Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Is EMU Sustainable?
Wim Koesters
Ruhr-Universitaet Bochum and
Rheinisch Westfaelisches Institut
fuer Wirtschaftsforschung Essen
[email protected]
Wim Koesters
1
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Contents
1.
2.
3.
4.
Motivation
EMU - Some Basic Facts
Economic Conception of EMU
Fundamental Requirements for the
Sustainability of EMU
5. Critical Assessment on the Basis of
Actual Policy
Wim Koesters
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Motivation
„EMU is unique in history. It is one of the
great success stories in the long standing
process of European integration that
started immediately after the end of World
War II.“
O. Issing (2005), p. 31
(Chief economist of ECB)
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Rheinisch-Westfälisches Institut für Wirtschaftsforschung
1.
● Speaking as from a soap box politicans and others take the lasting
success of EMU for granted mainly by pointing to the stability of the
Euro.
● In their daily politics, however, they intentionally or unintentionally
act to the damage of the working of EMU which in the extreme could
lead to the failure of it.
● Since recently those threats grew markedly it is high time for a
discussion on the sustainability of EMU pointing to the dangers in
the hope that they then will be fully recognized and avoided by
policy makers.
● There exists a good tradition in Germany and Europe that academic
economists act in such a way by reminding and warning in public
(see e.g. the manifesto „The Euro comes too early“ signed by more
than 170 university professors of economics and published in the
Financial Times on February 9, 1998)
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Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Motivation (2)
●The failure of EMU would endanger the
European integration project alltogether.
●This would hurt the world economy much more
then e.g. the East Asian Crisis some years ago
and would, therefore also have a negative
impact on Korea and other economies in this
part of the world.
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Motivation (3)
EMU – Some Basic Facts
Chronology of European Integration
1957
1979
1987
1992
1993
Treaty of Rome (European Economic Community, EEC)
Establishment of the European Monetary System (EMS)
Single European Act (SEA)
Signing of Maastricht Treaty on European Union
Single European Market comes into effect
Chronology of European Monetary Union
July 1, 1990
January 1, 1994
December 13/14, 1996
January 1, 1999
January 1, 2002
Wim Koesters
Start of Preparatory Phase (Stage 1)
Start of Phase of Convergence (Stage 2)
Agreement on “Stability and Growth Pact”
Start of Monetary Union (Stage 3)
Distribution of Euro Notes and Coins
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2.
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
EMU – Some Basic Facts (2)
Table 2.1
Key real economy characteristics of the euro area in 2004
Unit
Euro area
1
Population
millions
309,7
2
GDP (share of world GDP)
%
15,3
2
GDP per capita
€ thousands
24,4
Services (including non-market
% of GDP
70,8
services)
Unemployment rate (share of the
%
8,8
labour force)
Labour force participation rate
%
69,2
4
Employment rate
%
62,8
General government
Surplus (+) or deficit (-)
% of GDP
-2,7
5
Gross debt
% of GDP
70,6
Revenue
% of GDP
45,4
of which direct taxes
% of GDP
11,6
of which indirect taxes
% of GDP
13,8
of which social con% of GDP
15,9
tributions
Expenditure
% of GDP
48,2
of which final consumption
% of GDP
20,4
of which social transfers
% of DGP
22,8
76
Exports of goods
% of GDP
14,8
6
Exports of goods and services
% of GDP
19,5
6
Imports of goods
% of GDP
13,5
6
Imports of goods and services
% of GDP
17,8
7
Exports (share of world exports
%
31,1
6
Current account balance
% of GDP
0,6
United States
294,0
20,9
34,7
79,5
Japan
127,6
6,9
25,9
69,6
5,5
4,7
75,4
71,2
72,0
68,4
-4,4
48,7
29,4
11,1
7,2
7,0
-7,0
3
149,2
31,6
7,3
8,3
10,9
33,8
15,5
11,8
6,9
9,8
12,6
15,0
10,4
-5,7
38,6
17,7
10,9
11,5
13,6
8,7
11,6
5,7
3,7
Sources: Eurostat, IMF, European Commission, OECD, Reuters, ECB, national data and ECB
1
2
calculations. Notes: Euro area: annual average; United States; mid-year; Japan: 1 October. – Data
3
for United States and Japan converted into euro at OECD purchasing power parities (PPPs). – 2003
4
figures. – As a ratio of the number of persons to the working age population (those aged between 15
5
and 64). – For euro area: gross government debt as defined in Council Regulation (EC) No 3605/93.
6
7
– Balance of payments data, only extra-euro area trade flows for the euro area. – IMF World
Economic Outlook; the world export share of the euro area includes intra-area trade, which
represents roughly 50% of the euro area’s total exports.
Source: ECB
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EMU – Some Basic Facts (3)
Selected economic indicators of EU countries
Real GDP growth1
Inflation rate2
2003
2004
2005
2003
2004
2005
Austria
1,4
2,4
1,7
1,7
1,3
2,0
Belgium
0,9
2,6
1,4
1,5
1,9
2,5
Cyprus
1,9
3,9
3,8
2,8
4,0
1,9
Czech Republic
3,2
4,4
6,2
-0,1
2,6
1,6
Denmark
0,7
1,9
3,4
2,0
0,9
1,7
Estonia
6,7
7,8
8,4
1,4
3,0
4,1
Finland
2,4
3,6
2,1
1,3
0,1
0,8
France
0,8
2,3
1,5
2,2
2,3
1,9
Germany
-0,2
1,6
1,9
1,0
1,8
1,9
Greece
4,8
4,7
3,7
3,5
3,0
3,5
Hungary
3,5
3,0
4,0
5,2
4,7
6,8
Ireland
4,4
4,5
4,4
4,0
2,3
2,2
Italy
0,0
1,1
0,0
2,8
2,3
2,2
Latvia
7,2
8,5
10,2
2,0
2,9
6,2
Lithuania
10,5
7,0
7,0
-1,1
1,2
2,7
Luxemburg
2,9
4,5
4,2
2,5
3,2
2,8
Malta
-2,5
-1,5
2,5
1,9
2,7
2,5
Netherlands
-0,1
1,7
0,9
2,2
1,4
1,5
Poland
3,8
5,3
3,2
0,7
3,6
2,2
Portugal
-1,1
1,1
0,3
3,3
2,5
2,1
Slovakia
4,5
5,5
6,0
8,4
7,5
2,8
Slovenia
2,7
4,2
3,8
5,7
3,7
2,5
Spain
3,0
3,1
3,4
3,1
3,1
3,4
Sweden
1,7
3,7
2,7
2,3
1,0
0,8
United Kingdom
2,5
3,2
1,8
1,4
1,3
2,0
EU
1,2
2,4
1,6
1,9
2,1
2,2
EMU
0,7
2,1
1,3
2,1
2,1
2,2
EU-15
1,0
2,3
1,4
2,0
2,0
2,1
Own calculations on the basis of EUROSTAT data and national sources. – 1Annual percentage
changes. – 2Harmonized Index of Consumer Prices (HICP).
Source: RWI Essen
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EMU – Some Basic Facts (4)
Selected economic indicators of EU countries (cont.)
Unemployment rate3
Government budget deficit4
2003
2004
2005
2003
2004
2005
Austria
4,3
4,8
5,2
-1,2
-1,0
-1,9
Belgium
8,2
8,4
8,4
0,1
0,0
0,0
Cyprus
4,1
4,7
5,3
-6,3
-4,1
-2,5
Czech Republic
7,8
8,3
7,9
-12,5
-3,0
-4,8
Denmark
5,4
5,5
4,9
1,0
2,3
3,6
Estonia
10,0
9,7
7,8
2,6
1,7
0,3
Finland
9,0
8,8
8,4
2,5
2,1
1,8
France
9,5
9,6
9,5
-4,2
-3,6
-3,0
Germany
9,0
9,5
9,5
-4,1
-3,7
-3,3
Greece
9,7
10,5
10,0
-5,7
-6,6
-4,3
Hungary
5,9
6,1
7,1
-6,5
-5,4
-6,1
Ireland
4,7
4,5
4,3
0,2
1,4
0,3
Italy
8,4
8,0
7,6
-3,2
-3,2
-4,3
Latvia
10,5
10,4
9,0
-1,2
-0,9
-1,5
Lithuania
12,4
11,4
8,2
-1,2
-1,4
-1,5
Luxemburg
3,7
4,8
4,3
0,2
-0,6
-2,3
Malta
7,6
7,3
7,2
-10,4
-5,1
-3,9
Netherlands
3,7
4,6
4,7
-3,2
-2,1
-1,2
Poland
19,6
19,0
17,7
-4,8
-3,9
-2,9
Portugal
6,3
6,7
7,6
-2,9
-3,0
-6,0
Slovakia
17,6
18,2
16,4
-3,8
-3,1
-4,1
Slovenia
6,7
6,3
6,3
-2,7
-2,1
-1,7
Spain
11,5
11,0
9,2
0,0
-0,1
1,0
Sweden
5,6
6,3
6,3
0,2
1,6
1,6
United Kingdom
4,9
4,7
4,6
-3,3
-3,1
-3,1
EU
9,0
9,1
8,7
-3,0
-2,6
-2,6
EMU
8,7
8,9
8,6
-3,0
-2,7
-2,6
EU-15
8,0
8,1
7,9
-2,9
-2,6
-2,6
Own calculations on the basis of EUROSTAT data and national sources. – 3EUROSTAT standardized
unemployment rate, annual average. – 4As a percentage of GDP.
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EMU –Some Basic Facts (5)
Real GDP Grow th of EMU, EU, USA and Japan (%)
8,0
USA
USA
7,0
Japan
6,0
5,0
4,0
3,0
2,0
European Union
1,0
0,0
-1,0
European Monetary
Union
-2,0
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
-3,0
Sources: OECD;
ESRI
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EMU –Some Basic Facts (6)
Standardised Unem ploym ent Rates (%)
12,0
11,0
European Monetary
Union
USA
10,0
9,0
European Union
8,0
7,0
6,0
5,0
4,0
Japan
3,0
2,0
1,0
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
0,0
Source: OECD
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EMU- Some Basic Facts (7)
Inflation Rate (CPI %)
14,0
13,0
12,0
11,0
10,0
European Monetary Union
9,0
8,0
7,0
European Union
6,0
5,0
USA
4,0
3,0
2,0
Japan
1,0
0,0
-1,0
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
-2,0
Source: OECD
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EMU- Some Basic Facts (8)
Inflation rate in Germany and EMU
7
Start EMU
Germany CPI 1)
6
5
4
EMU HCPI 2)
3
averag
e (2.0)
average (2.6)
2
1
0
1992
1993
1)
2)
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
CPI % change over corresponding period of previous year (Source: IMF International Financial Statistics)
HCPI % change over corresponding period of previous year (Source: IMF International Financial Statistics)
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● Thus, up to now EMU was quite successful in
creating a stable currency. In spite of that, the
Euro is not yet fully accepted by Europeans
(„Der Euro ist ein Teuro“).
● With respect to growth and employment EMU on
average falls back behind the rest of EU und
other countries.
● For several reasons the seemingly easy solution
of trading off price stability for more growth and
employment is not possible.
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EMU – Some Basic Facts (9)
● Among others, it would raise existing
acceptance problems for the new currency and
neglect the fact that mainly big member states
(especially Germany, Italy, France)
underperform whereas mainly smaller ones
(notably Ireland) do well.
● My proposition is that it is not EMU per se that
creates the differences in performance but the
way how the challenges put by its new
framework for economic policy are taken up by
the member states.
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EMU – Some Basic Facts (10)
Economic Conception of EMU
• EMU and the European Single Market (ESM) for goods,
services, capital, and labour have to be looked at together since
their success is dependent upon each other.
• EMU is seen as „natural“ supplement of ESM, since by
removing exchange rate risks, simplifying comparisons of
prices etc. it enhances competition.
• It will be shown, that EMU needs a working ESM, since the
loss of at least two policy instruments on the national level
requires more wage and price flexibility.
• Thus both EMU and ESM constitute the new framework for
economic policy in Europe challenging prevailing structures.
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3.
The monetary constitution of EMU can be described in
short by
- the mandate of the ECB in article 105 of the EU Treaty
“The primary objective of the ESCB is to maintain price
stability.”
- the independence of ECB (article 108 of the EU Treaty),
- the prohibition of monetary financing of public budget
deficits (articles 101 and 102 of the EU Treaty),
- The no-bail-out clause (article 103 of the EU Treaty) and
- the fiscal provisions (article 104 of the EU Treaty) and the
Stability and Growth-Pact
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Economic Conception (2)
The German monetary constitution served as a model for the
European monetary constitution
- The first three characteristics just described were taken from
the German monetary order
- The organizational structure of the ECB resembles that of the
Deutsche Bundesbank very closely
- Just like the Deutsche Bundesbank the ECB publicly
announced a monetary policy strategy: The Two Pillar Strategy
(economic and monetary analysis)
- By all this part of the high reputation and credibility of the
Deutsche Bundesbank was transferred to the ECB
- All these factors explain the continued price stability within
EMU
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Economic Conception (3)
The stability orientation of European monetary policy is,
however, not guaranteed in the long run, because an important
element of the German monetary order was not transferred to
the European level: the system of checks and balances securing
an accountability of the Deutsche Bundesbank.
A possible substitute for this was not introduced into the
European monetary order.
Therefore, one still has to wait, whether the bureaucracy ECB in
the long run will stick to its mandate strictly.
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Economic Conception (4)
• The European Single Market (ESM) aims at
removing all non tariff barriers and guaranteeing
the free movement of goods, services, capital
and labor within EU.
• By this not only goods and services markets but
also factor markets will be open within EU.
• Capital and labor (human capital) mobility thus
increased strengthening their options for „voice“
and „exit“.
• In addition, the country of origin principle
enables an evasion from national jurisdictions
and regulations even without factor movements.
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Economic Conception (5)
• All this, in combination with yardstick competition should
bring about more competition on the economic markets
as well as between national regulatory systems.
• This in turn should put pressure on the member states to
enact the badly wanted structural reforms of labor
markets, social security and tax systems etc.
• By that wages and prices should become more flexible
to make EU and EMU economies more adaptable.
• This is absolutely necessary to balance the loss of
national adjustment instruments:
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Economic Conception (6)
- Monetary policy is no longer a national economic policy instrument
but a European one assigned to the goal of price stability in the Euro
area
- Exchange rate policy is no longer a policy instrument within EMU
- Fiscal policy remains a national policy instrument but its use is limited
by the Stability and Growth Pact (3 % deficit and 60 % debt criterion).
Thus it can not serve stabilizing purposes as much as in the past but
has to be used more for allocative ones.
- The fight against the high unemployment in many EMU-countries has
to be done mainly by wage policy. Trade unions and employer
federations have to bear more responsibility for the goal of high
employment.
- This is not a Keynesian but much more a neoclassica assignment
approach founded by institutional economics.
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Economic Conception (7)
In sum the deliberations before show that the
success of EMU and ESM is interdependent.
For EMU this means that the danger of its failure
will grow the less ESM works.
In case, however, the economic conception just
described would be realized fully, EMU member
countries would meet the challenges of
globalization better and by adjusting faster than
other countries would get a lead over them.
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Economic Conception (8)
Fundamental Requirements for the
Sustainability of EMU
• The Euro area is a monetary union without a fully
fledged political union.
• How much of a political union is necessary to make a
monetary union sustainable?
• The answer follows right from our reflections on the
economic conception of EMU:
• The monetary constitution of EMU laid down in the
Maastricht Treaty should be fully respected and
• the European Single Market (ESM) should be
completed as soon as possible and its rules should be
strictly observed.
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4.
More specifically this means (see also Issing 2004)
- that the independence of the ECB, its mandate for the goal of
price stability as well as the prohibition of monetary financing
of public deficits is fully accepted,
- that the rules of the Stability and Growth Pact (SGP) limiting
national sovereignty over budgets are fully observed,
- that, by completing ESM, badly needed structural reforms on
the level of member states are enforced and factor, goods and
services markets are made more flexible.
By this, in fact, an elementary political union is described.
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Fundamental Requirements for
Sustainability of EMU (2)
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Fundamental Requirements for
Sustainability of EMU (3)
To turn the argument on its head, this means that the
sustainablity of EMU is put at risk by
- challenging the core elements of the monetary
constitution like independence, prohibition of
monetary financing of public deficits, Growth and
Stability Pact etc.
- not completing the ESM and instead introducing
minimum wages limiting the free flow of capital
within EMU etc.
There are quite some instances recently!
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Critical Assessment on the Basis of
Actual Policy
Actual economic policy did not rise to the challenges just described:
-
In June 2005 the Italian minister of labor, Roberto Maroni, demanded that
Italy should leave the Euro area and return to the Lira.
Although the independence of ECB and ist mandate for price stability were
not touched directly yet, there were attempts to do so.
In the first draft of the European Constititional Treaty price stability was no
more among the goals of the EU, but instead was degraded to an objective
of ECB alone.
There were demands (mainly from the French and the Italian government)
to add growth and employment as goals for the ECB.
In 2005 it turned out that Greece was admitted to EMU on wrong terms:
the budget and debt figures were forged again and again. The same seems
to be true for Italy.
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5.
• Germany and France did not comply with the budget deficit
criterium since 2002 year after year and Greece, Italy as well
as Portugal recently failed too.
• Mainly on demand of the big countries the SGP was
„reformed“, i.e. watered down (Table)
• France and Spain try to prevent takeovers of home firms by
enterprises from EMU countries clearly violating a constitutive
criterion of a monetary union, the free flow of capital and full
convertibility.
These instances show that the monetary constitution of EMU
laid down in the Maastricht Treaty is not fully accepted by
now. Its efficient working is put at risk since the pressures for
introducing structural reforms to make wages and prices more
flexible are thus lowered.
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Critical Assessment (2)
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Critical Assessment (3)
Important Elements of SGP – Old and New
Sources: ECB and Gros (2005)
Wim Koesters
29
The fact that the implementation of national reforms is very sluggish
especially in the big EMU countries like Germany, France and Italy is also
due to delays in the completion of ESM.
A very important actual example is the rejection of the first draft of the
services directive of the European Commission which was based on the
general validity of the principle of origin just like in European goods
markets.
On the demand of Germany, France and other countries this was watered
down to the point that in the new draft the principle of destination is the
rule and the principle of origin is the exemption.
This would have the effect of lowering the intensity of competition (less
„Polish plumbers“ in France and less „Polish butchers“ in Germany) thus
preventing more flexible wages and prices. By this a possible source for
growth is locked: services contribute on average about 70 percent to GDP
of EU countries but its share in EU intra trade is only about 40 percent.
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Critical Assessment (4)
-
-
In addition, there are many instances or national
measures against the spirit if not the letters of ESM
limiting competition even more, e.g.
Germany is planning to introduce minimum wages by
law which then would have to be payed also by foreign
service suppliers.
The French prime minister demands economic
patriotism, declares some firms to be strategically
important so that they cannot be taken over by non
French and is planning on constructing national
champions by merging firms under French leadership.
The Spanish government tries to prevent the takeover of
Endesa (energy supplier) by the German Eon
The Polish government tries to block the merger of
Unicredit and Hypo-Vereinsbank as well as their Polish
subsidiaries Pekao and BPH.
Wim Koesters
31
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Critical Assessment (5)
- Italy`s minister of finance disappointed by the French
rejection of the takeover of Suez by Italian Enel was
in public even comparing the present situation in
Europe with that just before the outbreak of WWI in
1994 and less dramatically showed deep concern that
the EU could fall back to a „Zollverein“ (customs
union).
Wim Koesters
32
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Critical Assessment (6)
- After the failure of the European Constitutional
Treaty in the referenda in France and the Netherland
many policy-makers not only in these two countries
are demanding that Europe should not be left to free
markets and big business. The „European social
model“ should be saved instead.
- The German government just declared, that it will
prevent free migration of labor from the 10 new EU
member states as long as possible.
Wim Koesters
33
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Critical Assessment (7)
All this together has the effect that structural reforms
in EMU member countries are not taking place faster
than in the rest of OECD (see following figures and
tables).
Because of the loss of national adjustment
instruments they are however, badly needed as shown
before.
Wim Koesters
34
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Critical Assessment (8)
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Critical Assessment (9)
Source: Pisani-Ferry (2005)
Wim Koesters
35
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Critical Assessment (10)
Source: Pisani-Ferry (2005)
Wim Koesters
36
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Critical Assessment (11)
Source: Pisani-Ferry (2005)
Wim Koesters
37
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Critical Assessment (12)
Source: Pisani-Ferry (2005)
Wim Koesters
38
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Critical Assessment (13)
Source: Pisani-Ferry (2005)
Wim Koesters
39
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Critical Assessment (14)
Source: Pisani-Ferry (2005)
Wim Koesters
40
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Critical Assessment (15)
Source: Pisani-Ferry (2005)
Wim Koesters
41
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Critical Assessment (16)
Table 1
Relative US/EU15 Performance
(EU Performance Level as Percentage of Corrosponding US Performance)
1995
2003
Income per capita
Hourly labor productivity
Employment rate
72,1
93,6
82,9
70,9
88,0
90,4
Source: Eurostat, structural indicators database
Source: Pisani-Ferry (2005)
Wim Koesters
42
Conclusions
- EMU was introduced on the premise of a completed ESM.
- A common currency in connection with factor mobility should
create a higher dregree of competition on goods, services and
factor markets pushing for more structural reforms to make
wages and prices more flexible.
- This would have made the economies more adaptable and
adjusting faster to the challenges of globalization.
- At the moment the EU is in a dilemma: the ESM project is not
made ready to deliver and the rules of EMU are discussed or
even broken by policymakers in the attempt to overcome these
deficiencies.
Wim Koesters
43
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Critical Assessment (17)
The success of EMU comes not automatically about
but has to be earned politically:
It is only sustainable if ESM is completed with the
highest priority and the monetary constitution of the
Maastricht Treaty is fully accepted and supported by
all member states.
The processes of ongoing globalization and aging of
European societies will not wait until European
policy is finally ready.
Wim Koesters
44
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Critical Assessment (18)
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Real GDP Growth of EMU Countries (%)
11,0
Ireland
10,0
9,0
Luxembourg
8,0
7,0
Variance
6,0
Spain
5,0
Finland
Greece
4,0
3,0
2,0
Italy
Belgium
1,0
Austria
France
0,0
Germany
-1,0
-2,0
1999
2000
2001
Netherlands
2002
Portugal
2003
2004
2005
Source: OECD
Wim Koesters
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