Friday, November 4, 2016

Should Greece, Spain and Portugal have joined the Eurozone?

In a previous piece I looked at the range in unemployment rates in the EU28 and pointed out that the Eurozone19 has a 1.5 pc points higher unemployment rate than the EU28 average. That this difference comes from high unemployment in Greece, Spain, Cyprus, Italy, Portugal and France (all Eurozone, all South and mostly Mediterranean) plus Croatia (the EU's newest member, since 2013).

One reason for these statistics is that in these countries flexible employment (eg part time, mini jobs) is not as wide as eg in the UK, Germany and the Netherlands.

So why have these countries-economies not been able to produce enough jobs?

The Euro was established as a tool by the 1992 Maastricht Treaty of the EU. It was part of Economic and Monetary Union. And was implemented ten years later. The criteria for entry were public debt (as a % of GNP), convergence of inflation and interest rates as well as public deficit (as a % of GNP).

Many economists, eg German had pointed out that these macro-economic criteria were not enough and that the real economies had to converge before they joined (not after). The EU was not a US with strong regional policies and funding to help lagging areas. EU regional funding existed by it was not comparable to the US. Economies had to be prepared to join.

All countries mentioned above joined from the start except Greece that joined one year later and Cyprus that joined even later (it after all joined the EU in 2004).

The Euro reduced lending rates (including bonds) and allowed states and companies and people to borrow at much lower rates. That led to consumption increases.

The Euro was managed as a hard currency (I will do a separate piece on that) and thus it encouraged imports to the Eurozone and discouraged exports for many of its goods categories.

Post subprime crisis and in the last few years Greece, Spain and Portugal went through crises (Greece of course faced and still faces the biggest one). So did Cyprus.

None of these economies have become economic powerhouse, but they were supposed to do so before they joined. They did not become competitive by simply joining the "Champions League" of the Eurozone. But that was not supposed to be the case.

The Euro became a reality because Germany was willing to join. It is natural that the Euro and the European Central Bank was designed based on the DM and the Bundesbank (for example, unlike the US Fed, only inflation is the ECB's concern, not growth/employment).

Countries rushed to join the Euro as a status symbol and it seems that they paid a price. It more than clear Greece joined the Euro too early ie unprepared from a real economy point of view). Evidence shows that this partly applies to Spain and Portugal too.

Should some member leave the Eurozone? That is a very complicated issue. The Eurozone is not a country club that one can easily join, leave and re-join. Entry and exit cause major adaptations.

What members lost was the ability to absorb loss of competitiveness by changes in the exchange rates of their national currencies and that means that once you are in the Eurozone you have to be extremely mindful of your competitiveness.

There are anti-Euro feelings in Greece and in Italy. But in the Netherlands and even Germany too. One way to make the Euro more economically sound at this stage is to make the Eurozone an even closer economic union (and possibly political too). Make the Eurozone more of a "Single Economy" I have referred to in previous posts. With 19 or less. With a Eurozone tax system, especially in corporate taxation, and other features too.

But one drawback will always exist: Linguistic barriers, both in the Eurozone and the EU. Nothing can be done about it but it has to be taken into account in every new design idea in EU Reform.

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Nick

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