House of Lords - European Union

Select Committee on European Union Eighteenth Report

PART 4: HOW IS THE EURO WORKING FOR ITS MEMBER STATES?

34. As Mr Jonathan Taylor, Director of Macroeconomic Policy and Prospects Directorate at HM Treasury, said in his oral evidence to us:

"The euro has now been in being for 18 months or so, and while this is certainly long enough for judgements to be made about some issues it is obviously not long enough for … deeper seated structural or macroeconomic changes to have taken place or for those effects to come through fully … [In addition,] it is quite difficult to disentangle the economic elements which are a direct consequence of EMU and the economic elements which are for example a consequence of the cyclical upswing at the macroeconomic level" (QQ 1 and 3).

Mr Peter Boldt (Senior Economist of the Central Organisation of Finnish Trade Unions) concurred:

"It is very difficult to state clearly what is because of the euro, what is because of EU membership and what is because of globalisation of the economy, especially of the deregulation of monetary currency movements, because they interact" (Q 162).

We fully accept these points—and we would add the difficulties of disentangling the effects of EMU from those which the developing Single Market would have produced in any case and from those of the information revolution[22]. And it would be premature to seek to reach any firm judgements while the euro is still used only for banking and business transactions, until euro notes and coin come into use on 1 January 2001. This Part of our Report can obviously be based only on the evidence which is available so far.

WHAT HAS BEEN THE EFFECT OF THE SINGLE CURRENCY ON THE ECONOMY OF THE EURO-ZONE?

35. In order to inform our inquiry, we commissioned the preparation of a wide range of relevant statistics. The resulting tables and graphs are printed as Appendix 3, and are referred to as appropriate in the text.

36. Growth in the euro-zone has shown strong signs of revival since January 1999, with real GDP growth of 2.3 per cent in 1999 and a forecast of 3.0 per cent in 2000[23] (increasing from 2.1 per cent pa in q2[24] 1999 to 3.8 per cent pa in q2 2000 (year on year)). This includes strong growth of investment (at an average of roughly 5 per cent pa over this period[25], but relatively slow growth of private consumption expenditure (roughly 3 per cent pa)[26] and of government consumption (roughly 1.5 per cent pa)[27] over the whole of the period. The main contributions to growth came from consumer expenditure and exports. Both exports and imports have grown very fast in 2000 (at 13.1 per cent pa and 12.3 per cent pa respectively in q2)[28]. There has been no "stagflation" dilemma for the ECB so far[29].

37. As Table 1 shows[30], within the overall picture there are variations between countries.

Table 1: Annual percentage change in gross domestic product

	1996	1997	1998	1999	2000
Austria	2.0	1.2	2.9	2.3	3.2
Belgium	1.0	3.5	2.7	2.5	3.5
Finland	4.0	6.3	5.0	3.5	4.9
France	1.1	2.0	3.2	2.9	3.7
Germany	0.8	1.5	2.2	1.5	2.9
Ireland	7.7	10.7	8.9	8.3	7.5
Italy	1.1	1.8	1.5	1.4	2.7
Luxembourg	2.9	7.3	5.0	7.5	5.6
Netherlands	3.0	3.8	3.7	3.6	4.1
Portugal	3.2	3.5	3.5	2.9	3.6
Spain	2.3	3.8	4.0	3.8	3.8
EU-11	1.4	2.3	2.7	2.4	3.4
EU-15	1.6	2.5	2.7	2.4	3.3
UK	2.6	3.5	2.2	2.1	3.3
US	3.6	4.4	4.4	4.2	3.6
Japan	5.2	1.6	-2.6	0.3	1.1

Source:	Eurostat, New Cronos Database: National Accounts, supplemented by Data for short-term economic analysis.
Note:	Growth rates are measured from the middle of each year.

Ireland's GDP growth has been remarkable over the last five years, and indeed over the whole decade[31]. Finland's growth has been very robust, as the country has emerged from its deep recession of the early 1990s; the Netherlands has grown steadily; Spain has grown strongly since 1997, and Portugal a little less so. The growth rates in the "core" participating Member States of France, Germany, and Italy have on the whole been rather lower than the growth rates of these countries, though they have increased in 2000 relative to 1999.

38. The unemployment rate in the euro-zone has been falling, from 10.9 per cent on average in 1998, to 10 per cent in 1999, and further in 2000, to 9.4 per cent in March, 9.1 per cent in June, and 9.0 per cent in August[32]. The average masks wide variations between countries, with in particular significant falls in Spain, Ireland and Finland, and relatively low unemployment throughout in the Netherlands. In addition to the fall in rates of unemployment, increasing attention has been given to figures for employment—the absolute numbers employed and the percentage of the population of working age employed—and to changes in them. There has been an increase in the rate of growth of employment in the euro-zone, from 1.6 per cent pa in 1998, to 1.8 per cent pa in 1999, to 2.2 per cent pa (year on year) in q2 2000.

39. Inflation as defined by the Harmonised Index of Consumer Prices (HIPC) in the euro-zone as a whole was within the 0-2 per cent target range through 1999 and until May 2000. Since then, it has risen above 2 per cent—to 2.4 per cent pa in June and July 2000, and 2.3 per cent pa in August 2000. However, differences in inflation rates between participating Member States have widened a little. Whereas country inflation rates in q1 1999 ranged from 2.6 per cent pa in Portugal to -0.1 per cent in Luxembourg, in q2 2000 they ranged from 5.1 per cent pa in Ireland to 1.6 per cent pa in France[33].

40. In response to the question forming the title of our inquiry, "How is the euro working?", Professor Dr Norbert Walter, Chief Economist of the Deutsche Bank Group, replied "very well indeed". He pointed in particular to the acceleration of economic growth after the introduction of the euro, with foreign demand as one driving force ("supported by the relatively low euro exchange rate and the momentum of export markets in Asia, Central and Eastern Europe and the United States"), and domestic demand as another (with rising real wages and higher employment raising consumption in the participating Member States). Price stability was "more or less achieved", with inflation remaining "subdued" despite the tripling of oil prices since early 1999. Core inflation (excluding energy prices) remained at 1.4 per cent in the euro-zone, compared with 2.6 per cent in the United States (p 122). In a recent press article[34], Dr Walter is quoted as saying that "the euro has set off a chain reaction among the member countries that cannot be stopped. National borders and national champions, including stock markets, will soon be quaint notions that belong to the past". Professor Minford was more doubtful, saying: "We can argue about whether there are microeconomic benefits from this degree of monetary integration. Obviously there are macroeconomic policy problems because the removal of that adjustment mechanism means there has to be some substitute"; the problem was the lack of an appropriate alternative mechanism for coping with short run shocks (Q 201).

41. The Governor of the Bank of England (Sir Edward George) said that growth in the euro-zone had picked up after a "fairly sluggish" start. Unemployment started at "terribly high" levels, but had begun to come down. "Core inflation has really been quite low—1.5 per cent or so", though the impact of oil prices, exaggerated by the weakness of the euro, had caused recorded inflation to accelerate.

"Basically, however, looking at the euro-zone economy I think it is actually not at all a bad performance; in fact, it is quite a good performance … On the whole I think the evidence is [that] in terms of the euro-zone [the euro] has been working pretty well" (QQ 258 and 289).

He judged the performance of the ECB to have been "pretty satisfactory"—which he said for a central banker was "more than faint praise" (QQ 275-277). Professor Fitz Gerald agreed that growth in the euro-zone as "reasonably robust", with unemployment falling. Part of this must be due to the enhanced consumer and investor confidence resulting from the prospect of price stability, low and stable interest rates, and prudent budgetary policies (Q 229).

42. Witnesses also gave us their views on how the euro was working within the individual participating Member States. The Austrian government considered that "today we can say that the introduction of the euro and the creation of Economic and Monetary Union have been an unmitigated success" (p 113), and the German Ambassador, HE Dr Hans-Friedrich von Ploetz, described price stability within the euro-zone as "a resounding success" (Q 294). Others identified a number of benefits for their own countries which they said were being perceived already, such as higher growth (mentioned for example by France[35], Germany, Italy, the Netherlands); increased stability (Belgium, Finland, Spain); diversification (Finland[36]); increased competitiveness (Finland, France, Germany, Italy, Portugal); increased employment, and labour market reforms (Germany, Ireland, the Netherlands); increased investment (Germany); and lower inflation (Germany, Italy).

22 A point made by the Dutch Ambassador (Q 337). Back

23 See Appendix 3, Table 1.4. Back

24 References in this form are to the relevant quarter of the year specified. Back

25 See Appendix 3, Table 8.2-though it slowed in q2 2000. Back

26 See Appendix 3, Tables 7.2 and 7.4. Back

27 See Appendix 3, Table 7.6. Back

28 See Appendix 3, Tables 3.1 - 3.6. Back

29 See paragraph 157. Back

30 See also Appendix 3, Table 2.1. Back

31 Figures for Ireland's GDP are positively affected by the accounting practices of multinational corporations, but even when this effect is removed by using alternative measures of economic activity, such as GNP, the growth rate remains remarkable. Back

32 See Appendix 3, Table 6.1. Back

33 See Appendix 3, Table 5.2. Back