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The Euro

Evolution and Prospects

Philip Arestis, Andrew Brown and Malcolm Sawyer

The authors offer a sustained argument that the single currency as currently implemented does not promise to deliver prolonged growth. They contend that the economic impact of the euro, and its accompanying institutions, is likely to be destabilising and deflationary; that the political impact is profoundly undemocratic and that the social consequences are likely to be deleterious. They do not reject the concept of a single currency but are highly critical of policy arrangements such as the Stability and Growth Pact which govern the euro. The authors propose alternative policy and institutional arrangements within which the euro should be embedded. They demonstrate that these would have the benefits of a single currency whilst avoiding many of the potential costs identified by detractors.
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Chapter 3: The Conditions Surrounding the Launch of the Euro

Philip Arestis, Kevin McCauley and Malcolm Sawyer


3.1 INTRODUCTION Chapter 2 discussed how we arrived at the establishment of EMU. This and the chapter which follows deal with the policy conditions and the institutional arrangements which surround the introduction of the euro. The euro was adopted in January 1999 with the member currencies locked together from that point, and with the intention that the euro is used as the sole currency in the participating countries from early 2002. Criteria were set down under the Maastricht Treaty to determine which countries should (or would have to) join the single currency. The operation of the euro is to be governed by the Stability and Growth Pact. The terms of the Maastricht Treaty and of the Stability Pact will be discussed below. Over the next two chapters we assess the introduction of the euro, its accompanying institutions and future prospects for the euro and the European economies. Our focus is on macroeconomic policies and the euro, and we divide the discussion into fiscal policies and problems (this chapter) and monetary and financial policies and problems (next chapter). This chapter argues that the effective preclusion of active fiscal policy, either on an EU-wide or individual government basis, and of coordination of fiscal with monetary policy, is likely to perpetuate the already high and divergent levels of unemployment. It is also likely to exacerbate asymmetries of economic performance across the eurozone. Alternative proposals are put forward that will remedy this situation, as part of an alternative ‘full employment, growth and stability pact’...

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