important enlightenment for Asian integration.
The history of the euro
Since ancient times, Europe has had the genes of a unified currency. In the 1st century AD, from ancient Rome, through Lutetia Parisiorum, and finally to Londinium, that is, from today's Rome, through Paris, and finally to London, all along the way used the same coin, that is, the ancient Roman penny (denarius), which facilitated the circulation of people, money and goods. Political alliances under the roman empire were the political guarantee for the unification of money. "The skin will not exist, the hair will be attached", the ancient Roman penny disappeared with the fall of the Roman Empire, the European continent immediately fell into a state of disintegration, the same journey will face endless currency exchange and calculation, there are hundreds of coins in Germany alone, until the unification of Germany in 1871, the currency was unified. Money has always been a symbol of sovereignty and power, a product of politics.
About 2000 years later, a supra-sovereign currency, the euro, emerged on the continent, and a cross-country monetary area, the euro area, with member states ceding the power to set monetary policy to the European Central Bank (ECB). Unlike the ancient Roman period, this monetary union did not have a political union as a guarantee, but instead was used as a "glue" to promote European integration. So, from the day the idea of monetary union was conceived, skepticism has been heard. In a government statement issued on 6 November 1991, Helmut Kohl, then Chancellor of the Federal Republic of Germany, stressed that political union was an indispensable condition for economic and monetary union, which would otherwise be difficult to maintain. In a letter congratulating Otamr Issing on his election to the inaugural ECB committee, Nobel laureate Friedman predicted that the monetary union would collapse within five years. Mervyn King, former governor of the Bank of England, in The End of Financial Alchemy, sees the European debt crisis as the result of flaws in the euro system. Gu Chaoming (Richard Koo, 2008; 2015; 2018) has repeatedly denounced the eurozone's institutions in several monographs, arguing that uniform monetary policy and an inherently fixed exchange-rate system have left member states less resilient in the face of asymmetric effects from exogenous shocks, leading to internal and external imbalances and a difficult post-crisis recovery process.
The background to the birth of the euro
A quote from the British political economist Susan Strange during the Cold War helps to understand the shift from dependency to competition between the euro and the dollar, although she was talking about the relationship between the Deutsche Mark and the dollar:
We can imagine a future scenario in which the Federal Republic of Germany is occupied by the mighty Soviet Red Army, while the "fortress of America" across the Atlantic remains intact. The reverse is not the case: if the United States were invaded or the North American continent was reduced to rubble by nuclear weapons, the Federal Republic of Germany would be destroyed. As long as this fundamental political asymmetry persists, the Deutsche Mark will not be the center of the international monetary system.
In an opinion, the Deutsche Bundesbank made it clear: "Joining the monetary union will have a huge economic impact and must be carefully considered when making decisions." But the choice of participating countries is ultimately a political decision", which sets the stage for future economic challenges for the eurozone.
Since the euro is a political choice, understanding the birth of the euro is also an indispensable dimension of politics. Since ancient times, geopolitical disputes have led to constant wars on the European continent. After entering the 21st century, the two world wars have hit Europe hard.
The Treaty of Versailles, signed after World War I, became a tool for the victorious powers to deprive the defeated countries of their victories, with the result of a more divided Europe and a more unbalanced economy. Keynes, who was a member of the British delegation to the Paris Peace Conference at the time, was indignant and wrote the book "The Economic Consequences of Peace", in which he asserted in the preface to the French edition that the victorious congress "lost everything and gained nothing" and claimed that the victorious powers were "too concerned with political objectives, with the acquisition of an unrealistic so-called security, and neglecting economic unity". Keynes's proposal in the book is to strengthen the "wholeness" of Europe. However, These claims of Keynes were not taken seriously. Unfortunately, all this was described by Keynes as Europe's economy plummeted, and countries implemented beggar-thy-neighbor economic policies that eventually led to the Great Depression of 1929-1933. At this time, the defeated countries had accumulated deep resentment against the victorious countries, the economic depression led to the rapid rise of fascist forces, Hitler in Germany and Mussolini in Italy successively took power and began to implement plans of revenge. After 20 years, the most devastating World War II broke out.
Before the end of the war, how to build a new post-war order has been put on the agenda. After the end of World War II, the United States changed its previous "isolationist" policy and took the lead in initiating the establishment of multilateral organizations such as the United Nations, the World Bank and the International Monetary Fund (the "Troika") to strengthen dialogue and cooperation between countries. But at the same time, the relationship between Britain, the United States, and the Soviet Union also began to change significantly. Stalin's "Victory of the Soviets" in February 1946, Churchill's "Iron Curtain Address" in the United States in March 1946, and Truman's "Trumanism" speech on March 12, 1947, kicked off the ideological "Cold War." It was in this context that the United States formulated the Marshall Plan, and Europe initiated European integration to enhance its integrated defense capabilities.
In view of the political and economic considerations, Marshall, who was the US secretary of state at the time, formulated the European revival plan, the Marshall Plan. Europe was the main battlefield of World War II, and the war dealt a devastating blow to the economies of European countries. Compared to before the war, total industrial output in France and the Federal Republic of Germany fell by 75 percent. In the eyes of the United States, the global economy is interdependent, and the recovery of the European economy is conducive to the exports of American companies. At the same time, the recovery of the European economy was able to resist the infiltration of communist ideology. Because in the eyes of the American decision-makers, poverty and war are the soil for the growth and spread of communist ideology. Therefore, in formulating the Marshall Plan, the United States did not exclude the Soviet Union and the countries of Eastern Europe. The precondition for U.S. assistance to Europe is for Western European countries to strengthen cooperation, and internal trade and payments must be gradually liberalized. To this end, western European countries other than Spain set up the Committee of European Economic Cooperation (CEEC) in 1947 to be responsible for the implementation of the Marshall Plan, which was the first step in European economic integration.
After World War II, the United States, Britain, and France were in charge of West Germany. France controlled the coal-rich Saar region, while Britain and the United States controlled the Ruhr heavy industry. France intended to bring the Ruhr-Saar region under its jurisdiction, serving the French economy on the one hand, and containing Germany on the other. Thus, in 1949, France agreed to merge with the Anglo-American occupation zones to form the Federal Republic of Germany. However, in the Federal Republic of Germany, France had no say. In the spirit of "I have no benefit, no one is good", the French politician Jean Monnet proposed the creation of a super-sovereign body to regulate coal and steel production in France and the Federal Republic of Germany. French Foreign Minister Schuman R. accepted Monnet's proposal and in 1950 proposed an open plan that would place coal and steel production under the management of high-level joint ventures, with other European countries also participating, and the flow of coal and steel between member states would be tariff-free, which was the "Schumann Plan". On this basis, on April 18, 1951, France, the Federal Republic of Germany and other six countries signed the European Coal and Steel Community in Paris, realizing the free trade of coal and steel products in Western Europe, which is the first step in the free circulation of production factors.
In 1955, the heads of state of the six member states of the Coal and Steel Community convened a second government meeting in Messina, Italy, and entrusted The Belgian Foreign Minister, Henri Spark, with the next plan, which was the prototype of the Treaty of Rome, which entered into force on January 1, 1958. The Treaty of Rome decided to establish two institutions, the European Atomic Energy Community (Euratom) and the European Economic Community (EEC), whose mandate was to extend the scope of free trade from coal and steel products to all goods, services and factors of production, establishing the goal of "convergence of economic policies" and establishing a monetary committee to oversee the economic and financial policies of member states. A few years later, proposals for a unified currency began to be proposed. The European Summit in The Hague in December 1969 agreed to draw up a phased plan the following year to create an economic and monetary union.
Europe's plan to establish a monetary union was closely related to the Bretton Woods system established after World War II, which made the dollar almost as important as gold, the dollar at the center of the system, other countries' currencies pegged to the dollar, and the implementation of an adjustable fixed exchange rate system. Countries have achieved free conversion of bilateral current accounts with the United States, but countries within Europe have not achieved free conversion of currencies between themselves, and the trade deficit can only be settled in us dollars or gold. In this way, the basis for trade between European countries is the accumulation of dollars and gold. However, before the 1970s, the United States maintained a long-term current account surplus, resulting in insufficient supply of dollars and hindering trade between Western European countries. The countries of Western Europe recognize that only joint action and the establishment of a monetary compensation mechanism can overcome the predicament. The Netherlands, Belgium and Luxembourg took the first steps by establishing a three-state multilateral clearing system in 1947. In 1949, all European Economic Cooperation member states joined the system. In 1950, the European Payments Union was established, and the surpluses and deficits between member countries were netted and multilaterally hedged. The system lasted until the late 1950s, when it was replaced by the European Monetary Agreement.
After the establishment of the European Community, the member states demanded that they go further in the work of currency coordination, implement the free conversion of the currency, and maintain the exchange rate in a stable state of narrow fluctuations, in addition to the establishment of a European reserve currency.
Beginning in the mid-to-late 1960s, the drawbacks of the Bretton Woods system began to appear, and the "golden crisis" triggered sharp fluctuations in exchange rates. In December 1967, Italy, Germany and other members of the gold treasury withdrew and stopped intervening in the London gold market. The United States still announced a commitment to maintain 1 ounce of gold against $35, but this has not stabilized market sentiment, more and more countries are demanding to convert dollars into gold, and the us gold stock is getting smaller and smaller every day. The rise in the price of the gold market has created depreciation pressure on the pound and franc. The pound began to depreciate as early as the end of 1967. France fell into a payments crisis in 1968, and the outflow of speculative capital increased the depreciation pressure of the franc, but the decision-makers, from a political point of view, still insisted on defending the franc, and finally collapsed in 1969, the franc depreciated by 11.1%. At the same time, the Deutsche Mark passively appreciated by 10%, which had a negative impact on German agricultural exports.
Danger is change. The shortcomings of the dollar-dominated Bretton Woods system and the imbalance in Europe's internal economic development have made Western European countries want to strengthen internal cohesion and jointly resist external risks.
A plan of currency union with twists and turns
1971 was a turning point, before the dollar-dominated Bretton Woods system worked well (although there were some problems since the 1960s), exchange rates between countries in the eurozone remained relatively stable, and the need for a unified currency was not urgent. But after that, the Bretton Woods system began to disintegrate (completely collapsed in 1973), the us dollar replaced gold as an "anchor" to the exchange rates of various countries, and exchange rate fluctuations between European countries began to increase. At the same time, with the recovery of the economy, European countries feel the need to unify their currencies and further promote European integration. The United States also initially expressed support, arguing that it could strengthen Europe's ability to resist the Soviet Union. Within Europe, the economic prominence of the Federal Republic of Germany has left Britain and France restless (especially France), who want to use European integration to restrain Germany, which is France's "primary political goal" in promoting European integration.
According to the "ternary paradox", exchange rate stability, monetary policy independence and free capital flow can only choose one or the other. Among them, capital control is contrary to the goal of European integration, so the free flow of capital is a must, so it can only choose between exchange rate stability and monetary policy independence, either a floating exchange rate and a combination of monetary policy independence, or a combination of fixed exchange rate and non-independent monetary policy. Considering the history of European countries habitually adopting beggar-thy-neighbor competitive devaluation policies in the face of external shocks, floating exchange rates are not conducive to strengthening policy coordination within Europe, so in order to stabilize exchange rates and maintain the free flow of capital, the independence of monetary policy can only be sacrificed. There are two options for stabilizing the exchange rate, one is to adopt the exchange rate system, the other is to create a common currency, and the choice of political compromise is the latter, because at that time, the Deutsche Mark was the most qualified to act as the "anchor" of the exchange rate, but considering the history of World War I and World War II, the United States, France, and Britain would not approve of it (although the United Kingdom was not a member of the eurozone, but participated in the preparations). The Hague Conference formally made the establishment of an economic and monetary union the goal of the European Community, but the implementation of this plan was met with resistance.
France and Germany disagree on the order of economic and monetary integration. The central idea of the Federal Republic of Germany's proposal was that monetary integration should be a natural consequence of economic integration and that a fixed exchange rate system could only be based on policy coordination. France disagrees, believing that the top priority is to stabilize the exchange rate, and that currency integration and economic integration are not progressive, but parallel. Behind the difference in views is the entanglement of interests. France wants to stabilize its exchange rate, establish an exchange rate system that is not dependent on the US dollar, and protect its agriculture. The reason why Germany emphasizes the importance of economic policy coordination is to reduce the burden of monetary aid, because Germany has become the locomotive of the entire European economy.
In order to resolve the contradictions between Germany and France, in March 1970, the Council of Ministers of the European Community entrusted Werner P., Prime Minister and Chancellor of the Exchequer of Luxembourg, with the task of drafting a compromise plan, the Werner Plan, which was the first "10-year plan" for the integration of European currencies: free conversion of the current account, free movement of capital, elimination of exchange rate fluctuations, fixed exchange rate parity (and unadjustible parity), and emphasized the transfer of economic decision-making power to the European Community. Expand the powers of the European Parliament.
During the collapse of the Bretton Woods system, the European Community introduced a snake-shaped floating exchange rate system. On the one hand, under pressure from the United States, the G10 signed the Smithsonian Agreement, which expanded the volatility of its currency against the dollar from 1% to 2.25%. In this way, the fluctuations in the bilateral exchange rates of European sovereign currencies are amplified. This is extremely detrimental to the common agricultural policy of the European Community. To this end, in April 1972, the six european communities signed the "Basel Agreement", decided to implement a collective joint floating exchange rate system externally, and implement a pegged exchange rate system internally, controlling the volatility of the exchange rate of member countries' currencies within the range of 1.125%. This is the European version of the "two-track system of exchange rates".
After the collapse of the Bretton Woods system, the Deutsche Mark gradually replaced the role of the US dollar and became the anchor of the currencies of the EUROPEAN Community members. When the first oil crisis erupted in 1973, prices and unemployment in Western European countries, which were heavily dependent on oil imports from the Middle East, began to rise, and imbalances within the European Community and in the global economy were exacerbated. Countries have grown irreconcilablely divided over how to deal with imbalances. The Federal Republic of Germany controlled prices by suppressing demand, which was criticized by the United States. France suppressed the devaluation of the franc by raising interest rates and tightening capital controls, but because the results were not obvious, it chose to withdraw from the serpentine floating exchange rate system in January 1974 (before that, britain and Italy had already withdrawn), and the serpentine floating exchange rate system existed in name only.
In 1977, the dollar crisis broke out again, the mark passively appreciated by 26%, the pound and franc depreciated by nearly 20% of the German mark, and the exchange rate appreciation put a "tight curse" on the German economy. Schmidt, then Chancellor of the Federal Republic of Germany, was critical of the United States and the dollar and was eager to create a European currency independent of the dollar. The volatility of the franc also brought trouble to the development of French agriculture, and the then French president D'Estaine planned to take the steady Bundesbank and Mark's free rider and join forces with Germany to get rid of the hegemonic order of the dollar. The Copenhagen Summit in April 1978 formalized the goal of establishing a European monetary system. In July of the same year, the United Kingdom, the Federal Republic of Germany and France jointly issued the Bremen Declaration, announcing the creation of the European monetary unit, Eju, with a value established by the weighted average of 12 currencies. The Declaration also provides for a stricter exchange rate adjustment mechanism, whereby fluctuations in bilateral exchange rates must be implemented with the consent of the other party.
The Bremen Declaration established the basic principles of the European Monetary System, but the Federal Republic of Germany and France still had major differences on the exchange rate. France advocates the use of a basket system, with Egui as the core, and any deviation must be intervened immediately, which actually pushes the responsibility for intervention to the Federal Republic of Germany, as long as the deutsche mark appreciates more than the preset range, the Bundesbank needs to sell the mark in the foreign exchange market, which will bring inflationary pressure to the domestic economy. Therefore, Germany advocates continuing to refer to the "lattice system" adopted by the serpentine floating system to establish a center for the bilateral exchange rate, and the currencies of various countries still take Ethiopia as the core, forming a "dual core" interest rate mechanism, which reduces the burden of German intervention mark. After the bargaining, the Brussels Conference in 1978 reached a compromise: a dual exchange rate intervention system combining a basket system and a lattice system,[2] and a resolution establishing the European Monetary System, which had been in force since 1 January 1979, with the goal of stabilizing the exchange rate, low inflation and promoting the stability of the international monetary system.
Prior to the creation of the euro and the European Central Bank, fixed exchange rates, independent monetary policy and capital controls were a combination of policies of EC member states, but the drawbacks of capital controls were becoming increasingly prominent. Germany has maintained a trade surplus for a long time, resulting in the continuous appreciation of the mark against the US dollar, and other countries have passively followed the appreciation of the mark in order to maintain the stability of the exchange rate, bringing tightening pressure to the domestic economy. France and Italy are unhappy with the current monetary system and have shifted the blame to Germany. They believed that the European Community had become a "mark zone", that Mark had gained hegemony, and that the Bundesbank had become the central bank of the European Community, so they advocated the establishment of the European Central Bank. The Federal Republic of Germany was well aware that this asymmetrical monetary system would be unsustainable and feared that if it did not agree, other countries would follow the old path of protectionism. More importantly, Germany remains wary of the two world wars and hopes to dispel the wariness of other countries. After all this, the Federal Republic of Germany finally agreed to the proposal to build a European Monetary Union, and the Drorder Report issued in April 1989 formally brought the European Economic and Monetary Union into the implementation phase, but the Drore Report still did not explicitly propose the creation of a unified European currency, only the establishment of "unchangeable fixed exchange rate parity". After another twist and turn, such as the 1992 Battle of the Pound Sterling and the 1992-1993 Battle of the Franc, the idea of a unified currency was finally formally proposed in the Treaty of Maastricht in December 1991. The Masjourn provides for the establishment of the European Monetary and Economic Union by 1999 at the latest and gives specific operational steps.
At this point, the European Monetary Union (i.e. the eurozone) has officially entered the preparatory stage.
Phase of implementation of the Monetary Union Program
Crisis is the driving force of reform, but peace and development are the guarantee for the smooth implementation of reform. In 1991, the Cold War ended with the collapse of the Soviet Union, and the preconditions for U.S. support for Europe against the Soviet Union were no longer in place. After the European Monetary and Economic Union decided to create the euro, the United States began to worry that the euro would threaten the status of the dollar, but in the early 1990s, the United States was still skeptical about the smooth implementation of the European Monetary Union plan, and Greenspan, then chairman of the Federal Reserve, did not even think that the European Economic and Monetary Union would be launched. His reasoning was that the powers of the European Central Bank and the Central Bank of the Federal Republic of Germany were in conflict with each other and did not have sufficient authority to govern monetary policy throughout Europe.[3] Nobel laureate in economics Milton Friedman (1997) argues that the euro is the product of political compromise, premised on the sacrifice of economic interests, in which case the process of political integration will also be hindered. Harvard Professor Feldstein M. (1997) argued that the negative impact of a single currency on unemployment and inflation would outweigh the positive effects of free trade and the free movement of capital, that a unified monetary policy contradicted an independent fiscal policy, and that France's desire to be on an equal footing with Germany was contradictory to Germany's goal of gaining European hegemony. Hindsight, the eurozone was set up more smoothly than the United States had anticipated, which is closely related to the "three-step" plan set out in the Delore Report and the relevant requirements of the Maastricht Treaty.
The Delore Report proposes a three-step vision of the construction of the European Economic and Monetary Union, and the European Membership Meeting in June of the same year formally proposes a concrete plan, specifically: the first phase, on 1 July 1990, to remove all obstacles to the flow of funds among member States; The second phase was marked by the establishment of the European Monetary Authority on 1 January 1994; The third phase began on 1 January 1999, with the creation of the euro, in which countries transferred responsibility for setting monetary policy to the European Central Bank, which was also considered the starting point of monetary union.
Differences between European countries in terms of inflation, fiscal discipline, and price elasticity in the markets of goods and services will hinder the smooth implementation of the monetary union. For example, if there is a large difference in the inflation rate, there will be a difference in the real exchange rate under the condition of a constant nominal exchange rate, which in turn will bring about a difference in the competitiveness of the product. If a country maintains low inflation for a long time, its exports will be more competitive, leading to imbalances in the balance of payments within the eurozone. Thus, the Maastricht Treaty sets out the so-called "convergence criteria", and only countries that meet these conditions are eligible to join the eurozone. In summary, these conditions include: low inflation levels; sound public finances (deficit rate less than 3%, government debt leverage ratio less than 60%); Have been in the fixed exchange rate system for at least two years without significant exchange rate fluctuations; Long-term nominal interest rates align with the three (or fewer) countries with the lowest inflation rates.
From 1990 to 1999, the above-mentioned convergence criteria were gradually fulfilled. On January 1, 1999, the euro was officially born, but it also underwent a transition period in replacing sovereign currencies in monetary functions. On 1 January 2002, euro coins and banknotes began to circulate, and in March 2002 the previous sovereign currency was completely replaced.
There are three leaps in European integration: "The first leap" is that in April 1951, the six European countries prepared to formally sign the Treaty of Paris, establishing the European Coal and Steel Community (ECSC), and for the first time establishing a dialogue mechanism for political and economic integration; The "Second Leap Forward" was the second meeting of governments held in 1955 by the six member states of the Coal and Steel Community to entrust Belgian Foreign Minister Henri Spark with the next step, which was the prototype of the Treaty of Rome, which officially entered into force on January 1, 1958. The Treaty of Rome decided to establish two institutions, the European Atomic Energy Community (Euratom) and the European Economic Community (EEC), whose mandate was to extend the scope of free trade from coal and steel products to all goods, services and factors of production, establishing the goal of "convergence of economic policies" and establishing a monetary committee to oversee the economic and financial policies of the member states. The "Third Leap Forward" was the Hague Conference in 1969, which formally made the establishment of an economic and monetary union the goal of the European Community. The 1991 Maastricht Treaty formally began the transition to the eurozone, establishing "convergence criteria" that stipulate that only countries that meet these conditions are eligible to join the eurozone. In summary, these conditions include: low inflation levels; sound public finances (deficit rate less than 3%, government debt leverage ratio less than 60%); Have been in the fixed exchange rate system for at least two years without significant exchange rate fluctuations; Long-term nominal interest rates are on par with the 3 countries with the lowest inflation rates.
Duisenberg, the first president of the European Central Bank, said at a press conference the day before the euro was officially launched: "While money is important as a medium of exchange, a unit of denomination, and a store of value, its role is far more important than that." A country's currency is also part of the identity of a country's people. It reflects the common aspirations of people now and in the future. The euro will become a symbol of european unity. "The mission of the euro is to accelerate and deepen European integration and seek more autonomy in foreign policy for member states. Although the original intention of the euro was not to be a competitor to the dollar, this is a natural result. As Eichengreen (2011) put it: "Fundamentally, the euro is a political project". In a relatively short period of time alone, the euro has gained a large market share in terms of foreign exchange transactions, international reserves and units of account, becoming the second largest international currency after the US dollar and the only international currency with the strength to compete with the US dollar.
The success or failure of a system derived from political compromise will depend on the force that frames its political rules, as well as the will of the countries that dominate them. The European debt crisis has once again focused the world's attention on the future of the euro, but the ECB's determination to uphold the euro and the eurozone has allowed the euro to survive the difficulties.
The birth of the euro has changed the international monetary system and even the international political and economic pattern. The dollar hegemony began to decline, and the world shifted toward a multipolar, competitive, and relatively balanced monetary system. After the European debt crisis, will the euro be reborn in nirvana, and how can it be reborn in nirvana? This is something we are more concerned about. For we can see the eurosystem as a microcosm of the global monetary system and as a possible path for the evolution of the international monetary system in the future. In this system, some kind of super-sovereign currency becomes the only world currency. This is also the ideal state of the famous financial historian Kindleberg, who once said: "Money is like language, as long as one is enough". But this may only be the optimal equilibrium in theoretical or conceptual models, and once the political attributes of money and the boundaries of power are taken into account, the most equilibrium of global unified money may be difficult to achieve. However, we should not deny the possibility of partial success of supra-sovereign currencies.
The euro has been in circulation for 20 years: lackluster
From the time of the euro's birth, imbalances have plagued the eurozone. Germany, as the core country of the eurozone, has instead had a "siphon effect" on the periphery.
The story begins with the bursting of the Internet (IT) bubble in 2000. From early 1998 to March 2000, the German tech stock index soared 8.6 times, well above the NASDAQ Composite Index by 2 times and the NASDAQ Computer Index by 3.3 times. After the bubble burst, the German tech index shrank by 97 percent, even outpacing the Dow Jones' decline during the Great Depression (89 percent).
The bursting of the IT bubble changed the balance of payments in all sectors of Germany: the household and non-financial corporate sectors entered a period of deleveraging and balance sheet recession that lasted until the 2008 financial crisis. The government deficit rate continued to rise until 2003 and was largely back in balance by 2008. The expansion of capital outflows continued until the end of 2006.
Germany's gross domestic product (GDP) growth rate declined from the beginning of 2000 to negative growth in the second quarter of 2002. Then the recovery began. If the economy were closed, the Recession in Germany would have continued until the end of 2005, when domestic demand had contributed negatively to GDP growth for 75 per cent of the time from the third quarter of 2001 to the third quarter of 2005. Therefore, the only explanation for the German economy from contraction to expansion is the pull of external demand. From 2000 to 2008, the contribution of net exports to German GDP was negative only in 2003.
The widening of Germany's trade surplus by region is a major factor in the increase in Germany's net exports before the 2008 financial crisis. From 2000 to the second quarter of 2008, the eurozone's quarterly trade surplus with Germany averaged $15 billion, with an average contribution of 37 percent.
The widening of the trade surplus corresponds to a decline in Germany's domestic consumption and investment rates. After the IT bubble burst in 2000, Germany entered a balance sheet recession zone. While the eurozone's peripheral countries have suffered less negative impact, Germany's recession forced the ECB to cut interest rates. From April 2000 to June 2003, the main refinancing rate was reduced from 4.75% to 2.5%. Even so, the German private sector continues to deleverage and aim for debt minimization, with continued net outflows of capital across borders.
In contrast, the rest of the eurozone presents the opposite balance sheet cycle. In the case of the non-financial corporate sector, for example, the surplus of non-financial firms in Germany continued to expand from the end of 2003 until its peak at the end of 2006, and non-financial firms in other countries of the eurozone began to leverage until the outbreak of the financial crisis in 2008. During this period, the leverage ratio of non-financial enterprises in Germany fell by 6 percentage points, and the leverage ratio of non-financial enterprises in the euro area (excluding Germany) increased by 12.3 percentage points. In the countries that followed the European debt crisis, the leverage ratio of non-financial companies in Ireland rose by 70 percentage points from 76% to 146%, Spain increased by 46 percentage points (from 83% to 129%), and Italy, Portugal and Greece increased by 19, 17 and 16 percentage points respectively.
This is the family sector. After the IT bubble, the German household sector entered a balance sheet recession cycle, the surplus ratio increased significantly, and the leverage ratio continued to decline. By the end of 2005, net financial investment as a share of GDP had risen from 2% in the early 2000s to 4%. It has further improved after the 2008 financial crisis and has increased to 6% by the end of 2019. Household leverage fell from 70 percent in the early 2000s to 60 percent on the eve of the financial crisis, and to 54 percent by the end of 2019. The household sector in other eurozone countries began to diverge from Germany in mid-2002, and the surplus ratio continued to decline, turning negative by the end of 2005, and the debt leverage ratio continued to increase. At the beginning of 2000, the leverage ratio of the household sector of the "European Pig Five" was lower than that of Germany, and by the end of 2010, all four countries except Italy had surpassed Germany, and it was in Ireland, Spain and Greece that there was a real estate bubble.
"Only one crisis can bring about real change." Greece's debt problems began to be exposed in 2009, and the European debt crisis broke out in full swing in 2010, highlighting the shortcomings of the eurozone system. On the one hand, the ECB has extremely few tools at its disposal than the Fed, and is more slow to act under the "inflation standard"; On the other hand, in May 2010, the eurozone realized the importance of fiscal synergy and decided to promote "Fiscal Consolidation", and in 2012 a Fiscal Compact was concluded to extend Germany's Debt Break mechanism to the entire eurozone. The treaty stipulates that in almost any case, eurozone governments should maintain fiscal balances, issue public debt with the consent of other countries, and punish those who violate the rules. Since then, the fiscal deficit rate of eurozone countries has been decreasing, and in 2018 it has fallen to less than -1%, and Greece, the initiator of the European debt crisis, even turned into a surplus in 2016.
Since the end of 2017, eurozone GDP growth has begun to slow, in part because of a significant decline in net exports, as a buffer, the government sector has expanded the intensity of counter-cyclical adjustment, the Size of the German government surplus has narrowed, and the deficit rate of other eurozone countries has increased. Due to the impact of the COVID-19 pandemic, external and domestic private sector demand has plummeted, and the European Commission's adoption of a 750 billion euro fiscal stimulus package has boosted market expectations for European economic recovery and opened up imagination for future fiscal and other integration prospects.
After the European debt crisis, after nearly 10 consecutive years of deleveraging, restructuring and rebalancing, national credit has achieved secondary convergence (see Figure 1), the balance sheet quality of the private non-financial sector in the euro area has improved significantly, household surpluses have continued, non-corporate balances of payments have been basically balanced, the balance sheet recession has eased, fiscal policy space has been significantly improved, and the balance of payments structure within the euro area has become more balanced - before 2008, the balance of payments situation in the euro area was generally balanced. But the internal structure is basically that Germany's surplus is offset by the deficits of the countries that occurred in the European debt crisis. After 2008, Germany's total surplus has decreased slightly, and more importantly, the source of the surplus has shifted from the eurozone to the United States. That is, intra-European rebalancing comes at the expense of global imbalances.
Figure 1 Secondary convergence of credit in eurozone countries: The spread between the "European Pig Five" and German government bonds
Source: EU, ECB, CEIC, Orient Securities Wealth Research
Europe was more lost than Japan after 2008 because of the eurozone's institutional inadequacies and the primacy of political considerations over the economy
In terms of horizontal comparison, among the three major economies of the United States, Europe and Japan, Europe's performance after 2007 has been lackluster, and Europe's loss is worse than Japan's. Comparing Japan's post-1991 economic performance (real GDP, real GDP per person in employment, real GDP per working hour) in japan after 1991 and the United States and Europe after 2007 shows that post-crisis Europe has had the slowest recovery (see figure 2). In addition to the inherent reasons for the aging of the population, the stagnation of technological progress and the backwardness of education, the academic community often attributes the gap in economic performance in the United States and Europe after 2007 in part to the differences in the actions of the Federal Reserve and the European Central Bank, such as in 2008, when the Federal Reserve and the Bank of England were cutting interest rates, while the European Central Bank raised interest rates in order to resist inflation; Another example is quantitative easing, which the European Central Bank did not implement until 2015, when the Federal Reserve has started the process of monetary normalization and the US economy has basically recovered before the financial crisis. Ultimately, it is the eurozone's institutional inadequacies and the primacy of political considerations over the economy.
Figure 2 Comparison of real GDP indices of Japan, the United States and the European Union
Source: OECD, CEIC, Orient Securities Wealth Research
Note: Japan 'T+0' is 1991, and the UNITED States and the European Union are in 2007
For the single-currency plan to be effectively implemented, it is necessary not only to meet the so-called "convergence criteria", but also to require the transfer of funds from economically active countries to countries with economic downturns, including financial assistance in addition to market-oriented funds. Without full fiscal integration, the euro is incomplete. It is conceivable that in the United States, if the federal government does not have enough fiscal spending space, if there is no synergy between the Treasury Department and the Fed, the Fed's unconventional policies will not be well implemented. So, in 1998, as the euro was about to be launched, Gerhard Schroeder, then leader of germany's Social Democratic Party, proposed a moratorium because some countries had difficulty meeting the convergence criteria. He called the euro a "sick premature baby."
The rebalancing within the eurozone in the wake of the European debt crisis, achieved by suppressing domestic demand for debt, provoked nationalist sentiment against integration on the continent. The voice on the issue of debt disposal in Greece is basically in the hands of Germany and France, even including the head of state or core cabinet members. In The Adult in the Room, former Greek Finance Minister Yannis Varoufax reveals how "terrifying" the shackles imposed on Greece by the European Central Bank, the European Commission and others are. The indignation in Varoufax's heart can be easily felt: "No, it was not their iron fist that defeated us. We could have won. Unfortunately, the disunity of our ranks has become the most realistic enemy within us."
Not only in the periphery, but also in the two core countries of Germany and France, there is a strong centrifugal force. France has never lacked an anti-integrated mass base. In the 1992 referendum, the French population almost rejected the Maastricht Treaty and the European Single Currency Plan. France is now part of the "Southern States" due to prolonged economic fatigue, with nationalist sentiment raging in the wake of the European debt crisis, with Marina Le Pen, the leader of the right-wing National Front, in the final round of the 2017 French presidential election, losing to The 39-year-old Macron.
Macron ran as a pan-Europeanist. But voters supported Macron's campaign platform more than they did support Le Pen's brash nationalism. Macron, who has been successfully re-elected, is still adhering to the ideal of "democratic congress" and "reshaping Europe", but the centrifugal force in Europe at present may be stronger than when he first took office, and I am afraid that even Germany, the "central country", will be confused. Politically, after 2012, the alternative arspostasia, which developed as an anti-euro movement, enjoyed growing popular support. On trade, the German economy has been de-embedded with Europe, which will also affect its support for the EU. Germany, deeply troubled by geopolitical conflicts and energy crises, will not use its own strength to bail out peripheral countries. At present, Italy, which has been a fragile link since joining the eurozone, is likely to become a "spoiler" in the eurozone. The market is also raising expectations of a rate hike from the European Central Bank, and Interest rates on Italian government bonds are soaring. The ECB mainly holds government bonds from marginal countries such as Greece. After the first 20 years, Europe still lacks a strong and centralized fiscal institution. The ECB is hard to support.
At the beginning of the second 20 years, the eurozone has to deal with the legacy of the European debt crisis while dealing with new problems of geopolitical conflicts, inflation and global energy changes. In the future, the eurozone is likely to face either a retreat or a break through the bottleneck in integration and truly implement fiscal integration, rather than just staying on slogans. Either subtraction, as brexit did, introduce a forced exit mechanism for eurozone members to prevent a collapse as a whole. France remains the most active advocate of integration, but perhaps no longer has the ambitions of the last century. Germany has always been "in the heart of Cao Ying", and most of the leaders of the 21st century do not feel guilty about the war, especially the people.
Implications for Asian integration
Integration and differentiation are a pair of keywords in the economic and social development of the European continent after World War II. In the order of integration, political factors have always dominated, and the core countries expect to promote political synergy through economic and monetary integration, with a view to achieving the result of internal checks and balances and external balances.
The creation of the eurozone has always been considered a political act, but its proper functioning cannot be based on political will alone. The agreement requires member states to maintain the complete free flow of factors and products of production, which requires member states to converge on economic indicators such as prices, fiscal deficits, debt leverage, and long-term interest rates. However, it has been proved that integration has its own internal operating mechanisms, and that the supranational single currency cannot operate effectively in a system in which strong supranational administrative, legislative or financial institutions have long been absent. There are still many unfinished matters in European integration, including not only the coordination of fiscal policies, such as property taxes, payroll taxes, etc., but even social security, environmental protection and employment security will affect whether the eurozone can develop evenly, because any policy affecting consumption, savings and investment relations will be reflected in the balance of payments.
From the structure of value chain trade, there are three major global cycles: One is the American cycle with the United States as the core; The second is the Asian cycle with China as the core; The third is the European cycle with Germany at its core. The essence of globalization is the sum of the three regionalizations. Europe is at the forefront of regional integration, but, as mentioned earlier, perhaps too far ahead, has led Europe to experience a bubble of marginal countries and then a 10-year restructuring of sovereign debt over the past 20 years.
The process of Asian integration has also made great strides in both trade and capital flows. The share of intraregional trade has steadily increased, all within the framework of multilateral agreements. On January 1, 2022, the Regional Comprehensive Economic Partnership (RCEP) officially entered into force, marking the official operation of the world's most populous and economically and trade free trade area. Among them, the top five industries in the regional value chain trade are: electrical and machinery, crude oil and chemicals, metals, textiles and clothing, and means of transport. Among them, in the electrical and mechanical industry, RCEP contributes 35% of the world (24% of global value chain trade and 37% of RCEP). These five major industrial chains also contribute 50% of the greenfield investment projects in the region. Based on ASEAN's experience, the share of trade among RECP members will turn down. Trade will have a radiating effect on capital flows, thereby promoting cross-border direct investment in the region and further strengthening trade networks.
Compared with Europe, the process of Asian integration is slow, with neither the free circulation of all factors, nor a unified currency, nor a super-sovereign power institution. Perhaps that's why Asia has been a major contributor to global growth over the past 20 years and the most economically active region of the next 20 years. Asian integration is more in line with economic principles than In Europe, and it has not been forced forward by political factors, nor has it been stopped by political factors. This is more in line with Hayek's principle of "spontaneous order".
In 2001, during the APEC meeting in Shanghai, Robert Mundell, the "father of the euro", believed that in the next decade, the world would have three major currency areas: the euro area, the dollar area and the Asian dollar area. At that time, the idea of a eurozone was a reality, and Mundell's optimism was understandable. Looking back more than 20 years later, the euro has not only failed to become a strong competitor to the dollar, but also become a "stumbling block" to the European economy. Last time, faced with sovereign debt, ECB Former President Mario Draghi almost single-handedly saved the euro. This time, facing the problem of stagflation, whether the European Central Bank led by Lagarde can lead the European economy to break through the siege is still unknown. After Trump was elected president of the United States in 2016, the construction of the China-Japan-South Korea Free Trade Area accelerated, the currency swap arrangement landed, and the "Asian dollar area" began to take shape, but the "Asian dollar area" of building a single currency has not yet become a priority in the integration agenda. This more pragmatic approach will help Asian integration to move forward steadily.
Implications for China
Whether it is the transformation of Germany or the synergy between countries in the process of European integration, it is of reference significance for China. Because the socialist market economic system with Chinese characteristics has many similarities with the German social market economy. In terms of value chains, Germany's position in the eurozone is similar to China's position in Asia. The reason why Germany can maintain the competitiveness of exports in the appreciation of the mark and the increase in labor costs is not only due to technological innovation and industrial upgrading, but also to the restraint of macro policies. Cyclical conflicts at home and abroad can actually be exploited as well. During the COVID-19 period, domestic loose monetary policy took advantage of the time difference between the domestic and foreign economic recovery cycles in the choice of exit timing. Exiting when foreign economies are recovering strongly can reduce the cost of exit, because external demand can compensate for the negative effect of domestic policy contraction on domestic demand.
After more than 40 years of reform and opening up, China's "catch-up dividend" has gradually drifted away. After the 2008 financial crisis, China also faced the dual challenges of rising labor costs and an appreciation of the exchange rate. Faced with the challenge of a sharp contraction in external demand, China launched a $4 trillion fiscal stimulus package and then achieved a soft landing through credit expansion and real estate investment. Demand-side support measures can indeed help alleviate the sharp shocks in the short cycle of the economy, but only supply-side structural reforms can win long-term self-viability. In response to the challenge of the new crown pneumonia epidemic, China still adheres to the idea of supply-side reform as the main line, the counter-cyclical regulation and control method is significantly different from the past, the macro policy is more restrained, and the real estate regulation and control adheres to the "housing and housing not speculation" and "not real estate as a short-term means to stimulate the economy", which is actually a concrete embodiment of the mutual promotion of internal and external cycles. From the perspective of general equilibrium, the relatively restrained inner circulation will create room for the outer circulation.