Since the euro was adopted as a virtual currency in 1999 (and the exchange rates between the currencies of the then 11 countries fixed en route to adopting the euro), growth among the euro-area countries has been lacklustre. The euro-area annual growth rate was just under 2% in 2002 to 2007, followed by 0.3% in 2008, -4.5% in 2009, then 2% in 2010, and an average of 0.8% 2011 to 2016. Over the period 1999 to 2016, the average was 1.1%. Unemployment declined through to 2007 down to 7.5%, then rose in the aftermath of the financial crises and the effects of fiscal austerity programmes to 12% in 2013, and has gently declined since to 10% in 2016 and likely to come close to 9% at the end of October 2017. There are notable disparities between different countries’ experiences, with Italy’s growth 1998 to 2016 being an annual average rate of 0.2%, and unemployment in Greece over 23% and Spain close to 20% in 2016.
The economic difficulties of many of the now euro-area counties had been noted in the early 1990s. In the late 1980s, all the talk was of the “single market” and the removal of non-tariff barriers to boost trade between member countries and to stimulate economic activity. The EC forecast a 6% boost to GDP following the single market. The launch of the single currency had a whole range of political forces behind it, but was viewed as enhancing economic integration and giving some boost to trade between member countries. “Structural reforms” of labour and product markets (for which read de-regulation and liberalisation) have been frequently promoted as lowering unemployment and improving economic performance. Writing in 2008, the European Commission (2008, p. 6) claimed that “the bulk of these improvements [in the reduction of unemployment] reflect reforms of both labour markets and social security systems carried out under the Lisbon Strategy for Growth and Jobs and the coordination and surveillance framework of EMU, as well as the wage moderation that has characterised most euro area countries.” The ECB amongst others has been consistent in its calls for “structural reforms,” and the promotion of “structural reforms” have become as a significant part of the “fiscal compact.”
These major policies (single market, single currency, “structural reforms”) have all been promoted as enhancing economic performance. Yet the economic performance of the euro area in particular has been anaemic to say the least, and these policy “pushes” have not been self-evidently successful. The supposed stimulus to trade between EU member countries was rather muted, and indeed trade within the EU grew less quickly that trade between EU and the rest of the world. Over the period 2002-2016, trade between EU member countries grew (in nominal terms) by around 65%, while trade between EU countries and the rest of world grew by around 90%. In two earlier blog posts (here and here) and in other writings (e.g. Arestis and Sawyer 2013) we have argued that many of the “structural reforms” have detrimental effects on inequality and productivity. “Reforms” attacking the level of minimum wages and undermining the position of trade unions exacerbate inequality. “Reforms” attacking employment protection and security of employment do not help to foster training and innovation. Indeed, “structural reforms” were promoted to reduce “structural unemployment” and yet it is notable that (on the OECD’s estimates) the rate of “structural unemployment” in 2016 was 8.9%, compared with an average of 9.0% in the period 1992-2001, and 9.1% over 2002=2011.
The operations of the euro area (and the Economic and Monetary Union) are hampered by restrictive fiscal policies which strive (often unsuccessfully) for balanced budgets (and for some under the excessive deficit procedure budget surpluses). The attempt at a uniformity of fiscal policy (with the common aim of a “balanced structural budget”) cannot take into account the differing needs of countries for infrastructure investments nor does it take into account the differing economic circumstances of countries.
The adoption of the euro took place without any thought to the current-account imbalances between the member countries, and without any perspective on the sustainability of those imbalances. The single currency is a fixed-exchange-rate system (between the member countries) par excellence without possibilities of exchange-rate adjustments to address the current-account imbalances other than internal deflation designed to reduce domestic prices. The current-account imbalances grew in the first decade of the euro, with associated capital flows between countries. In the second decade of the euro, current-account deficits were drastically reduced as internal deflation brought imports down. But the underlying pattern of imbalances has not been resolved, and countries with high unemployment seeking a return to prosperity will face severe constraints from their current-account position.
There are no doubts, and many reasons, for the poor performance of most of the euro-area economies. Yet the austerity policy agenda (from the Stability and Growth Pact, the “fiscal compact,” etc., with the drives for balanced budgets), the pursuit of “structural reforms,” and the failures to address the current account constraints on euro-area member countries have all contributed to the lacklustre economic performance.
Arestis, P. and Sawyer, M. (2013), Economic and Monetary Union Macroeconomic Policies, Houndmills, Basingstoke: Palgrave Macmillan. Chapter 6.
European Commission (2008) ‘EMU@10 Successes and challenges after ten years of Economic and Monetary Union’, European Economy 2, 2008.
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