Abstract
The creation of the Eurozone following the Maastricht Treaty led to the region becoming one of the largest single currency areas in the world. However, at the heart of this project lay a series of inherent weaknesses. This paper discusses these weaknesses from the perspective of three countries: Ireland, Portugal and Greece. Each of these countries had their own particular economic and fiscal issues which would have exposed them to economic shock should the Eurozone experience a financial downturn. This was the case in 2008 when the US led financial crisis spread to Europe. This paper assesses that none of these countries were sufficiently prepared to join the Eurozone but also that they also possessed their own unique structural weaknesses which would perpetuate any financial crisis. It is for this reason that these three states would not have been allowed to join and also that they all sought bailouts in order to stop their domestic governments from bankruptcy.
Introduction

The development of the Eurozone represented a further attempt in the European Union to create increased economic and fiscal convergence and integration. The recent financial crisis has provided this new project with its first major test. This paper begins by reviewing the development and evolution of the Euro and the Eurozone. In doing so, it looks at the considered need for fiscal stabilisation at the international level. This section also highlights the various fiscal and economic mechanisms which were put in place prior to allowing any country to join the project. Subsequent to this the eligibility of three countries, Ireland, Portugal and Greece is considered. Here, the rationale for these countries joining, as well as reviewing the structure of their respective economies, is taken into consideration. Further to this, the question of whether these countries met the stabilising mechanisms prior to joining is assessed. This paper then highlights various other reasons why it may have been beneficial for them not to join the Eurozone. Finally, this paper reviews the recent meltdown in the Eurozone area and highlights that this event was precipitated by a structural weakness in both US as well as global financial markets which left these three countries exposed to debts sufficient for them to require bailouts and restructuring programmes which were indicative of shock therapy. This paper concludes that Ireland, Portugal and Greece should have been allowed to join the Eurozone since neither of these countries had met the eligibility criteria. In addition each of these states possessed their own structural weaknesses that ultimately would have exposed them to an economic downturn, regardless of the causation.
Euro Evolution
The Euro is the common currency which is used by the majority of member states of the European Union (EU). It originated in 1992 following the signing of the Maastricht Treaty which contained three aspects to combining and increasing EU governance. The Exchange Rate Mechanism (ERM), as a vehicle for economic integration and financial convergence, was first muted in the late 1970s as a vehicle for furthering economic integration (Civitas, 2013), and represented the latest international drive towards economic stability. Originally known as the European Monetary System, it was wound up in 1992 with the development of the ERM (Civitas, 2013).
Progression towards the ERM included the creation of an independent central bank, which was mandated to achieving and maintaining price stability across the Eurozone space; a Stability and Growth Pact (SGP) which consisted of an intergovernmental agreement which was conjoined with the EU legal framework, the aim of which was to limit member state fiscal deficits; and a no co-responsibility (in layman terms, a no bail out clause) which was enshrined within Article 125 of the Treaty (Europa, 1992). These mechanisms were considered to be decent fiscal instruments for EU and Eurozone governance and, as a result, member states did not consider that it was important to coordinate their economic policies. This latter aspect was forwarded by powerful member states such as the UK, France and Germany, which did not consider that they would have any benefit from these policies. For them, any subsequent domestic policy changes were considered to have a detrimental impact upon their finances (Campaign against Euro Federalism, 2013). However, as a precursor to Euro membership, aspiring member states need to comply with a pre-set series of fiscal guidelines.
EU Member states which join the Eurozone must meet a series of convergence criteria (European Commission, 2014). These criteria are based on a series of fiscal; mechanisms which are utilised to restructure the economies of member states in order that the transition to conversion to the Euro are based upon macroeconomic indicators which are used to measure The convergence criteria are formally defined as a set of macroeconomic indicators which measure stability of prices and inflationary pressures; sound and sustainability public finances which includes an imposed limit on government borrowing as well as national debt in order that member states avoid possessing an excessive national deficit (European Commission, 2014). However prior to this, aspiring member states need to conform to the exchange-rate stability mechanism, through which participation in the ERM takes place for at least two years prior to membership without there being any evidence of a strong deviations from the ERM criteria (European Commission, 2014). A further factor in the progression towards joining the Eurozone for any aspirant state is an assessment of long-term interest rates. Indeed this latter criterion was a mitigating factor in the UK’s failure to adhere to ERM controls in the early 1990s (Civitas, 2013). More recently the Eurozone has been engulfed in a global financial crisis which began in the USA and spread to Europe via Iceland (this is discussed in greater detail later in the paper). The fallout from this particular crisis is yet to fully land. However, the Eurozone has progressed through a series of crises since the idea was first muted in the later 1970s and, more recently, via the sovereign debt crises of recent years. It is evident that the Eurozone is not an exact science and that there exist a number of structural issues at the heart of this project.
Economic and Political Reasons for the Three joining the Euro
The aforementioned group of PIGS (Portugal, Ireland, Greece and Spain) joined the Euro at its inception. This section discusses three of these states, Ireland, Greece and Portugal. Bardhan, Edelstein and Kroll (2011) noted that Ireland benefitted from a number from Eurozone membership. Additionally, it is noted that the period of economic convergence provided the country with an array of stabilising fiscal factors which led to the country becoming known as tiger economy (Bardhan, Edelstein and Kroll, 2011; BBC, 2011) but in 2008 the country was the first Eurozone country to fall in to recession (BBC, 2011). However this outcome was the end of a dream which, for Arestic and Sawyer (2012), was based upon a political aspiration of economic success as well as personal and national prosperity for the Irish population.
Greece joined the Eurozone in 2001 (BBC, 2001). EU membership was previously extremely popular in Greece and its populace had experienced tough austerity measures in order to comply with the economic and fiscal mechanisms which were needed to ensure a successful transition to the new currency. Similarly, there was a political determination to join the new currency since it was seen that progression would provide increased international scope for the country (BBC, 2001). Lynn (2011) argues that the historic role, in terms of political development, of Greece was a contributory factor in the national rush to join the Eurozone and considered that this outcome was to be achieved at all costs. Schadler (2005) suggests that the at all costs caveat was provided by the austerity measures and the near compliance with pre-set regulatory fiscal criteria which ensured membership of this exclusive group. In effect, whilst Ireland had hoped for increased economic wealth and prosperity, Greek aspirations largely concentrated upon gaining increased international respect and recognition.
With regards to Portugal, it is noted that this country did not join the EU space until 1986 and, effectively, was a late comer to this political institution. This is of particular importance to its membership of the Eurozone since wholesale economic change first began thirteen years later as a precursor to Eurozone membership in 2002 (Porter and Prince, 2012). Porter and Prince (2012) argue that the country’s membership of the Euro came at the behest of a political leadership that had a largely uneventful foreign policy. They link the convergence with EU policies such as membership with the Eurozone with the decreasing influence within its former colonies (Porter and Prince, 2012). This includes the return of former territories to China during the same period as the shift in focus towards its near neighbourhood was taking place. To summarise, it can be evidenced that there were numerous reasons why Ireland, Greece and Portugal joined the Eurozone. These include increased prosperity and wealth as well as increased political clout and international recognition.
Was the Convergence Criteria met by the Three?
It is of particular concern that Ireland, Greece and Portugal required mass fiscal stimuli packages and bailouts in order to shore up their economies and protect the respective states from going bust. A central factor in this outcome, it can be argued is a failure of these three states to adhere to the fiscal criteria that membership of the Eurozone required in order to provide a secure transition to the new currency.
As stated previously, aspirant Eurozone states were required to attain to a number of preset economic and fiscal controls which would have indicated their capabilities and successful transition to the Eurozone. Maduro (2012) holds a perspective which states that structural failings within the ERM, as well as the wider EU, failed to address the excessive cross-border flow of capital which was a contributory factor in the subsequent economic crisis. Mauro also highlights that a particular failure of the EU to implement the then existing rules relating to EU budgetary frameworks also impacted upon states abilities to progress to the Eurozone successfully. For Maduro (2012) this particular outcome was important to the success of the Greek model, as well as its subsequent economic crash, since it revealed that both the local and supra national system for monitoring public finances was not working as effectively as it should have. It is noted that Greek economic performances were outside of the considered ERM requirements and that from 2000 to 2008, the budget deficit given to the European Commission was nearly three per cent of the country’s GDP. In 2001, it is also noted that Greece was warned by the European Central Bank ECB, that the country still work to do to if it was going to successfully be adpted into the Eurozone. This included developing the structure of its economy and bringing inflation under control (BBC, 2001). Nevertheless Greece did join the Eurozone despite having a series of noted failings within its central fiscal requirements.
Bardhan, Edelstein, and Kroll, (2011) note that the Irish economy had been inflated by a large housing bubble. This helped inflate the Irish economy to a status of having near full employment by the turn of the century (Bardhan, Edelstein, and Kroll, 2011). However a party to this success proved to be the Irish commitment to the controls which had been placed upon it by the ERM. Regling and Watson (2010) argue that a failure of the ERM structure had a detrimental impact upon the Irish economy since the loss of fiscal independence was a mitigating factor on both the creation of the bubble as well as the failure of the Irish government to combat increasing inflationary, and other fiscal pressures. Regling and Watson (2010) blame this outcome on the structure of the ERM and highlight that a small nation requires having, as full as possible, fiscal controls.
Portuguese compliance with ERM criteria provided a greater economic stimulus that had first been thought was possible (Constancio, 2005). This produced a similar outcome to the Irish economic experience of the ERM and realised a booming Portuguese economy. Constancio, (2005) also notes that subsequent pay increases outstripped inflationary pressures and this outcome provide to be decisive in the battle to retain control of this area of fiscal policy, particularly where an economic downturn would result in the possibility of rampant inflation. These outcomes, Constancio (2005) argued led to pay increases in Portugal outstripping their EU partners. Essentially this outcome was borne of the structural failings discussed earlier into this paper and were only exposed when these state were impacted by the financial crisis. In terms of the Eurozone qualifying criteria, it is to be noted that none of these three countries met the criteria for joining the Eurozone. Ireland, Portugal and Greece, therefore were in good company and were aligned to the German, Spanish, Austrian et al experiences of convergence criteria which all failed to meet qualifying critiera. Indeed, , of all the member states only two, France and Luxembourg, were the only countries to satisfy all the convergence criteria (Arestis, Brown, Sawyer, 2001).
Any other Reason why any of the Three should have not Joined the Euro
The earlier discussions as to the reasons why these three states, Ireland, Portugal and Greece joined the Eurozone produced divergent responses and listed from economic reasons to political vanity and reshaping of foreign policy. These issues alone are not sufficient to realise the potential pitfalls should they experience an economic downturn, as was the case in 2008 onwards. Arestis and Sawyer (2012) noted that in the case of Greece the risks far outweighed the benefits. They compared Greece with Austria and recognised that both economic models were similar apart from Greece having a far lower wage economy that Austria. Austria, therefore, was capable of resisting economic shock. Had the Greek government recognised this potential risk then it is recognised that it would not have been in their benefit to join this monetary union. With regards to Portugal and Ireland, Constancio (2005) argues that these economies had not resolved the structural issues of boom and bust. AS a result economic recession was a highly probable outcome in the event of an economic bust. In essence, therefore for reasons of due diligence it is arguable that neither of these staes should have joined the Eurozone.
One other potential reason for not joining the Eurozone is the philosophical argument of losing sovereignty. After the ERM had its first crisis in the early 1990s, Palm (1996) noted that the loss of state sovereignty also meant the loss of fiscal control. Whilst this particular issue is discussed elsewhere in this paper, Palm (1996) specifically discussed the loss of fiscal control in terms of an absence of asymmetric county-specific economic shock which, he argued, would be a thing of the past. Instead Palm (1996) stated that it is entirely feasible that or counterbalancing methods would be needed in order to stop economic contagion since all member states would be affected in one way or another. With hindsight Palm (1996) is discussing the response to the Eurozone crisis of 2008 to the present day. It is unfortunate, therefore, that the three countries were unable to consider due diligence when considering their membership of the Eurozone. Had they have done so they would have recognised the exposure to the potential banking failures and acted accordingly.
Euro crises
The recent fiscal crisis in the Eurozone has highlighted that it is exposed to the international financial climate. The recent fiscal crisis began in earnest in the USA with a series of regulatory changes to the US banking system in the early 2000’s (Jickling, 2012). The collapse of US subprime lending facilities impacted on Europe, firstly in Iceland where its ballooning financial sector had been exposed to the debt crisis in the USA (Lewis, 2009), and latterly on other Eurozone member states which had been exposed to large banking debts and bad practices . This has included Cyprus and the PIGS group of nations, Portugal, Ireland, Greece and Spain. The latest crisis occurred in Cyprus where experiences there were in line with similar financial and economic failings within the Eurozone space. In each case, it can be evidenced that a number of structural failings as well as an inordinate exposure to risk have been causal factors in their particular financial collapses Menendez, 2013). Indeed, Iceland subsequently possessed a national debt which was ten times its national GDP (Glitner, Landbanksi and Kaupthing, 2009). Jickling (2012) Argues that the underlying causal factors of the recent crisis in both the USA and in the Eurozone were structural and that, as a result, it can be evidenced that there were four factors which needed to be addressed. These factors are: imprudent mortgage lending, bursting of housing bubbles, the structural imbalance of global debt as well as issues relating to securitization (Jickling, 2012).
Menendez (2013) notes that following the financial crisis the three countries, Ireland, Portugal and Greece were impacted further when they were faced within increased demand for higher interest rates on borrowing as well as reduced fees from issued bonds. This particular outcome also impacted upon the three mechanisms which were available to these countries (renegotiation, bond issues and monetization) when attempting to relieve themselves of the economic and fiscal burdens (Menendez, 2013). The resultant outcome was that the reform processes which they were able to utilise led to reform of their respective public sectors. Prior to this, Klein (2007) had argued that such an outcome would be indicative of the new model of international crisis management. Indeed with subsequent remedies for filling the vacuum caused by financial shortfalls becoming more autocratic and oppressive it is arguable as to whether the EU space witnessed for the first time a Bolivian style response to a financial crisis (Klein, 2007). Janssen (2011) argues that one possible solution could have been that the Euro is devalued however this would not have been beneficial to Germany since its economy is export driven. As such, the political shenanigans which led to the creation of the Eurozone, and which failed to realise the preset criteria for the vast majority of countries has continued to perpetuate the structural issues that reside at the heart of this institution. For Ireland, Portugal and Greece, however, the economic and fiscal issues remain.
Conclusion
In conclusion, the creation of the Eurozone has been some thirty years in the making and has been considered as a regional attempt at satisfying the need for a cross border fiscal control system. The ERM was developed in order to progress this ideal but failed to address a number of structural issues that resided within the international monetary system. As a party to this, the resultant exposure of the UK to fiscal issues resulted in this country leaving the ERM some twenty years ago. Since this time the project has developed and went live with a number of nations converting their currency to the Euro. As such the Eurozone was created. However the qualifying criteria of the Eurozone was not met by all but two countries and the subsequent exposure to the US banking crisis by Eurozone members left a number of them in need of financial bailout packages. This included Ireland, Portugal and Greece. These three countries were heavily exposed to this crisis as a result of their own structural issues which included booming economies and exposure to a credit bubble. When these bubbles burst, the Eurozone project was in crisis and, today, a number of issues remain unresolved. This includes how to restructure the economies of states that reside within the Eurozone. However as a result of the exposure of these three countries to the recent crisis, the failure to restructure their economies prior to joining, as well as their failure to adhere to all the preset compliances evidences that they should not have been allowed to join in the first place. This issue aside, with only France and Luxembourg satisfying the qualifying criteria the question of whether any other state should have been allowed to join remains a matter of debate. In conclusion, the Eurozone crisis which engulfed these three countries typifies the weakened global fiscal structure which led to the crisis in the first place.
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