Saturday, April 23, 2011

Final Proposal

Final Proposal

TO: Professors: Scott Abbott, Mark Jeffreys, William Cobb and Vaughn Armstrong

FROM: Jared Johnson

DATE: April 23, 2011

SUBJECT: Proposal to complete a research project on the effects of the Euro on the European Union and to demonstrate weaknesses within the Union itself that raise warning signs for the health of the EU moving forward.

Statement of Thesis and Project Summary:

The aim of this research project is to diagram and expose major economic and political flaws within the structure of the European Union and the creation of the Euro. The propose is to argue the negative impact and eventual demise of the Euro. I intend to do this by exploring and discussing how the Euro is a symbol of political and economic unity and whether it is enough to maintain that same unity within the European Union. My point of view on the Euro is opposed by many economist, financial analysts and politicians, especially while the Euro is currently nearly 50% stronger than the US Dollar with international money and attention ever growing in that region. So a key part of my argument will come from the Growth and Stability Pact at the creation of the Euro outlining “worst case scenario” debt situations that could lead to financial meltdown within the European Union, those scenarios arrived approximately two years ago. I will discuss both sides of the argument acknowledging the a positive Euro future (the majority) and the demise of the Euro (small minority) and I will attempt to argue the latter and demonstrate my point through hard economic facts, case studies, current events and similar international situations. With my background in international markets and currencies I have firsthand experience in this field and the Euro is a standing example of these kinds of major economical and political mishaps.

Key points of my argument will consist of the following:

  1. The hundreds of billions of dollars that have been spent on recent bailouts while the financial crisis is only growing more serious
  2. The political and social discontent between the “producing” countries and those in need of assistance.
  3. The continuing violations, by several member states of the EU, of severe debt warnings put in place at the creation of the Euro with the Stability and Growth Pact.
  4. Discuss the topic of the Euro replacing the US Dollar as the world reserve currency, pros and cons of that argument.
  5. The history of European countries fighting each other and taking advantage of those countries less able to defend themselves.
  6. The history of treaties and pacts put in place by the larger member states with any implications this has had regarding the smaller EU members.
  7. Lastly I will include the compare and contrast of the EU with other countries that have attempted currency unions and those countries that are in preliminary stages of considering such an organization (several oil producing countries are in talk currently).

Literature in Review:

Several of the sources used come directly from the International Monetary Fund (IMF) site as well as the European Commission for Economic and Financial Affairs (ECFIN), these are great primary sources for information regarding the affairs of the EU. According to the ECFIN, "implementation of the single currency was not only an economic decision; it was also a political commitment by the EU Member States to work together." (European Commission) There is big debate on whether the problems with the EU are more political or economical, my research so far has found both to be of equal importance and equally problematic. The political problems and tension between the small and large countries in the EU seem to be causing Issues on both sides, hence it appears the political problems are causing the economical problems and vice versa.

Indeed a major topic to be addressed in my project will be the financial danger looming around the PIIGS (Portugal, Ireland, Italy, Greece and Spain) and a great article found in my research reinforces this point, “Greece’s fiscal problems are, as I have argued many times, but the tip of a global iceberg... Indeed, history suggests that severe recession and socialization of private losses often lead to an unsustainable build-up of public debt.” (Roubini) This adds to the problem of several countries being in major violation of the Stability and Growth Pact of which, “Implementation started on January 1, 1999,in order to make sure that the EU member states maintained fiscal discipline after the introduction of the euro, the single currency.” (Kesner-Škreb) Both articles have been key in forming my argument and leading me to new and informational sources.

Another article that was crucial comes from a professor of economics at UC Berkley, he discusses the financial and political challenges the EU faces with fighting to keep the EU from completely falling apart, he makes the comparison of an American state vs a country within the European Union. Along with the financial problems plaguing the EU there are serious social and political hurdles, “Europeans don’t do these things (think of themselves as completely united) because they see themselves as Greeks and Germans first. They don’t interfere in the “sovereign prerogatives” of other member states.” (Eichengreen) As demonstrated in the previous article, issues within the European Union span across a large array and the obstacles to overcome are great.

Preliminary Outline

1. Introduction

2. Discussion of the financial state of several of the major EU members and the effects they have on each other with the positive and negative aspects of the Euro (pro and con argument)

a. Discuss the current state of the Euro and financial issues most prevalent within the EU giving recent developments.

b. Discuss prominent social/political issues and in the EU

3. Possible causes of the current state of financial crisis.

4. Analysis of the Stability and Growth Pact (SGP)

a. Discuss when and why it came about

b. Review the major violators of the SGP and what impact that has on the rest of the EU

5. Review historical implications in Europe and the past and present effects they have on the current situation.

6. Discuss current affairs pertaining to this issue (topics of interest)

7. Conclusion.

Schedule for Completion:

May 30th, completion of research

June 30th, refined thesis, completion of two pending interviews

July 30th, completion of economic/finance section of draft

August 30th, completion of historical section of draft

September 30th, submit first draft/start revision

October 30th, submit final draft, revise (hopefully defend)


Brash, Donald. "The Pros and Cons of Currency Union: a Reserve Bank Perspective." 2008. Reserve Bank of New Zealand. 2011 .

-Great article from the bank of New Zealand discussing the pro and cons of a currency union, reasons they would want to enter into a larger one, which countries would best benefit them in the union but also some of the major draw backs. He specifically discusses the aspect of losing monetary control of an individual country when a currency union is started.

Brown, Brenden. Euro Crash: The Implications of Monetary Failure in Europe. Palgrave Mcmillan, 2010.

-Brown's book further explores the path the EU is on with the Euro and increasingly weakening countries. The author also goes into further detail about what would likely happen to the EU should more defaults come as a result of the extensive bailouts possible needed.

Eichengreen, Barry. "European monetary unification: a tour d'horizon." 2009. Feb 2011 .

—. "Europe's Trojan Horse." February 2010. Project Syndicate. 2011 .

—. Globalizing Capital: a History of the International Monetary . Princeton University Press, 2008.

European Commission. European Commission of Economic and Finanial Affairs. 2010. April 2011 .

International Monetary Fund. "Currency Unions." 2010. IMF. 2011 .

Kesner-Škreb, Marina. "Stability and Growth Pact." 2008. Financial Theory and Practice.

-Great article on the Stability and Growth Pact and what exactly it entails and more specifically those countries that instigated it and those that are in violation of the pact.

Lien, Kathy. How Does a Weaker Dollar Impact Your Investments? 2007

Lynn, Matthew. Bust: Greece, the Euro and Sovereign Debt Crisis. John Wiley & Sons Inc., 2011.

There's much reading yet to do with Lynn's book but so far he brings up some good topics about current fiscal problems the EU is facing and some implications for the future of the EU/Euro, specifically regarding the bailouts and how they are just a band aide on the problem

Masson, Paul and Mark Taylor. Policy Issues in the Operation of Currency Unions. Campbridge: University Press, 1993.

-Masson and Taylor discuss the functions of a currency union and get into great details about the inner workings and where they fall short but how political power pushes them on, NOT economic power.

McNamara, Kathleen. The Currency of Ideas: Monetary Politics in the European Union. Cornell University, 1998.

-McNamara discusses in details some of the reasons that countries enter into currency unions and some of the major pitfalls of these relationships. She does a great job in discussing the strains associated with these unions and some of what the EU is and has been facing.

Pissarides, Christopher. "London School of Economics, The Labor Market and the Euro." Feb 2011 .

-Pissarides discusses the aspects of a currency union, the expectations but the sometimes overlooked detail of the work force through the various countries involved in the unions, great implications for the EU.

Roubini, Nouriel. "Teaching PIIGS To Fly." 2010. Project Syndicate. April 2011 .

-Roubin's article on the PIIGS counties is very interesting, he basically covers the troubles that lay ahead with the EU with the current debt crisis and what the EU might face if major changes are not applied.

Sarkar, Salil. "Will Austerity Save Europe From Crisis." Feb 2011 .

—. "Will The Euro Survive?" Feb 2011 .

-Sarkar discusses the specific aspect of the lack of a central federal body to more tightly unify the countries as well as the heavy burden of debt each country holds reinforces the problems the EU is facing and if their attempts of a solution are really making enough of a difference.


As per Professor Abbott's request, I just wanted to elaborate a bit more on the work I've done and some of the topics I plan to tackle as I work towards completion of this project.

As mentioned in the above proposal I have several topics to work with in making my final argument. Some background information that is important to understand is specifically related to the formation of the Euro and certain guidelines that were put into place at that time. It's important to note that my argument is for the demise of the Euro, I am not arguing the collapse of the European Union, just the splintering of the countries that use the Euro and the downturn and ultimate abandoning of the single currency.

My argument is not backed by many economists, in fact the popular opinion as of current is the possibility of the Euro replacing the USD as the world reserve currency. That argument is a strong one especially while the Euro is almost 50% more valuable than the USD on the open market.

Much of the base of my argument comes from the Stability and Growth Pact that was created at the introduction of the Euro. This pact laid out strict guidelines for where member states of the EU/users of the Euro needed to be in regards to the GDP/debt ratio, it discusses warnings and possible outcomes if these guidelines are not followed. The SGP REQUIRES all countries within the EU to have a national budget deficit no higher than 3% of the GDP, most have only violated this one slightly but still have been unable to stay within this limit. The big and arguable most important is the requirement that the government debt NOT exceed 60% of the annual GDP of that country. Not only do several countries, including Portugal, Italy, Belgium, Spain, Greece and Ireland currently stand in violation of those guidelines (most running 90% or more of government debt to GDP) but they have been in violation of this guideline for some years now. (Kesner-Škreb)

The SGP states that if these guidelines are not followed the outcome can and will likely lead to financial meltdown within the region. This pact warned of this in the late 1990's about 10 years before the first bailout of an EU country, that being Greece. Since Greece's bailout of over 100 billion Euros, Ireland and Portugal have both also received bailouts from the International Monetary Fund and the European Central Bank. The funds from these bailouts have come from loans the ECB has made from the stronger/producing countries like Germany and France. Economists have said that although the bailout has been rough, at least the debt of the troubled countries is under control and risk of default on the government bonds is no longer at risk. Only one year after the Bailout of Greece and a mere 5 month after the bailout of Ireland both countries are at risk of defaulting on their repayments of the bailout funds. (European Commission) Portugal has only just received bailout money within the last 60 days, repayment issues are yet to come there but they are in identical circumstances as the other two that are unable to meet repayment of bailout money.

So while China and Japan are buying government bonds from Spain and Portugal and the value of the Euro continues to climb, I've got my sites (and argument) are focused on the other countries that are growing closer by the day to requesting bailout funds and the lack of tolerance from the larger countries from whom the bailout money is burrowed.

An important principle in the value of a currency is an interest rate. Interest rates determine "how much" a currency is worth, the higher the interest rate the more valuable the currency is. This comes from outsides countries buying bonds of that country because the higher the interest rate, the more investors make on their investment in that government bond. The trick with this is central banks (the Fed, bank of England, ECB etc) keep interest rates low in bad economic times to keep the value of the currency low as well. The benefit of a weak currency in bad economic times is cheap money makes the products of that country much more attractive in the international market place, thus demand for exports usually increase substantially for that country due to its weak currency. Economics shows us that a country that exports is a country that has long term viability. Also, when a country has a weak currency it is much less affordable to purchase foreign products, so not only has that country's product becomes more attractive to foreigners but it's the only product the domestic economy can afford, thus boosting that local economy due to a spike in domestic demand. (lien) Thus local central banks like, like the Fed, encourage a weak currency to help spark demand on their goods and services which lead to long term recovery and growth.

The problem happening with the individual countries within the EU is, as mentioned, many of the individual countries are suffering from weak economies and where they would normally lower their interest rates and allow for a weaker currency to spark growth/recovery, they can no longer do this as a result of being part of the EU. The European Central Bank sets the interest rate for the entire region thus taking away the ability for the individual countries to set their own interest rate and make necessary adjustments in time of economic downturns. This is where the violation of the SGP starts and where the economic problem worsens, the individual member states are seeing some of the worst economical times since WWII and the evidence from recent bailouts of three countries is irrefutable proof. With the Euro near historic highs and continuing to climb everyday, the problem in the EU will only get worse, the countries with unstable economies are nearing collapse and the bailouts will continue to shift the debt within the EU and bury the smaller economies.

This is the base of my argument at this point, as mentioned in the proposal I will also demonstrate the counterargument with the majority leaning to the positive side of the Euro. I will use the above points to strengthen my argument and prove my thesis. There is much more material along with all of this but I wanted to clarify these points with more substance than I was able to put in the original proposal.


Mark Jeffreys said...


I think the strongest part of your argument will be the material surrounding the violations of the SGP. One concern I have at this point is simply that your current proposal seems to admit of no counter-evidence. Have you researched possible counterarguments against your prediction of collapse for the Euro and EU? If you have already, give them a brief mention. If you haven't, indicate that you will.

Other than that, this looks like a finished proposal to me.

Scott Abbott said...

I agree with Mark. You've done just what we ask in Capstone 1. Because of that, you're well situated for Capstone 2.

Counter-evidence, as Mark writes, will be important to show that you've really thought through the possibilities. In the end, that will make your argument stronger.