By André Cartapanis
Translation by: Davina Durgana
Passage au crible n°25
Since the onset of the Greek Financial Crisis, controversy has multiplied in Europe. A policy of financial solidarity must be implemented to the benefit of the misbehaving members of the European Union, under the form of a rescue plan to the order of 750 million Euros. This arrangement coupled with an adjustment policy of considerable size is taking place in Greece, but is influencing the entire Euro Zone. From this point forward, must we introduce the most Draconian budgetary rules to avoid repeating such a catastrophic scenario, or on the contrary, must we begin the dissolution of the Monetary Union?
> Historical background
> Theoretical framework
> Analysis
> References
In 1999, the creation of the single currency (Euro) initially had the ambition to put an end to the repetitive crises that struck the European economy and impeded its growth. So long as the liberalization of capital controls had taken place in the heart of the European Union and the fixed exchange-rates governed the common European market, the multiplicity of monetary policies had become impossible, due to its tendency to provoke repetitive exchange rate crises. The creation of the Euro was intended to guarantee a greater degree of efficiency in monetary policy as far as the fight against inflation, thanks to the credibility of an independent Central European Bank (BCE). This institution was responsible for price stability, respecting the Pact of Stability and supporting growth in the domain of budgetary deficits and the public debt. In addition, the Euro was to give increasingly flexible margins in decreasing the restrictions on balance of payments and the distortions of exchange rates within the Euro Zone. This new currency was meant to equally reduce the sensitivity to fluctuations in exchange rates in relation to other currencies, the U.S. Dollar in particular. However, the difficulties of macroeconomic convergence were underestimated when the single currency had to enter the heart of an excessively heterogeneous European community. Due to this, the Economic and Monetary Union did not constitute an optimal monetary zone.
1. Optimal Monetary Zone: In order to properly function, a Monetary Union must theoretically meet a series of macroeconomic criteria- complete factor mobility; of wage labor in particular, budgetary federalism and nominal convergence, so that it can support asymmetrical shocks. Asymmetrical shocks refer to specific shocks affecting respectively each member of the Monetary Union, while all holding a single monetary policy, and rendering impossible intra-European adjustments to the exchange rate. Faced by worries of those with a strict respect for the criteria ex ante of joining an Optimal Monetary Zone, some have kept their focus on the risk of recurrence that could follow adherence to a Euro Zone on the characteristics of each member-state, facilitating as well, ex post, the macroeconomic functioning of the Zone.
The development of intra-European commerce and financial integration depends on monetary integration to drive an increased synchronization of cycles and a stabilizing of levels of consumption by depending on a strengthening of the intra-European allocation to the reserves. However, the situation presently appears to be too optimistic. To the contrary, the decade from 2000-2010 was characterized by a very clear differentiation of growth trajectories seen in many economies of the Euro Zone. In this way, the heterogeneity of the member-states was further augmented by the creation of the Euro.
2. Heterogeneity of the Euro Zone: The overall persistence of the distinct heterogeneities of the Euro Zone member-countries, such as; systems of growth more or less tied to State or consumer debt, fiscal distortions, differentiation of social systems and types of international specialization, do not represent an overall obstacle to the efficient functioning of the Economic and Monetary Union. The fact remains that wage labor differentiations or the differences regarding modes of specialization seem, to the contrary, likely to introduce increasing efficiency in the allocation of factors of production. However, that assumes that those differentiations do not accompany lasting macroeconomic imbalances – in growth, unemployment and debt – that render this configuration unsustainable. And yet, for the last ten years, the monetary policy of the Central European Bank and the domestic coordination of budgetary policies, imposed by the Pact of Stability, have been unable to respond to the specific trajectories of the economies of the Euro Zone. Furthermore, individual economies are not punished for the recurrent macroeconomic imbalances of the member-states. Finally, the Euro Zone was weakened by a mediocrity in global performance, in terms of growth and employment. Naturally, the global crisis aggravated such a process.
Since the middle of 2000, the heterogeneity of the Euro Zone had manifested with strong and divergent exports, the effects of which, were apparent in the domestic markets of the European Union. This was evident in the evolution of wage labor differentiations and increases in rates of individual consumer debt as well as States’ debt. Coupled with preexisting heterogeneity, shocks of supply and demand accentuated internal distortions, with which, the adjustment policies could not be applied to the whole European Union. The rules and institutions of economic governance of the Euro Zone, have certainly adapted to cyclical shocks of weak magnitude on the Union. Consequently, these institutions cannot respond effectively to macroeconomic dynamics and divergent structures. Above all, this is evident when faced with the German policy of wage restriction.
With the Maastricht Treaty and the Treaty of Amsterdam, the European governments have stayed at the crossroads of monetary policy. They have come very far, in creating a single currency within an economic space that is almost exclusively dedicated to the objective of monetary stability, but they have not come far enough on the road to integration of economic policies of the member-countries of the Euro Zone.
It is important to understand that the Monetary Union cannot limit itself to a basic technique that optimizes the use of economic policy instruments and reduces dysfunction originating from the instability of the exchange rate. For many – such as Jacques Delors –the Economic and Monetary Union represents a political project that is aiming toward an improvement in the economic and political integration of Europe. Yet, the crisis of the Euro Zone and the destabilizing effects of globalization will necessitate a new form of the Euro Zone. Therefore, it is urgent to construct a new model of the European Monetary Union.
Beetsma Roel, Massimo Giuliodori, « The Macroeconomic Costs and Benefits of the EMU and other Monetary Unions : An Overview of Recent Research », Journal of Economic Literature, 2010, (forthcoming).
Cartapanis André (Éd.), « Les enseignements d’une décennie d’euro », Numéro spécial de la Revue d’Économie Politique, 120(2), mars-avril 2010.
European Commission, « EMU@10: Successes and Challenges after 10 Years of Economic and Monetary Union », European Economy, (2), 2008.
Mackowiak Bartosz,Francesco Paolo Mongelli, Gilles Noblet, Frank Smets, (Ed.), The Euro at Ten- Lessons and Challenges, European Central Bank, Frankfurt, 2009.
