European economics

On North Sea Diaries there is an article (in french) on the impact that the Euro has had on the economies of Euroland, you can translate with bablefish or go to the North Sea Diaries post on it which includes the important sections, but is translated well. What it says is what us sceptics where saying would happen has happened, it is a mess that doesn't work.

It was claimed that it would make Euroland an economic force to rival the United states. In 2003 the USA grew 3%, while Euroland ony managed 0.6%, in 2004 the USA grew 4.4% and Euroland only 2%. This year Euroland is expected to grow a mere 1.6%.

"In three years - of 2003 to 2005 -, the cumulated growth of the American economy would exceed that of the zone euro of almost seven points, which is considerable", underlines Patrick Artus, economist at Ixis CIB.

The ECB has not run the Euro well,

"Instead of us to protect from the fluctuations from the rates of exchange, the common monetary policy accentuated", deplores Philippe Brossard, director of the economic research for Euler Hermes FAC

This is not purely their fault as the economies of Euroland are simply to divergent to run it well.

The creation of the single currency was not accompanied by a convergence of the economies of the countries of the zone euro. To have the same currency and to be subjected to the same interest rates do not prevent the existence of important variations out of matter of growth, inflation and unemployment. In 2003, Ireland recorded a rise of its GDP of 3,7 %, while Portugal saw it his moving back of 1,1 % and the Netherlands of 0,9 %. In 2004, Finland had a rate of growth more than three times superior to that of Italy (3,7 %, against 1,1 %). Even heterogeneity with regard to the trend of prices. In January 2005, the annual rate of inflation was 0,1 % in Finland, but 3,1 % in Greece. As for unemployment, it was established, in January 2005, to 4,3 % in Ireland and 4,5 % in Austria, but to 10,3 % in Spain.

These disparities complicate the task of the ECB. Must it have a rather strict monetary policy adapted to Spanish economic strength and the Greek inflationary tensions? Does it have, on the contrary, to adopt a strategy of flexibility to answer the stagnation of the economies German or Italian?

This is not helped by the inabilities of the national governments to do much themselves to correct the problems thanks to the equally unsucsessful Growth and Stability Pact, which is supposed to limit the amount of borrowing that the varrious governments can undertake, as excessive borrowing could destablise the currency. Not that the Euro has ever been particually stable, having had 40% shifts in value since its inception. Nor has this pact stopped borrowing

In 1999, the budget deficit of the zone represented 1,3 % of the GDP. In 2004, it should have passed very close to the bar of 3 %. Since years, the public deficits of many countries exceed this limit of 3 % imposed by the pact of stability. France recorded in 2004 a negative balance of 3,7 % of the GDP, Greece of 5,3 %. the International Monetary International Monetary Funds still envisages, for Germany, a deficit of 3,6 % in 2005.

but it has prevented any use of the kind of Keynesian tools that could have been used to pull Euroland out of stagnation.

Nor has the Euro helped to force the Euroland countries to perform the kind of structural reforms that they need

The hope which the euro was going to allow to speed up the structural reforms in the zone euro is not concretized. On the contrary, by offering a relative impunity to the States, the euro had the opposite effect. The errors of the economic policies are not sanctioned any more by the financial markets as they were it before within the framework of the European Monetary System (EMS), by the means of pressures on the national currency or tensions on the rates of the Government loans.

The most dangerous reform that is needed being that of pensions, currently all the major Euroland economies, but not the UK, are heading towards having deficts in their pension funds of close to, or above 100% GDP by 2050:

A recent report by Standard & Poor’s stated that,

"Without further social security reform, the EU-15 public debt ratio could rise to almost 150 per cent of GDP by 2050, leading to average deficits near 10 per cent of GDP. Most of the fiscal worsening would take place after 2020."

The situation is getting such that Pro-Eurolanders are begining to tell the truth that Euroland is a political and not just economic project. Sceptics have always understood this but it is nice to see a bit of honesty, even if it is just because they can no longer possibly credibly argue that by giving away power to Brussels we will reap massive economic rewards.

Mr Liddle [Tony Blair's former Europe adviser] told BBC Radio 4's Today programme Britain's successful economy showed there was no longer a compelling financial argument for Britain to be at the centre of the EU.

"We have got to be much more honest and open with people that Europe has always been a political project.

The UK economy is doing to well compared to Euroland for this to be at all credable, despite their claims that by not joining the Euro we would get left behind economically.