Academic journal article The Cato Journal

Euro Imbalances and Adjustment: A Comparative Analysis

Academic journal article The Cato Journal

Euro Imbalances and Adjustment: A Comparative Analysis

Article excerpt

This article deals with the main problems and proposed solutions with respect to the euro. I start with what I perceive to be confusion in the debate on the euro. The next section shows a large variation in the growth performance in the eurozone, and more broadly in the European Union (EU). This should make us skeptical when hearing about the crisis of the euro, or of Europe. I then proceed to discuss what the problem countries in the eurozone suffer from. The next section deals with a more difficult question: What are the links between the euro architecture and the accumulation of these problems--that is, the imbalances and structural barriers to economic growth in some members of the eurozone? I then proceed to discuss the adjustment under the euro after 2008, focusing on the weaknesses of the policies of the crisis management. The article ends with a critical discussion of the problems and solutions put forward in the debate on the euro.

Against this background and based on the previous diagnosis, I sketch what I consider to be the right approach to solving the problems of the eurozone. Throughout the article I discuss the euro as a monetary arrangement, the weaknesses of which have to be identified by taking a comparative perspective--namely, that of other currency unions.

Confusion in the Debate on the Euro

There is a lot of confusion in the debate on the euro. First, problems that have appeared in the eurozone are often confused with those caused by the euro. As a result, the euro is blamed for almost everything bad that emerged after the introduction of the Economic and Monetary Union (EMU). In discussing the impact on the euro, little effort is usually dedicated to spelling out what would have been the developments in the eurozone under alternative monetary arrangements--that is, if EMU had not been introduced.

Second, more general issues are mixed up with those specific to the eurozone, often without a clear separation between the two categories. The first group includes discussions on hard (fixed) pegs versus free floats and on the causes of the financial crises. It also includes some newer issues like the proper fiscal policy during a financial crisis and the consequences of unconventional monetary policy. Obviously, one cannot avoid considering general issues in discussing the problems in the eurozone. However, general arguments are not enough for the proper diagnosis and the proper therapy with respect to the euro. In addition, one must isolate and analyze the specificities of the eurozone--for example, why differences in risk premiums between such different countries as Greece and Germany were so small until recently, and why fiscal constraints in the member countries of the eurozone have proven so weak. Moreover, to isolate and discuss these specificities, one must compare the EMU with other types of hard-peg arrangements.

Third, there is a lot of verbiage in the debate on the necessary solutions to the euro's problems, exemplified by such popular, but unclear, expressions as "fiscal union" or "political union." That rhetoric, used by the proponents of the further centralists integration in the eurozone, reflects, I think, wishful thinking and an unreflective belief that a monetary union necessarily requires a political union.

Finally, there are excessive generalizations in the discussions on the euro which mask a huge variation in the economic performance of the member countries, especially since 2008. (The same goes for the rest of the EU.) Not every member has turned out to be a problem country. The division into the center and the periphery has emerged.

The Variation in GDP Growth in the EU, 2008-13

Table 1 shows the large variation in the growth performance in the EU during 2008-13. The cumulative growth in the eurozone over 2008-13 ranged from 5.2 percent in Slovakia to -23.6 percent in Greece; among the non-euro EU members, it ranged from 12. …

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