The euro, long-run convergence and the impact of the crises
Enrico Marelli and Marcello Signorelli
Prof. Enrico Marelli, Department of Economics and Management, University of Brescia, Italy, corresponding author (enrico.marelli@unibs.it).
Prof. Marcello Signorelli, Department of Economics, University of Perugia, Italy (marcello.signorelli@unipg.it)
Please cite the paper as:
Enrico Marelli and Marcello Signorelli, (2015), The euro, long-run convergence and the impact of the crises, World Economics Association (WEA) Conferences, No. 2 2015, The European Crisis, 1st October to 1st December, 2015
This paper has been included in the publication
“The European Crisis”
Abstract
In this paper we analyse two different issues concerning economic performances and policies in Europe after the introduction of euro: the long-run real economic convergence (or divergence) across Eurozone countries and the impact of the recent crises. Regarding the first issue, we review the relevant economic theories, with particular reference to the “Optimal currency area” theories. Then we accomplish some empirical analyses to assess the extent of long-run economic convergence (or divergence), the similarity of economic cycles and trade integration within the Eurozone countries, as well as in the EU in general. The results show that the role of the monetary union in favouring real convergence is disputable.
As regards the second issue, we speak of “crises” since after the global financial crisis and the Great Recession (2007-09) in Europe we had a second crisis – the sovereign debt crisis – causing a second recession and whose impact is long-lasting. Particularly worrying are the consequences on the labour markets, especially on youth unemployment. Our opinion is that the austerity measures undertaken in the area, especially in the peripheral countries, have caused a prolonged recession, stagnation and persistent unemployment.
In the conclusive section, we emphasize the policy implications, related both to the radical reforms needed in the EU institutions and governance – in particular to guarantee a viable monetary union and favour real convergence of its economies – and the changes needed in current macroeconomic policies.
Prof. Enrico Marelli, Department of Economics and Management, University of Brescia, Italy, corresponding author (enrico.marelli@unibs.it).
Prof. Marcello Signorelli, Department of Economics, University of Perugia, Italy (marcello.signorelli@unipg.it).
I agree that fiscal austerity could become a risky long-term strategy as a tighter fiscal policy would certainly result in even weaker economic growth rates and higher public debt/GDP rates. Besides, the current era of austerity certainly affects day-to-day life of citizens. Indeed, austerity programs subordinate the whole policy decision process that turns out to look for a realignment of relative prices (mainly real wages) and further structural reforms (mainly in the public sector and the labor market). The labor market has become a key variable in macroeconomic policies based on austerity programs. Longer working hours, job destruction, turnover, outsourcing, workforce displacement, job reduction and loss of rights are part of the spectrum of management practices that emerge from the austerity guidelines. This scenario, characterized by precarious jobs, enhances the vulnerability of workers, mainly young people.
Considering this background, I would like you to expand the ideas related to the relevant suggestions you presented in the conclusion. In particular, how monetary policy could be integrated by a real “growth policy” at the EU level in order to favor job creation? .
Thanks, Maria Alejandra. You are right, the labour market has become a key variable in macroeconomic adjustments. The mentioned trends (longer working hours, job destruction, turnover, outsourcing, workforce displacement, job reduction and loss of rights) were dominant in many countries as a consequence of long-run changes (globalization, etc.) but have become more worrying after the recent crises.
I would add two more points. The first one is the persistence in the rise of unemployment in the peripheral countries of the Eurozone: despite slight improvements in the last months in Spain, Portugal and now also Italy, it will take many years to return to the pre-crisis situation. The second point is the dreadful situation of young people in these countries: youth unemployment rates are unacceptably high.
What can be done? An accommodative monetary policy is a necessary but insufficient condition; we need appropriate fiscal and structural policies, more resources from the EU budget, more effective plans (e.g. Youth Guarantee), etc.
I find this a very illuminating paper on the current European crisis. I fully agree that
the lack of fiscal capacity of the EMU is the greatest failure of EMU’s construction.
However, I don´t agree with the assertion that “in the long run, a common currency cannot be maintained in a group of countries characterized by huge differences in competitiveness and current account balances.” Productivity gaps and external deficits exist within each country. Do all American states have the same productivity? What about East and West Germany? Who cares what their external balances are? A region within a country can run a current account deficit indefinitely as long as there is a transfer of resources from the richer to the poorer regions. The real issue is the lack of a centralized budget which can provide such fiscal transfers. For example, in the case of Germany, the New Länder began with an enormous competitive disadvantage and West Germans were supposed to transfer between 3% and 4% of GDP per annum to the East. However, no provision was taken in the Eurozone to make up for the short-run negative specific consequences that peripheral economies could suffer from joining the euro. The main pending issue is to remove the asymmetry between a centralized monetary policy and a decentralized fiscal policy.
Thanks, Victor. I fully agree with your conclusion: “The main pending issue is to remove the asymmetry between a centralized monetary policy and a decentralized fiscal policy”; a progressive (although partial) centralisation of the latter is fundamental. However, according to me, huge differences in competitiveness and current account balances are not possible, in the long-run, if we want to preserve the monetary union. Why? The reason is that otherwise we would need continuous and “huge” transfers of resources (from rich to poor areas). But such transfers are not politically feasible, now and also in the foreseeable future. Permanent transfers are criticized even within Germany, within Italy, and in all countries with significant productivity differences across regions.
So, for the future Eurozone it would probably be more feasible an increasing role of such transfers (when the EU budget will be increased) together with structural policies aimed at a “real convergence”, i.e. the reduction of the largest differences across States.
This paper seeks a solution to the long cq short term EU crisis in moving the austerity policy from too heavy tax load in charge of debt countries (i.e. ‘south’ countries) to more expansionary policy on domestic demand by creditor ‘north’ countries. How could those ‘south’ countries pay
this ‘northern’ expansionary economic policy over the back of ‘sourthern’ mor debt loaded inhabitants? Moreover: Northern countries like
Germany and France bear successively 26.000 and 30.000 Eur Public Sector Debt per capita and Spain and Italy bear successively
21.000 and 35.600 Eur Public sector Debts per capita. North counted together bears nearly as much as south counted together. Considering
this small difference together with the (in relation to personal income average ) high burden of public debt per person incl childeren , the load to the consumer to pay the proposed economic expansory policy would be to north as much as unbearable as to south.
Less austerity ( what else) combined with sustainable debts ( a real achievement) could not mean more loans to enterprise (csq higher prices
csq less exchange ) and more taxes to consumer ( csq less product potency ), and which means should than finance a new economic approach ? Whereas not proposed by authors, the mental open door should be announced by parliaments’s representatives proposing a more expansive financial liquidities politic to national and international based economic and public purposes , payed by means of in initio by legalized articles permitted debtless claims .
Surprisingly this policy seems to have placed its paw all over the world, according to World Bank Tables , Graphs and Maps, to public
and private purposes , but as suddenly appeared as disappeared, to feed an obscure reason.