The introduction of the euro was implemented very quickly, culminating in 1999 when the common currency began circulation, which occurred before many outstanding questions had been resolved. The policies that composed the European Monetary Union’s (EMU) legal and economic foundation contained many cursory and often contradictory points. Consequently, the euro countries came under pressure during the financial crisis in six interdependent areas, including: liquidity, banks and the broader financial system, sovereign debt and solvency, balance of payments, competi- tiveness, and economic growth and the labor market. These problems resulted in an all-encompassing systemic crisis of confidence.

1. Investment Research
Sunset Boulevard – An Interim Report
on the Development of the European
Monetary Union
Werner Krämer, Managing Director, Economic Analyst
The introduction of the euro was implemented very quickly, culminating in 1999 when the common currency began
circulation, which occurred before many outstanding questions had been resolved. The policies that composed the
European Monetary Union’s (EMU) legal and economic foundation contained many cursory and often contradictory
points. Consequently, the euro countries came under pressure during the financial crisis in six interdependent areas,
including: liquidity, banks and the broader financial system, sovereign debt and solvency, balance of payments, competitiveness, and economic growth and the labor market. These problems resulted in an all-encompassing systemic crisis of
confidence.
In our view, the combination of measures that the European Central Bank (ECB) introduced in response to the crisis with
the goal of stabilizing the euro zone have substantially reduced the short-term tail risk of its disintegration. Nevertheless,
we believe the ECB’s decisions in recent years must be viewed critically. Democratic process and communication with
the public fell by the wayside throughout many phases of the process due to the high degree of pressure faced by decision makers. From our perspective, the manner in which the “no-bailout” clause was forced through raised doubts about
the political sector’s willingness to openly communicate decisions. Moreover, the public’s disenchantment has led the
population to find its political voice through an emergence of protest parties.
In the current environment, we are left with mixed conclusions. We believe the euro and the EMU will remain intact,
because the backstop set up by the ECB has mitigated some tail risks and investors may feel reassured by this relatively safer backdrop. However, the euro currency is not the solution we were promised. Further European integration
currently remains a distant objective and future episodes of volatility seem likely.

2. 2
Goals of the European Unification
Process
Outbreak of the Euro, Sovereign Debt
Crises, and Reform Process
Above all, the following four goals have been pursued through the
European unification process, which began after World War II and
has continued through the (rushed) introduction of the euro after
Germany’s reunification.1
The 2008 financial market crisis mercilessly exposed the weaknesses
of the EMU’s structure. Since the financial crisis, politicians have,
metaphorically speaking, been performing open heart surgery without anesthetic on the very foundations of the EMU. Holding to the
metaphor, this is, by its very nature, substantially more difficult than
preventive care to avoid an operation altogether.
1. Achieve enduring peace: Foster mutual dependencies and shared
values in an effort to create enduring peace.
2. Integrate Germany into the unification process: The experience of
both World Wars led to an objective to contain power aspirations
and restrain European dominance.
3. Increase prosperity by means of a single internal market: Introduce
a unified market, based on the US model, in order to achieve
prosperity, create a more dynamic economy, and improve global
competitiveness (end of “Eurosclerosis”).
4. Maintain Europe’s global political weight: Protect Europe’s global
political position and unite the region amid the growing claim of
emerging nations.
While the European unification process was very gradual and incremental during the first several decades after World War II, the process
began to accelerate in the 1980s and, in particular, the 1990s. This
acceleration was triggered by German reunification in 1990, which
had come as a complete surprise to most European politicians.
The desire to quickly integrate the newly united Germany unleashed
vigorous broader unification activities in Europe. As previously mentioned, the introduction of the euro was implemented very quickly,
before questions such as a federal state versus confederation of states,
and economic and monetary union versus political union, had been
addressed. In our view, the fundamental legal and economic setup of
the EMU was underdeveloped and contradictory. Politicians and citizens did not have a clear understanding of some of the consequences
of the treaty structure.2
During the crisis, as is often the case in the political process, several
overdue reforms were not executed until the political sector had its
back against the wall. The disadvantage of this course of action was
that changes were hastily cobbled together under the pressure of the
crisis, which later necessitated constant corrections. As a result, the
general public doubted political transparency, which made the course
of the crisis unnecessarily severe and volatile.
A statement by former German Chancellor Helmut Schmidt, which
was quoted in the weekly periodical Die Zeit, we believe best illustrates
the mood of the general public: “The heads of state and finance ministers have invented one rescue mechanism after the other, one is called
ESM, the next EFSM—or something—endless abbreviations that I no
longer grasp.”3
Nevertheless, in recent years there has been substantial progress toward
containing the sovereign debt crisis and improving the EMU’s legal
function. In addition, the EMU has shown considerable improvement
in its political operation at the supranational, bilateral, and national
levels. The euro zone’s long-term survival has been made substantially
more likely by the institutional reforms that have been achieved.
In addition to the introduction of protective barriers for the
euro—namely, the European Financial Stability Facility (EFSF), the
European Financial Stabilization Mechanism (EFSM), the long-term
European Stability Mechanism (ESM) rescue package—and the new
role of the ECB as the “lender of last resort,” a number of individual
Exhibit 1
Key Components of the Reform Packages
Six Pack
Fiscal Policy
• Reform of the preventative
and corrective arm of the
Stability and Growth Pact (SGP)
•
•
Introduction of
macroeconomic monitoring
and a procedure in the event
of excessive imbalance
Growth and
Structural
Reforms
• European semester
(increased coordination of
economic and budget policy)
• Obligation to establish
national fiscal rules
Requirements on the
budget policy frameworks
of member states (among
other things: national fiscal rules)
Macroeconomic
Imbalances
Euro Plus Pact
As of 2012
Source: German Council of Experts
• Obligation to take measures
to promote competitiveness
and employment
Fiscal Treaty
Two Pack
• Obligation to establish • Join budget plan
national fiscal rules (debt
• Closer monitoring of member
limitation)
states in the deficit procedure
• Voting using reverse
• Increased monitoring of states
qualified majority in the
with serious difficulties
deficit procedure
with respect to financial
stability

3. 3
measures have been introduced with respect to fiscal policy. These
include initiatives to improve macroeconomic imbalances, and, to a
limited extent, growth and structural reforms, which are outlined in
Exhibit 1.4
The 2008 financial market crisis shook the EMU to its core. This
shock was caused by imbalances that had arisen, due to a lack of
coordination, and the fact that countries in the EMU had not grown
together since the introduction of the euro. Instead, they had continuously drifted apart. This was true, for example, in respect to labor
market policy, wage and income policy, state finances, competition
policy, and productivity trends.
Prior to the outbreak of the financial crisis, the EMU was a long way
from achieving its original goals, and was instead consistently moving
away from them. Thus, we believe the crisis was overdue, as a correction was inevitable amid these undesirable developments. In our view,
one could criticize the market for taking so long to recognize and
price in the disparities and false incentives. However, in our opinion,
the crisis arrived early enough for the region to benefit from the outcomes in the long term. If the political sector earnestly seeks a proper
response to the crisis, the euro zone could potentially even improve.5
Six Interdependent Sub-Crises
The euro zone countries came under pressure in six inter-related areas,
which we believe cannot be viewed independently of one another. The
following six sub-crises combined in phases to become an all-encompassing systemic crisis of confidence, when all European institutions
came under an indiscriminate suspicion of failure.6
Liquidity
The liquidity crisis was the component that most observers perceived
as the actual EMU crisis. Triggered by the general lack of liquidity in
the markets during the financial crisis, the weakened EMU peripheral
countries came under pressure when the securities they issued no longer
had buyers. These countries were only able to refinance at extremely
inflated costs, and in some cases were unable to refinance at all.
In an attempt to defuse these problems, the EFSF, EFSM, and ESM
rescue packages and their associated liability guarantees were introduced in May 2010, and ECB President Mario Draghi announced
in July 2012 that the central bank would do “whatever it takes” to
save the euro. In addition, Draghi’s speech also implicitly meant
the “threat” of unlimited purchases of government bonds from the
euro countries.
In particular, by assuming the role of “lender of last resort,” which was
always the role of the central banks in the Anglo-Saxon model, the
ECB was able to temporarily calm market sentiment and ensure that
the EMU countries could secure short- and medium-term financing.
The ECB’s safety anchor is one of the reasons for the strong decline
in euro zone government bond yields. In particular, we believe the
decline of the peripheral countries’ bond yields during recent quarters, as shown in Exhibit 2, can be attributed to market participants’
unwillingness to bet against the essentially unlimited depth of the
central bank’s pockets.
Exhibit 2
Yields on 10-Year Government Bonds
(%)
16
12
Italy
Portugal
Belgium
Ireland
Spain
France
Germany
Netherlands
8
4
0
2000
2002
2004
2006
2008
2010
2012
As of 7 June 2013
Source: Thomson Reuters Datastream
Exhibit 3
Credit Default Swap Spreads for Select European Banks
Name, current (bps)
Intesa Sanpaolo, 309.7
BBVA, 258.0
Santander, 256.4
RBS, 189.6
Credit Agricole, 184.4
Societe Generale, 183.8
Commerzbank, 177.0
Lloyds, 158.7
Barclays, 144.9
BNP Paribas, 141.9
Standard Chartered, 128.5
Deutsche Bank, 115.6
Handelsbanken, 99.8
HSBC, 94.6
DNB Nor, 76.9
Nordea, 66.1
Current
3-Year High
0
100
200
300
400
500
600
700
(bps)
As of 7 June 2013
This information is for illustrative purposes only. The securities mentioned are not
necessarily held by Lazard for all client portfolios, and their mention should not be
considered a recommendation or solicitation to purchase or sell these securities. It
should not be assumed that any investment in these securities was, or will prove to
be, profitable.
Source: Thomson Reuters Datastream
Banks and the Broader Financial System
We believe the EMU banking crisis is directly connected to the liquidity problem. The close interrelationship of governments and banks
in state financing put the European banking system—which already
faced serious challenges as a result of the general financial market
crisis—under additional pressure due to refinancing problems in many
countries. At times, the risk of a real core meltdown in the European
financial system was eminent. In particular, the reorganization of
Greece’s debt, which was anticipated early in the crisis, and the country’s associated banking problems, triggered a moderate upheaval.
The banking crisis and the state financing liquidity problem were
temporarily contained by the role of the ECB as “lender of last resort,”
even though the exact procedures to assist ailing banks and the best
method of liquidation or recapitalization remain unresolved.
The credit default swap spreads of bank bonds, which are shown in
Exhibit 3, have substantially narrowed during recent months, particularly subordinate bonds.

4. 4
Nevertheless, it would be wrong to suggest that the monetary
transmission mechanism from central banks to regional banks (and
ultimately to the real economy) has been restored, as it appears mutual
distrust between banks is still strong which, in effect, hampers the
interbank market. After the financial market crisis, officials in the
United States solved many of the country’s banking problems more
efficiently than those in Europe, where a number of “zombie” banks
within the fragmented market were artificially supported for national
interests.
Despite the current stabilization of European banks, the market for
loans to small- and medium-sized enterprises (SMEs), which are
included as part of loans to the private sector in Exhibit 4, remains
highly disrupted. Banking markets remain fragmented. The interest
rates and contractual structure of bank loans to SMEs in different
regions can persistently be characterized by an extreme north-south
gap. Many SMEs on the periphery remain almost completely cut
off from the credit market. This poses a significant problem, as
these SMEs compose a large portion of the market. This is not just
in Germany, but also in Italy and Spain, where these organizations
employ 80% and 67% of the working population, respectively.
Possible measures to revitalize the SME market by means of unconventional policies are a major, but so far controversial, topic of
discussion at the ECB and European Union (EU) Commission.7
Sovereign Debt and Solvency
Although it may not appear so at first glance, the solvency problem
should be viewed as largely independent of the liquidity problem. The
debt levels of most euro countries, which had already increased over
the decades, rose even more sharply during the financial crisis bank
rescues. In some countries, such as Greece, Cyprus, and Portugal,
indebtedness is no longer viable in the long term, and must be reduced
on a more permanent basis. The ESM’s liability guarantees or the
ECB’s bond purchases can ensure the securities’ liquidity, but since
that does not reduce debt, it scarcely contributes to an improvement
in solvency.
Thus far, an attempt has been made to get the peripheral countries’
debt under control through strict austerity measures. These peripheral
countries have extraordinarily contained their budget deficits, as
shown in Exhibit 5, and have, to some extent, been successful in their
stabilization programs, contrary to widespread public prejudices in
core countries.
Exhibit 5
Budget Balances in Select European Countries
Country
2006
2007
2008
2009
Cyclically Adjusted Primary
2010
2011
2012
Balancea (%)
Greece
-3.7
-5.4
-8.3
-13.1
-6.1
-1.5
0.9
Exhibit 4
Loans to the Private Sector
Ireland
-3.5
-7.0
-10.7
-9.2
-6.3
-4.6
-2.3
Italy
-0.0
1.7
-1.7
1.2
1.0
1.8
4.7
YoY Change (%)
10
Portugal
-1.3
-1.4
-1.5
-6.7
-6.9
0.1
1.0
Spain
2.1
1.4
-4.2
-8.5
-6.2
-5.4
-2.2
8
Primary Balanceb (%)
6
Greece
-1.3
-2.0
-4.8
-10.4
-4.7
-2.2
-1.7
4
Ireland
3.9
1.0
-6.2
-12.1
-27.9
-9.6
-4.4
2
Italy
1.0
3.1
-2.2
-1.0
-0.3
0.8
2.6
0
Portugal
-1.3
-0.6
-1.0
-7.5
-7.1
-0.6
-0.7
Spain
3.3
3.0
-3.1
-9.9
-7.9
-7.0
-4.5
-2
1992
1996
2000
2004
2008
2012
As of 10 June 2013
Actual Financing Balanceb (%)
The current dispute among EU member states concerns financial
market regulation and the European banking union, particularly with
regard to the three areas of the European Supervisory Authorities, the
European Bank Restructuring Agency, and the national and European
deposit insurance. The outcome of this dispute will be a critical factor
for the long-term stabilization of the European banking system, and
thus the EMU.
Although it is possible to have extended arguments about whether
deposit insurance should be implemented nationally or on a
European-wide basis, one thing is clear: the banking crisis is not over.
Without an acceptable solution for a banking union, the crisis could
return. We believe only structural reforms, not the central bank, can
secure a lasting solution for the financial system.
Greece
-6.0
-6.8
-9.9
-15.6
-10.5
-9.1
-7.5
Ireland
2.9
0.1
-7.3
-13.9
-30.9
-12.8
-8.3
Italy
Source: Thomson Reuters Datastream
-3.4
-1.6
-2.7
-5.4
-4.5
-3.8
-2.7
Portugal
-3.8
-3.2
-3.7
-10.2
-9.8
-4.2
-5.0
Spain
2.0
1.9
-4.2
-11.2
-9.4
-8.9
-7.0
Debt
Levelb (%)
Greece
107.3
107.4
112.6
129.0
144.5
165.4
170.7
Ireland
24.8
25.0
44.5
64.9
92.2
106.5
117.7
106.1
103.1
105.7
116.0
118.6
120.1
126.3
Portugal
63.7
68.3
71.6
83.1
93.3
107.8
119.1
Spain
39.7
35.3
40.2
53.9
61.3
69.1
90.7
Italy
As of 31 December 2012
a Financing balance, minus interest expense, adjusted for economic components
in relation to production potential
b In relation to the nominal GDP
Source: IMF

5. 5
Exhibit 6
Government Debt Levels for European Countries as
Percentage of GDP
Exhibit 7
Euro Countries Net Balance of Payments as a
Percentage of GDP
(%)
(%)
10
180
160
5
140
120
0
100
-5
80
60
-10
40
20
-15
1996
2000
Austria
Belgium
Finland
2004
France
Germany
Greece
2008
Ireland
Italy
Netherlands
2012
Portugal
Spain
2000
2004
Belgium
Euro Zone (12)
France
2008
Germany
Greece
Ireland
As of 7 June 2013
2012
Spain
As of 7 June 2013
Source: Thomson Reuters Datastream
Italy
Netherlands
Portugal
Source: Thomson Reuters Datastream
This drastic remedy for the European periphery was unavoidable
because of the negative effect that European countries’ simultaneous
austerity measures had on GDP growth, and due to the budget deficits
feedback loop (i.e., governments cut expenditures with the objective
of reducing the deficits, but this also reduces growth; thus increasing
social insurance payments and reducing tax income, which comes back
to less overall income for the government, increasing deficits again).
If growing out of debt by means of stronger nominal growth on the
basis of structural reforms is unsuccessful, then there is a threat of
additional haircuts for individual countries, from a long-term perspective, as this has already occurred in Greece and, indirectly, in Cyprus
through bank deposits.8
Exhibit 6 shows the debt levels for many of the European countries.
Despite austerity efforts, the current trends for some countries are not
viable, in our view. This is particularly the case when accounting for
each country’s disguised indebtedness as a result of commitments to
state pension and health systems, and civil servant retirement pensions, which need to be honored in the future.
Balance of Payments
The financial crisis has led to a balance of payments crisis in the euro
countries, as shown in Exhibit 7. Even though the aggregate balance
of payments of the EMU countries has been largely stable for years,
the differences in the balance of payments of the individual EMU
countries were only sustainable if either the capital account balances,
or the banking systems, were able to offset or refinance the deficits of
the weaker countries.
During the financial crisis, these mechanisms came to a standstill. In
the countries with constant balance of payment deficits like Greece,
Spain, and Portugal, heavy outflows occurred in the capital account
balance, and, in effect, the countries’ deficits could only be balanced
by means of internal transactions within the national central banks
of the ECB system (known as the Target II balances). Therefore, the
national central banks of the surplus countries (e.g., Germany and
the Netherlands) had to finance the deficits of the southern countries,
which is not sustainable in the long term, and ultimately led to the
balance-of-payments crisis within the EMU.9
However, the balance of payments is one aspect of the EMU crisis that
appears to remain under control as a result of the measures taken in
recent years. In the peripheral countries, cuts, reductions, and domestic economic collapse have not only substantially reduced imports,
but have also increased exports due to an internal devaluation and
improved competitiveness within these countries. Thus, the balance
of payments for Greece and Portugal are approaching zero, and Spain,
Ireland, and Italy are already showing balance-of-payment surpluses.
Although capital transactions have not yet returned to normal as a
result of persistent bank weakness, this is likely to gradually reduce the
problem of Target II balances.
Competitiveness
From the EMU’s inception until the outbreak of the financial crisis,
Germany’s competitiveness had consistently developed due to the
labor unions wage restraint and the Schröder reforms, which started in
2003. In contrast, the southern countries, in particular, have become
less competitive due to rising wage costs and growing economic rigidity. As a result, the euro zone imbalance continued to grow. Declining
competitiveness can translate to a deterioration of the balance of
payments and declining growth; this causes debt to rise, the response
to which is often a tax increase which, once again, leads to declining
competitiveness and so on until a crisis breaks, as the problem has
become too big to be ignored.10
Since 2008, competitiveness has significantly increased in many
countries as a result of the measures taken during the crisis. Wages and
costs have fallen massively, particularly in Ireland, Greece, and Spain.
France and Italy can be considered problem cases, where progress
is lacking. Nevertheless, as demonstrated in Exhibit 8, the relative

6. 6
competitiveness of the euro zone does not appear to be a major contributing factor to a disintegration of the euro zone in the short term.
Economic Growth and the Labor Market
In our view, economic growth and the labor market are at the heart of
the euro zone’s problems. For decades, the region has been plagued by
weak growth and a steadily weakening labor market. Thus, we believe
“Eurosclerosis”, or the ever increasing rigidity of euro zone economies,
continues to pose a very real problem.
We believe that the persistence of the most recent recession can
be overcome by a reduction in austerity and the continuation of
expansive monetary policy. However, there are not any forthcoming solutions to structurally return the euro zone to a path of higher
growth. As a result of softer economic growth and despite weak population growth, employment has continued to deteriorate, particularly
among younger generations. Exhibit 9 shows real GDP growth for
select euro zone countries, and Exhibit 10 the unemployment rate
for some of these. Taken together, one can see that currently most
countries are in a state of extremely low growth and, simultaneously,
have extremely high unemployment. Over the long term, this can
call into question the effectiveness, and thus the legitimacy, of a monetary union.
Europe’s steadily declining share of world trade over many years,
which is shown in Exhibit 11, can be considered an indicator of
economic weakness. We believe this is primarily due to the rise of the
emerging markets. However, Europeans seem jaded, as they appear to
be unaffected by this dynamic.
In our view, the EMU will only be a successful, long-term monetary
union when politicians and individuals are willing to carry out and
support the heavy lifting of structural reform, which includes: reforms
for the labor markets and pension systems, dismantling bureaucracy
with respect to company formation (improve the ease of doing business), and truly opening all markets. Moreover, high-level growth
initiatives across the entire continent, with the objective of overcoming the severe neglect of European infrastructure, could be a helpful
collateral solution.11
Evaluation and Outlook
We believe the combination of measures that were incorporated after
the financial crisis, such as the introduction of the ESM, the ECB
assuming the role of lender of last resort for states and banks, the
austerity measures taken in recent years, and multiple institutional
reforms to set up the EMU, have substantially reduced the short-term
tail risk of a disintegration of the euro zone.
In our view, the reforms that were successfully implemented during
the crisis are considerable, and far more effective than one may have
originally expected from the political sector. Once again, these measures were confirmation that the political system is capable of acting in
an acute crisis.
Nevertheless, we believe that one cannot overlook the fact that
the decisions made over recent years have a slightly bitter taste.
Throughout the crisis, the intense pressure on decision makers led to
an extensive lack of communication with the public and an abandonment of the democratic process. The “no alternative” argument, by
Exhibit 8
Relative Real Competitiveness
ECB Indicator Real Competitiveness
Index, 1999 = 100 (increase = less competitive)
140
130
120
Belgium
France
Germany
Netherlands
Portugal
Spain
Greece
Ireland
Italy
110
100
90
80
2000
2004
2008
2012
As of 7 June 2013
Source: Thomson Reuters Datastream
Exhibit 9
Real GDP Growth
Change Compared to the Previous Year
(%)
15
Austria
Belgium
Euro Zone
10
France
Germany
Ireland
Italy
Netherlands
Portugal
Spain
5
0
-5
-10
2000
2004
2008
2012
As of 7 June 2013
Source: Thomson Reuters Datastream
Exhibit 10
Unemployment Rate
(%)
30
25
Belgium
Euro Zone
France
Germany
Greece
Ireland
Italy
Netherlands
Portugal
Spain
20
15
10
5
00
2000
2004
As of 7 June 2013
Source: Thomson Reuters Datastream
2008
2012

7. 7
Exhibit 12
Deutschemark/US Dollar Exchange Rate
Exhibit 11
Share of Global Exports
(%)
(%)
(DEM per USD)
12
36
4.5
34
4.0
32
3.5
Euro Zone (RHS)
France
10
Germany
Italy
Netherlands
8
30
28
6
3.0
2.5
2.0
26
4
24
2
1995
2000
2005
2010
22
1.5
1.0
1960
1970
1980
1990
2000
2010
As of 10 June 2013
As of 7 June 2013
Notional exchange rate starting in 1999.
Source: Thomson Reuters Datastream
Source: Thomson Reuters Datastream
itself, will not generate any enthusiasm for the euro. The emergence
of many protest parties, such as Italy’s Five Star Movement and the
Alternative for Germany party (Alternative für Deutschland, or AfD),
illustrates how the public has found its political voice in response to its
discontent.
In addition, there has often been, in our view, little concern whether
politicians’ decisions were consistent with the law. The forced manner
in which the no-bailout clause was instituted raises doubts about the
political sector’s respect for treaties. Prime examples include the decisions regarding the ESM and ECB’s role as a backstop to the crisis,
the path toward community liability, and the inter-European transfer
union, which were made without open communication from the
political sector.
The ECB’s policy of unlimited government bond purchases is essentially state financing through the back door—a development that is
only effective as a short-term emergency measure.12 This following
point should also be clearly stated: The goal of the EMU was to create
a community of values and laws, and it becomes problematic when
common values are largely ignored once a difficult situation arises.13
A critical analysis shows that we are still a long way from achieving the
four main goals of European unification. It is important to recognize
that European unification has contributed to a long period of peace
in Europe after World War II (excluding the Balkan War in eastern
Europe). However, the disputes and recriminations between Germany
and the periphery, in connection with reduced rescue packages and the
appearance of the Troika, show that the goal of communal values is
still a long way off. The cultural differences, the diametrically opposed
concepts of the state in different countries, and the tenacity of these
differences were clearly underestimated at the start of the EMU.14
It can, at the very least, be disputed whether the goal of containing
Germany’s claim to power has been achieved by means of integration
during the unification process. During the crisis, Germany has moved
into a position of strength and dominance that even the country
itself did not want, as a result of the weakness of the other European
countries. In this regard, there is a need for the other countries to reorganize by means of structural reforms—only then will all euro zone
countries be able to approach one another on equal ground.
In our view, the goal of increasing prosperity through the internal
market has fallen far short of its potential. The introduction of the
euro did not improve Europe’s weak growth and rising unemployment—rather growth and unemployment have worsened. It is
important to note that, the internal market and the unification process
alone do not help to accomplish this goal. Such prosperity is only
attainable if the internal market arrangement and EMU’s institutional
framework are structured in such a manner that the internal market
can grow into its potential strength. With the current configuration,
this has not been the case.
Finally, we believe the goal of strengthening Europe’s global political
standing remains distant. Today, European nations continue to be as
divided as ever. The euro zone has been the center of economic adversity for some time, so it is not surprising that, at the global level, it
appears as if Europeans are not being taken as seriously anymore.
In the end, a mixed conclusion remains. The euro and the EMU will
remain intact, because the ECB and ESM provide a strong safeguard.
However, as previously stated, the euro currency is not the solution
we were promised. Exhibit 12 plots the deutschemark to US dollar
exchange rate over the last 50 years, and illustrates how the euro is not
as strong as the deutschmark once was. Further, the ECB is not like
the Bundesbank, and we believe it will not be the case that the rest of
Europe will become like Germany politically, but rather that Germany
will become a reflection of Europe.
The tail risks are now limited by the ESM and ECB, and even amid
the difficulty of a markedly low interest-rate environment, some
investors feel relatively safer with regard to Europe. But due to the
discrepancies in the EMU structure and the public political processes,
we believe enough unrest remains to create further volatility.

8. 8
Notes
1
Klaeren, J. (ed.) “Europäische Union, Informationen zur Politischen Bildung [European Union, Information on Political Education].” New revised edition, 2012.
2
Krämer, Werner. “Griechenland 2010 – ein Kanarienvogel im Minenschacht [Greece 2010 – A Canary in a Coal Mine].” Lazard Asset Management, Standpunkt [Opinion], April 2010.
3
http://www.zeit.de/news/2013-05/30/international-helmut-schmidt-wirft-eu-fuehrung-mutlosigkeit-vor-30121602
4
Franz, W. et al. “Jahresgutachten des Sachverständigenrats zur Begutachtung der gesamtwirtschaftlichen Entwicklung 2012/13 [Annual Expert Opinion of the Council of Experts on the
Examination of 2012/13 Overall Economic Development].” 2012.
5
Heinemann, F. and O. Schmuck. “Euro am Scheideweg? Informationen zu politischen Bildung aktuell [Euro on the Way Out? Information for current political education].” 2012.
6
Welfens, P. “Euro-Krise – Dynamik und Überwindung [Euro Crisis – Dynamics and Overcoming].” Presentation at Bergische Universität Wuppertal, October 2012; Franz, W.
“Herausforderungen an die Wirtschaftspolitik in Europa [Challenges for Economic Policy in Europe].” Lecture at the 16th Annual Congress on Porfolio Management, 4 June 2012.
7
http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-definition/
8
IMF. “Greece, IMF Country Report No. 13/154.” June 2013.
9
Sinn, H.W. “Die Target-Falle [The Target Trap].” Hanser-Verlag, 2012.
10 Hax et al. “Globale und spezifische Ursachen der Eurokrise [Global and Specific Causes of the Euro Crisis].” Excerpt from the 2010/11 Annual Expert Opinion, Council of Experts on the
Examination of Overall Economic Development, 2011.
11 Sidorov, P. “Euroraum – Wie könnten Wachstumsinitiativen im Detail aussehen? [Euro Area – How Might Growth Initiatives Look in Detail?].” Deutsche Bank Research, Research Briefing
European Integration, 31 May 2012.
12 Fuest, C. “Die EZB bewegt sich zweifellos in einer Grauzone [The ECB Is Undoubtedly Moving in a Gray Area].” Handelsblatt, 4 June 2013.
13 Klein, H.H. “Überfordert – Die Europäische Union braucht eine Reform an Haupt und Gliedern [Overburdened – The European Union Needs A Reform From Tip to Toe].” FAZ, 31 May 2013.
14 Mak, G. “Was, wenn Europa scheitert [What if Europe Fails].” 2012.
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