EKIP– Expert Club for Economics and Politics A Different Opinion
| Official video presentation of the analysis |
The eurozone suffers from deep structural problems that are hampering economic growth and leading to the accumulation of imbalances among member states, our new analysis shows. The common European currency is failing to achieve its main goals– ensuring faster growth and convergence in economic development among member states.
Since its creation in 1999, the eurozone’s economic development has lagged behind most of the developed world. According to the World Bank, between 1999 and 2021, the eurozone’s gross domestic product grew by 30.4%. During the same period, the US GDP grew by 55.3%. Growth in a number of other less developed economies has also been outpacing – Canada’s 51.3% over the period, the UK’s 36.9%, and developed European countries outside the eurozone, such as Switzerland, Sweden, Norway and Denmark, grew by 49.1%, 62.3%, 42.9% and 34.9% respectively. Only Japan has lagged behind the eurozone in terms of economic growth over this period.
In this report, we will defend the thesis that the slow economic development of the eurozone since its inception is due to its structural shortcomings as a monetary union. The countries that were included in the eurozone when it was created in 1999 did not form an optimal currency area, which led to the accumulation of macroeconomic imbalances. Subsequently, instead of achieving economic convergence between its constituent member states, the eurozone caused the opposite and led to divergence in their economic development. It is this divergence and the lagging behind of a number of member states, including some of the largest such as Italy, that leads to the overall lagging behind of the eurozone compared to many other developed economies.
Some of the main conclusions of our analysis are as follows:
- To be an optimal currency area, the eurozone must meet a certain set of economic and political criteria. These criteria were not met when the euro was created, nor today, over 20 years later.
- Because the eurozone is not an optimal currency area, the euro has brought mainly economic negatives to its member states. Since its creation in 1999, the euro has failed to stimulate economic convergence among its member states. On the contrary, divergence is evident in a number of key economic indicators.
- In 1999, Italy's GDP per capita in purchasing power parity was 7% higher than that of the euro area as a whole. In 2021, Italy's GDP per capita is already 9% lower. Compared to Germany, the gap is even more significant. In 1999, Italy's GDP per capita was 2.6% lower than that of Germany, and in 2021 it is already 20.7% lower.
- Even after the reforms undertaken after 2012 in response to the severe debt crisis, the eurozone has failed to become an optimal currency area.
- The eurozone's economic problems, stemming from its structural shortcomings, are hindering deeper political integration within the EU. Economic divergence is generating conflicts between different member states over what the monetary policy of the European Central Bank (ECB) should be.
- The eurozone is becoming a tragedy of the commons, in which member states with different business models, different economic indicators, and different economic interests try to exploit a common resource (the currency) for their own benefit, while passing the cost of this exploitation onto others.
- The ECB is pursuing a monetary policy that does not solve, but rather exacerbates, the problems of the eurozone. “Unconventional” policies such as “quantitative easing”, which aim to reduce interest rates on the government debt of fiscally weak member states, lead to the deepening of their economic problems. This policy is not sustainable in the long term; sooner or later, the accumulation of economic imbalances in the eurozone will either lead to a debt crisis in the fiscally weak countries, or will force the ECB to pursue a pro-inflationary monetary policy, which will lead to a permanent increase in the inflation rate in the monetary union.
A video presentation of the analysis can be found at this link.
