Raymond J. Ahearn, Coordinator
Specialist in International Trade and Finance
James K. Jackson
Specialist in International Trade and Finance
Rebecca M. Nelson
Analyst in International Trade and Finance
Martin A. Weiss
Specialist in International Trade and Finance
Seventeen of the European Union’s 27 member states share an economic and monetary union (EMU) with the euro as a single currency. Based on a gross domestic product (GDP) and global trade and investment shares comparable to the United States, these countries (collectively referred to as the Eurozone) are a major player in the world economy and can affect U.S. economic and political interests in significant ways. Given its economic and political heft, the evolution and future direction of the Eurozone is of major interest to Congress, particularly committees with oversight responsibilities for U.S. international economic and foreign policies.
Uncertainty about the future of the Eurozone grew in early 2010 as a result of the onset of a sovereign debt crisis in Greece that spread to Ireland later in the year. These concerns, in turn, took on added significance because the euro is considered a cornerstone of the European integration process.
One important cause of the crisis stemmed from flaws in the architecture of the currency union, including the fact that the EMU provides for a common central bank (the European Central Bank or ECB), and thus a common monetary policy, but leaves fiscal policy up to the member countries. Weak enforcement of fiscal discipline, over time, led to rising public debts, contributing to the 2010 Eurozone debt crisis. The problems were compounded by rapid expansion private sector debt in a number of countries, most notably Ireland.
In response, European leaders and institutions have adopted financial assistance packages for Greece in May 2010 and for Ireland in November 2010, combined with proposals to reform the currency union. These reforms center heavily on creation of a permanent liquidity facility (European Stability Mechanism or ESM) and real economy measures involving austerity and structural reforms to lower deficits and increase the competitiveness of the most highly indebted Eurozone members. These reforms do not contemplate sovereign debt restructuring, a break-up of the Eurozone, or movement towards a political or fiscal transfer union.
The reforms, if implemented, could strengthen the foundation of the Eurozone and bolster confidence in the euro. Given that the currency union is largely a political undertaking and a major symbol of European integration, European leaders may be expected to support reforms which keep the currency union intact. Moreover, the proposals under consideration introduce institutions and policies that did not exist prior to the crisis, and represent higher levels of integration and commitment to strengthening the EMU.
At the same time, a number of factors could weaken or even perhaps undermine the sustainability of the Eurozone. In the event of sovereign defaults by some members, public support in fiscally sound Eurozone countries for resource transfers to highly-indebted countries could decline. Shared responsibility for defaults could also lead to divisions among Eurozone members, causing some members to reconsider the costs and benefits of membership. In addition, the fiscal problems some Eurozone members face stem from economic imbalances that may be very difficult to resolve without a shift in economic policies by its members, particularly Germany.
If the Eurozone survives largely in its current form or strengthens, the impact on U.S. interests is likely to be minimal. However, if the Eurozone were to break-up in a way that undermines the functioning of Europe’s single market or resurrects national divisions, the impact on U.S. economic and political interests could be significant.
Date of Report: January 10, 2011
Number of Pages: 32
Order Number: R41411
Price: $29.95
Follow us on TWITTER at http://www.twitter.com/alertsPHP or #CRSreports
Document available via e-mail as a pdf file or in paper form.
To order, e-mail Penny Hill Press or call us at 301-253-0881. Provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.
Specialist in International Trade and Finance
James K. Jackson
Specialist in International Trade and Finance
Rebecca M. Nelson
Analyst in International Trade and Finance
Martin A. Weiss
Specialist in International Trade and Finance
Seventeen of the European Union’s 27 member states share an economic and monetary union (EMU) with the euro as a single currency. Based on a gross domestic product (GDP) and global trade and investment shares comparable to the United States, these countries (collectively referred to as the Eurozone) are a major player in the world economy and can affect U.S. economic and political interests in significant ways. Given its economic and political heft, the evolution and future direction of the Eurozone is of major interest to Congress, particularly committees with oversight responsibilities for U.S. international economic and foreign policies.
Uncertainty about the future of the Eurozone grew in early 2010 as a result of the onset of a sovereign debt crisis in Greece that spread to Ireland later in the year. These concerns, in turn, took on added significance because the euro is considered a cornerstone of the European integration process.
One important cause of the crisis stemmed from flaws in the architecture of the currency union, including the fact that the EMU provides for a common central bank (the European Central Bank or ECB), and thus a common monetary policy, but leaves fiscal policy up to the member countries. Weak enforcement of fiscal discipline, over time, led to rising public debts, contributing to the 2010 Eurozone debt crisis. The problems were compounded by rapid expansion private sector debt in a number of countries, most notably Ireland.
In response, European leaders and institutions have adopted financial assistance packages for Greece in May 2010 and for Ireland in November 2010, combined with proposals to reform the currency union. These reforms center heavily on creation of a permanent liquidity facility (European Stability Mechanism or ESM) and real economy measures involving austerity and structural reforms to lower deficits and increase the competitiveness of the most highly indebted Eurozone members. These reforms do not contemplate sovereign debt restructuring, a break-up of the Eurozone, or movement towards a political or fiscal transfer union.
The reforms, if implemented, could strengthen the foundation of the Eurozone and bolster confidence in the euro. Given that the currency union is largely a political undertaking and a major symbol of European integration, European leaders may be expected to support reforms which keep the currency union intact. Moreover, the proposals under consideration introduce institutions and policies that did not exist prior to the crisis, and represent higher levels of integration and commitment to strengthening the EMU.
At the same time, a number of factors could weaken or even perhaps undermine the sustainability of the Eurozone. In the event of sovereign defaults by some members, public support in fiscally sound Eurozone countries for resource transfers to highly-indebted countries could decline. Shared responsibility for defaults could also lead to divisions among Eurozone members, causing some members to reconsider the costs and benefits of membership. In addition, the fiscal problems some Eurozone members face stem from economic imbalances that may be very difficult to resolve without a shift in economic policies by its members, particularly Germany.
If the Eurozone survives largely in its current form or strengthens, the impact on U.S. interests is likely to be minimal. However, if the Eurozone were to break-up in a way that undermines the functioning of Europe’s single market or resurrects national divisions, the impact on U.S. economic and political interests could be significant.
Date of Report: January 10, 2011
Number of Pages: 32
Order Number: R41411
Price: $29.95
Follow us on TWITTER at http://www.twitter.com/alertsPHP or #CRSreports
Document available via e-mail as a pdf file or in paper form.
To order, e-mail Penny Hill Press or call us at 301-253-0881. Provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.
