Memorandum by Leon Podkaminer, The Vienna
Institute for International Economic Studies
The introduction of the Euro does not seem to
have affected the dynamics of the Euro area's exports
Over the eight-year period 1999-2006, the growth
of the volume of total exports (of goods and services) of the
Euro area was slower than in the preceding decade (1989-99)—and
also as compared to other advanced economies. Total exports of
the Euro area rose by about 5.1 % per annum in real terms, while
those of all advanced countries (and the UK) by 5.5%.
Moreover, the average 5.1% growth of the Euro
area conceals large differences across the individual Euro countries.
German exports were rising at about 7.5%; the French and Spanish
at about 4.4-4.5%; while the Italian at close to a mere 1%.
Trade (in goods) within the Eurozone has been
even less dynamic than the Eurozone's trade with the rest of the
world.
These are the facts. They do not necessarily
mean that it is the Euro itself which is responsible for the relative
weakness of trade (both internal as well as external) of the Euro
area. Other factors may have been at work (ie the differentials
in overall economic growth between the Euro area and the rest
of the world, as well as between individual Euro countries, real
appreciation of the Euro vs. other currencies, etc). But, given
the facts, it would seem rather extravagant to claim that the
Euro has been conducive to a stronger trade performance.
The Euro area capital market remains largely fragmented
The common currency has had important consequences.
The yields on long-term government debt has practically converged
throughout the Euro area. Also, the spreads between interest rates
on commercial loans charged across the Euro area have narrowed
substantially. The convergence of yields on government debt has
clearly benefited the high-debt countries (eg Italy). Moreover,
the Euro-denominated corporate bond market has been growing rapidly
since 1999. No doubt the cross-country transactions have become
much more frequent than before. Whether the latter development
is due to the common currency is debatable because other factors
may have been equally important (such as intensified privatisation
across the Continent). All in all, a single Euro area capital
market is yet to emerge. Banks, subject to diverse national traditions
(and regulations), continue to play a dominant role in continental
Europe's capital markets. Despite the elimination of the exchange
rate risk, the impact of the Euro on the Euro area capital market
is still considered fairly limited.
The Stability and Growth Pact: less of a nuisance,
currently
The interpretation of the Growth and Stability
Pact agreed upon in June 2005 provides for the necessary flexibility
vis-a"-vis the circumstances such as a prolonged stagnation.
Moreover, the governments can now defend "deficit spending"
by urgent needs (such as on health system reforms or infrastructure).
All this is reasonable. But the rhetoric of the EU Commission
and of the European Central Bank is still rather annoying. Apparently,
"Brussels" continues to believe in the SGP. In due time
(eg as the German government manages to eliminate its "excess
deficit"), one may expect a tendency to return to a more
rigid interpretation of the Pact.
The Euro's losers and winners
The single monetary policy (conducted by the
ECB) is at least partly responsible for the diverging performances
of individual Eurozone members. The ECB's single interest rate
has had radically different consequences throughout the Eurozone.
While in low-inflation countries (such as Germany) the ECB rate
has implied quite high real market interest rates, in higher-inflation
countries (say, Ireland or Spain) the same ECB rate implies low
(or even negative) real market interest rates. The perverse consequence
of this is that the same monetary policy which is actually too
restrictive in low-inflation (and hence usually also low-growth)
countries, is at the same time too lax in high-inflation (and,
sometimes, also high-growth) countries. Thus, the ECB mechanism
is actually a destabilising force, amplifying rather than reducing
cyclical movements in individual member states. Of course, stagnation
(and high unemployment) in Germany have had negative consequences
for the whole of the European Union (and even more so for its
major partners in the Euro area). The German stagnation released
a tendency to suppress wages (initially in Germany itself). This
further depressed German domestic demand—and further increased
the competitiveness of German exports. In effect Germany's problems
have been spilling over to other countries (eg Italy) losing out
on competitiveness/trade.
The ECB policy has been too restrictive
The ECB "implicit inflation target"
(less than 2%) is certainly too restrictive. Other major inflation-targeting
central banks (such as the Bank of England, Sweden's Riksbank)
have a 2% central target, with a +/- 1% tolerance band. Numbers
aside, the ECB is simply too inflation-averse. It sees signs of
impending inflation where almost nobody else does.
The impacts of Euro area enlargement: next to
nothing
Slovenia, recently admitted into the Euro club,
is a tiny economy compared with the rest of the Club. Its money
(M3) stock is about 0.2% of the Euro area's M3. Moreover, the
Slovenian economy is in a fairly good shape. All in all the enlargement
is unlikely to disrupt, in any imaginable way, the functioning
of the Eurozone economy. Also, it will not affect the management
of the monetary policy. Things might be different should Poland,
Hungary or the Czech Republic accede the Euro area. But this is
unlikely to happen anytime soon. None of these countries qualifies.
Moreover, they are not eager to accede at all—at least for
the time being.
3 April 2007
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